After Panama Papers, Modi warns dirty money owners

 

Says come clean to sleep peacefully or face action after September 30

LAHORE: Just months after the Panama Papers, which are 11.5 million worth of leaked documents that detail financial and attorney-client information for more than 214,488 offshore entities, had taken the world by storm, Indian Prime Minister Narendra Modi has issued a stern warning to his compatriots possessing undisclosed wealth — also termed ill-gotten wealth — that they should come clean to sleep peacefully or face action, including imprisonment, after September 30.

Stating that people have been jailed in the past for evading taxes, Modi said the government should not be forced to resort to the same after September 30.

According to numerous Indian media outlets, most of the country’s undisclosed wealth is parked in jewellery and real estate.

As far as this eyebrow-raising development is concerned, an Indian newspaper “The Hindu” has reported: “At a function jewellers organised to felicitate him, Modi said he is aware of people going to bullion merchants with cartloads of money and a message has to be delivered to them to come clean using the one-time compliance window closing on September 30.”

The newspaper has quoted Modi as saying: “I do not want to commit the sin which I will have to do after September 30 against black money holders.”

“The Hindu” went on to write: “Under the Income Declaration Scheme (IDS) which opened on June 1, black money holders can come clean by declaring the assets by September 30 and paying tax and penalty of 45 per cent thereafter. Those who fail to take advantage of the scheme will have to face stringent actions, including imprisonment. The Income Tax department has already identified 90 lakh high value transactions without Permanent Account Number (PAN). As part of the scrutiny, the department will initially issue 0.7 million letters to those who have indulged in such transactions seeking their details.”Research conducted by the Jang Group and Geo Television Network shows that in 1997, India had introduced a successful tax amnesty scheme.

The October 2, 2015 edition of the Indian Express wrote: “The idea of launching a tax amnesty scheme was helped by the fact that the National Development Council (NDC) had already suggested that the government should think of a scheme to harness black money for productive purposes. That is how the Voluntary Disclosure of Income Scheme, or VDIS, was conceived. Prime Minister Deve Gowda backed the proposal, and Chidambaram (former Indian Finance Minister) went on to say in his budget speech that he had balanced economic and ethical arguments, and reckoned that the time was opportune to launch such a scheme.”

The newspaper continued: “Under the VDIS, irrespective of the year or nature or source of funds, the amount disclosed, either as cash, securities or assets, whether in India or abroad, was to be charged at the highest tax rate. But at 30 per cent tax at acquisition value, many were drawn to the scheme. Under Revenue Secretary N K Singh, the scheme was marketed widely across states. The sweeteners were interest and penalty waivers (unlike the 30 per cent tax and 30 per cent penalty in the one-time compliance window scheme which closed on September 30 this year) and immunity from action under Income-Tax, wealth tax and the Foreign Exchange Regulation Act, or FERA — the law whose recast Chidambaram announced in the same Budget. Around 77.5 per cent of the proceeds from the VDIS was to accrue to state governments.”

Following road shows and marketing of the scheme, the then Indian government had netted Rs10,000 crore (Rs100 billion) in taxes alone, which meant that the mobilisation was substantially higher, putting in the shade five other amnesty schemes launched earlier.

Plenty of jewellery was deposited too. Stories floated around of the rich and the powerful — including politicians — having taken advantage of the scheme.

A total of 333.39 billion rupees was declared by 475,133 Indians in 1997 when India’s population was about 900 million, only 12 million people were being assessed to income tax and only 12,000 of the assesses were in the tax bracket of income of above Rs1 million.

The highest amount was collected in Mumbai (20.32 billion), followed by Delhi (12.28 billion) and Ahmedabad (9.68 billion). As promised, Rs75.94 billion was transferred to the states. The tax payable on the declared amount was at the rate of 35 per cent in the case of companies and firms and 30 per cent for others.

It is imperative to note that the then Indian comptroller and auditor general had condemned the 1997 amnesty scheme in his report, and had dubbed it abusive and a fraud on the genuine taxpayers of the country where black money could be resting anywhere between 40-70 per cent of GDP. (Reference: The July 14, 2015 edition of the “Financial Times”)

Earlier, the 1993 the gold bond scheme was also seen as an amnesty offer — and going by the gold mobilised, it did succeed.

However, less than 700 individuals had used the one-time compliance window to disclose undeclared income under the scheme introduced by the NDA government. That is because unlike in 1997, this compliance scheme had lacked flexibility.

By the way, the 1951 Voluntary Disclosure Scheme in India had made people disclose an amount of Rs700 million.

Research further shows that apart from India, many world countries including US, UK, Italy, Argentina, Australia, Belgium, Denmark, France, Sweden, Greece, Russia, Germany, Spain, Mexico, Netherlands, Norway, Peru, Colombia, Ireland Ecuador, Panama, Philippines, South Africa, Indonesia and Honduras have been introducing tax amnesty initiatives or financial disclosure schemes from time to time.

Such steps have been taken globally to broaden the revenue base, whiten the black money and encourage people to bring back the wealth they may have stashed in safe havens abroad.

As it has been the case in Pakistan, the economic policy-makers in all these aforementioned countries were vehemently criticised by certain quarters, who had contended that all such incentives were immoral and illegal, besides asserting that untaxed assets should have been confiscated and money deposited in offshore banks should have been brought back through stringent laws and bilateral treaties.

However, the financial wizards in the countries mentioned above have not paid any heed to the criticism or condemnation coming from their respective civil societies that all such schemes were actually encouraging money-laundering betraying the honest taxpayers.

They keep providing opportunities to the people who evaded taxes, perhaps because of high rates, to come clean.

It goes without saying that the tax rates of these amnesty schemes launched in the countries under review have varied, and so have the success rates.

In April 2016, the Federal Board of Revenue (FBR) authorities in Pakistan had expected that the number of beneficiaries for availing tax amnesty scheme for traders would touch 10,000 till expiry of the deadline April 30, 2016, by whitening working capital to the tune of Rs100 billion.

By April 18, 2016, the FBR had received 7,900 beneficiaries who had deposited Rs760 million by declaring working capital of Rs76 billion under this money-whitening incentive.

In Pakistan, tax amnesty schemes were also introduced during the Musharraf regime and the Pakistan People’s Party government.

In the United States, the 2014 Internal Revenue Service (IRS)-led Offshore Voluntary Disclosure Programme (OVDP) was specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a wilful failure to report foreign financial assets and pay all tax dues in respect of those unaccounted assets. This scheme provided protection from criminal liability and fixed terms for resolving their civil tax and penalty obligations.

However, the terms of the OVDP may change at any time. For example, the IRS may increase penalties or limit eligibility for all or some taxpayers or defined classes of taxpayers — or decide to end the programme entirely at any point.

The participating taxpayers were required to provide payment in the total amount of tax, interest, offshore penalty, accuracy-related penalty and, if applicable, the failure-to-file and failure-to-pay penalties. If the taxpayer could not pay the total amount due, a proposed payment arrangement and certain financial information must be provided.

The participating taxpayers were also asked to pay the 20 per cent accuracy-related penalties on the full amount of the tax on unreported offshore-income for all years, besides being advised to deposit the failure-to-file and failure-to-pay penalties, if applicable. The miscellaneous off-shore penalty was equal to 27.5 per cent (or 50 per cent in certain circumstances).

In the United States, a disclosure is deemed timely if it is received before the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation.

It is also deemed timely if it is received before the IRS has received information from a third party (eg informant, other governmental agency or the media) alerting the state-institution to the specific taxpayer’s non-compliance.

In June 2012, the IRS commissioner was quoted by media as saying: “The IRS offshore voluntary disclosure programme has so far collected more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programmes.”

In December 2014, the Italian parliament had approved legislation to introduce a voluntary disclosure programme to allow for the regularisation by Italian residents of undeclared capital held abroad and to increase the state revenue.

The law was passed in the Senate by a vote of 119 to 61, while 12 senators had abstained.

Under the final decree, voluntary “self-declarations” of undeclared assets were required to be made by September 30, 2015, but persons who were already subjected to a tax audit or inspection were declared ineligible.

The participants in the programme were required to remit all taxes that were payable on undeclared investments, in one amount or over three monthly instalments, but with much reduced administrative and criminal penalties.

They were also given immunity from criminal prosecution, including for the new criminal offence of money-laundering that was introduced by the decree.

Independent analysts had expected the scheme to fetch an amount to the tune of 1.5 billion euros ($1.85 billion) of undisclosed wealth, most of which was lying in Switzerland, which is home to at least €200 billion out of the estimated €230 billion of Italian capital abroad.

However, the capital that was still under investigation was required to pay the maximum tax rate (43 per cent, plus 2 per cent of local taxes) together with the usual interest rates. Such tax dodgers could only benefit from a huge discount on the sanctions imposed for not declaring income (three per cent of the capital).

Taxpayers were also required to pay taxes on profits generated by capital abroad (from 12.5 to 27 per cent, depending on the year and other laws).

Those who accepted this voluntary disclosure were granted amnesty from indictment for tax-related criminal offences (with the exception of the cases of serious fraud).

Another incentive was that all such people would escape indictment for the new felony of self-laundering, which could be punished with up to eight years in jail.

It should also be kept in mind that from 2018, Switzerland would become part of the automatic fiscal information-sharing mechanism, and would, therefore, be obliged to provide the Italian tax revenue agency with the names of all account holders.

Italian bankers and tax experts have viewed that if the scheme succeeds, the additional returns might rest between €5 billion and €20/25 billion.

On the other hand, the Italian government said it was expecting €3.5 billion in additional revenue from tax compliance activities in 2015, which it needed to keep its deficit below the 3 per cent limit allowed by the European Union.

By the way, the 2009 Italian tax amnesty scheme had led to declaration of assets worth €80 billion, which had in turn had resulted in tax revenues of €4 billion. The Bank of Italy had estimated that the Italian citizens held around €500billion in undeclared funds outside the country.

In United Kingdom, a report of the HM Revenue and Customs (HMRC), updated just a few years ago, carries a guide that explains how to apply, disclose outstanding liabilities and make payments for offshore investments and assets.

The HM Revenue and Customs report states: “This guide explains how people can come forward and disclose outstanding liabilities relating to offshore assets for previous tax years. The disclosure facilities offer the quickest way of doing this alongside favourable terms that are not normally available. For the current year and previous year, you’re still in time to file a Self-Assessment tax return to declare any liabilities. There’s nothing wrong with having investments overseas as long as you declare all taxable income and gains on your UK tax return. These facilities give you the chance to bring all your tax affairs up to date if you have worldwide income that’s not been taxed before.”

About the undeclared income offshore, the report maintains: “If you need help to decide whether you’ve paid the right amount of tax, ask your adviser if you have one. They can help you check your affairs and discuss the options if you need to make a disclosure to HMRC. If you do have undeclared income and gains from your overseas accounts, contact HMRC now to clear up your past tax affairs. You should also make sure that you declare all relevant income and gains in your next Self-Assessment tax return. If you’re not resident in the UK for tax purposes (a UK taxpayer) you won’t usually be liable to pay tax in the UK on your offshore income and gains. You should check what’s taxable and check your residency status.”

The HM Revenue and Customs report had further read: “Over 90 countries have committed to new international agreements that will let HMRC see more about overseas accounts held by you. If you have declared your taxable income and gains then you have nothing to worry about.

But if you haven’t, and HMRC finds out you will face an investigation and will have to pay the undeclared tax, a penalty of up to double the tax you owe, and could even go to prison. Using these disclosure facilities will avoid the need for an investigation and you may pay a lower penalty.”

By end of last year, HMRC had raised £610 million from voluntary disclosures and almost £395 million from a large number of follow-up activities.

Between 2011 and 2012, the HMRC had brought in a record £16.7 billion of additional revenues from compliance activities. It had also protected £2.5 billion of revenue by preventing organised criminal attacks, and defendants were convicted in 85 per cent of criminal cases taken to court.

The HMRC criminal investigations teams had brought in more than £1 billion in receipts and through preventing revenue loss in the tax year 2012 to 2013 and had issued more than 5,000 penalties in 2012-13 for deliberate rule-breaking.

Around 540 people were convicted for tax evasion and had expected to bring at least 1,165 tax fraud prosecutions in the tax year 2014 to 2015, up from 165 in 2010 to 2011.

By the way, according to HMRC estimates, there are about 6,200 individuals in the UK who each have £20 million or more in net assets. Overall, this group pays £3 to £4 billion in income tax and Capital Gains Tax in a year.

Australia had launched tax amnesties in 2007 and 2009, while the Belgian Parliament, in 2004 had adopted a law that allowed people subject to the country’s income tax to regularise the undeclared, or untaxed, assets they held before June 1, 2003.

In 2004, Germany had granted a tax amnesty in connection with tax evasion. Greece had enacted laws on September 30, 2010 to raise revenue by granting tax amnesty to millions of Greek citizens by paying just 55 percent of the outstanding debts.

Portugal had introduced tax amnesties in 2005 and 2010. The 2007 Russian tax amnesty programme had collected $130 million in the first six months. South Africa had introduced tax amnesty laws in 2003. Spain had done it in 2012.

In July 2015, the Indonesian government was again planning to revise regulations in taxation law to provide a tax amnesty to those willing to bring back their funds from overseas to Indonesia.

On July 06, 2015, the “Jakarta Post” had reported: “In the short term, a tax amnesty will increase tax revenue, as happened in Indonesia in 2008.

The directorate general of taxation implemented a sunset policy as one form of tax amnesty in 2008. Tax revenues increased by 30 per cent during that period.

In Bangladesh also, various tax amnesties have been offered in recent years to whiten black money.