CONTENTS

1. Black Money and Tax Evasion: Conceptual Settings
1.1 What is Black Money?
1.2 Sectors/Activities More Prone to Generation of Black Money and Tax Evasion
1.2.1 Land and Real Estate Transactions
1.2.2 Bullion and Jewellery Dealings
1.2.3 Complex Financial Market Transactions
1.2.4 Charitable (Non-profit) Activities
1.2.5 Informal Sector and Cash Economy
1.2.6 Self-employed Professionals
1.2.7 External Trade and Transfer Pricing
1.3 Tax Evasion: Meaning
1.3.1 Tax Evasion and Tax Avoidance
1.4 International Tax Avoidance and Evasion
1.4.1 Transfer Pricing
1.4.2 Tax Treaty Shopping
1.5 Global Concerns against Black Money/Tax Evasion
1.5.1 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
1.5.2 Multilateral Convention on Mutual Administrative Assistance in Tax Matters
1.5.3 United Nations Convention against Corruption
1.5.4 United Nations Convention against Transnational Organized Crime (Palermo Convention)
1.5.5 International Convention for the Suppression of the Financing of Terrorism
1.5.6 Financial Action Task Force (FATF)
1.5.7 Asia/Pacific Group on Money Laundering (APG)

2. Causes and Consequences of Black Money and Tax Evasion
2.1 Generation of Black Money: Leading Factors
2.1.1 Generation of Black Money through Illegal Activities
2.1.2 Generation of Black Money through Legal Activities
2.2 Causes of Tax Evasion
2.2.1 High Level of Tax Rates
2.2.2 Less Respect for Government and its Laws
2.2.3 Lenient Penal Action
2.2.4 Nature of the Economy
2.3 Consequences of Black Money/Tax Evasion

3. Methods to Generate Black Money and Evade Taxes
3.1 Cobwebs of Black Money Generation
3.2 Out of Book Transactions
3.2.1 No Books of Account
3.2.2 Parallel Books of Accounts
3.3 Manipulation of Books of Account
3.3.1 Manipulation of Sales/Receipts
3.3.2 Manipulation of Expenses
3.3.3 Manipulation of Capital
3.3.4 Manipulation of Closing Stock
3.3.5 Manipulation of Capital Expenses
3.3.6 International Transactions through Associate Enterprises
3.4 Devices Adopted to Evade Taxes
3.4.1 Income Tax
3.4.2 Excise Duties
3.4.3 Value-Added Tax (VAT)
3.4.4 Customs Duties
3.5 Tax Havens
3.5.1 Offshore Financial Centres
3.6 Participatory Notes (PNs)
3.7 Investment through Complex Derivative Instruments

4. Estimates of Black Money/Tax Evasion
4.1 Black Money: Estimation Techniques
4.1.1 Input-output Method
4.1.2 Money Circulation Approach
4.1.3 Survey Method
4.2 Various Estimates of Black Money/Tax Evasion
4.2.1 Early Attempts
4.2.2 Taxation Enquiry Commission (TEC) [Chairman: John Matthai], 1953-54
4.2.3 Estimates of Nicholas Kaldor
4.2.4 Central Board of Revenue
4.2.5 Direct Taxes Enquiry Committee (DTEC) [Chairman: Justice K.N. Wanchoo], 1971
4.2.6 National Institute of Public Finance and Policy (NIPFP)
4.2.7 Tax Reforms Committee (TRC) [Chairman: Raja Chelliah], 1991

5. Institutional Structure to Deal with Black Money/Tax Evasion
5.1 Agencies for Enforcement of Tax Laws
5.1.1 Central Board of Direct Taxes (CBDT)
5.1.2 Central Board of Excise and Customs (CBEC)
5.2 Regulatory Authorities for Supervision and Policing
5.2.1 Central Bureau of Investigation (CBI)
5.2.2 Financial Intelligence Unit (FIU)
5.2.3 Narcotics Control Bureau (NCB)
5.3 Co-ordinating Agencies
5.3.1 Central Economic Intelligence Bureau (CEIB)
5.3.2 National Investigation Agency (NIA)
5.4 Other Agencies
5.4.1 Central Bureau of Narcotics (CBN)
5.4.2 Serious Frauds Investigation Office (SFIO)
5.4.3 Registrar of Companies (ROCs)
5.4.4 Registrar of Societies (ROSs)
5.4.5 Economic Intelligence Council (EIC)
5.4.6 National Crime Records Bureau (NCRB)
5.4.7 State Police Agencies

6. Measures Adopted to Curb Black Money/Tax Evasion
6.1 Lowering of Tax Rates
6.2 Tax Amnesties
6.2.1 Special Bearer Bonds
6.2.2 Voluntary Deposit Scheme, 1991
6.2.3 Gold Bond Scheme, 1993
6.2.4 Voluntary Disclosure of Income Scheme (VDIS), 1997
6.3 Advance Tax Payment
6.4 Withholding Tax [or Tax Deduction at Source (TDS)]
6.5 Presumptive Tax for Small Traders
6.5.1 Estimated Income Scheme for Small Businesses
6.5.2 Estimated Income Scheme for Truck Owners
6.6 Permanent Account Number (PAN) or General Index Register Number (GIR)
6.7 Survey of Income Tax
6.8 Summons, and Search and Seizure
6.8.1 Summons
6.8.2 Search and Seizure
6.9 Penalties and Prosecutions
6.9.1 Penalties
6.9.2 Prosecutions
6.9.3 Penal Provisions: A Comment
6.10 Use of Information Technology in Tax Administration
6.10.1 E-payment of Tax and E-filing of Returns
6.10.2 Digital Signature
6.11 Recent Legislative Measures to Prevent Generation of Black Money
6.11.1 Prevention of Money Laundering Act (PMLA), 2002
6.11.2 Benami Transaction (Prohibition) Bill, 2011
6.11.3 Public Procurement Bill, 2012
6.11.4 Prevention of Bribery of Foreign Public Officials and Officials of the Public International Organisations Bill, 2011
6.11.5 Lokpal and Lokayukta Bill, 2011
6.11.6 Citizens’ Grievance Redressal Bill
6.11.7 Judicial Standards and Accountability Bill, 2010
6.11.8 Public Interest Disclosure and Protection to Persons Making the Disclosure Bill, 2010
6.11.9 Electronic Delivery of Services Bill, 2011

7. International Aspects of Indian Taxation (Double Taxation)
7.1 What is Double Taxation?
7.1.1 Double Taxation by the Same Tax Jurisdiction
7.1.2 Double Taxation by Competing Tax Jurisdictions at Different Levels of Government in a Country
7.1.3 Double Taxation by Competing Tax Jurisdictions at Same Level of Government in Different Countries
7.2 International Double Taxation
7.3 Assignment Rules of Foreign Income
7.3.1 Source Rule
7.3.2 Residence Rule
7.4 Methods to Alleviate International Double Taxation
7.4.1 Exemption Method
7.4.2 Foreign Tax Credit
7.4.3 Bilateral Tax Treaties
7.4.4 Multilateral Tax Treaties
7.5 Indian Law on Double Tax Relief
7.6 Salient Features of a Typical Tax Treaty between India and Another Country
7.6.1 Scope of the Treaty
7.6.2 Permanent Establishment
7.6.3 Provisions for Taxation under the Tax Treaty
7.6.4 Provisions Regarding Elimination of Double Taxation
7.6.5 Non-discrimination Clause
7.6.6 Mutual Agreement Procedure
7.6.7 Exchange of Information
7.7 Double Taxation Relief Where no Tax Treaty Exists
7.8 Issues Relating to Indo-Mauritius Tax Treaty
7.8.1 Supreme Court on Indo-Mauritius DTAA
7.9 Transfer Pricing Regulations in India
7.10 Assessment and Collection of Tax from Non-residents in India

8. Summing Up
8.1 Special Investigation Team (SIT) to Unearth Black Money, 2014

Appendix 1: White Paper on Black Money, Government of India, Ministry of Finance, May 2012

Appendix 2: Direct Taxes Enquiry Committee (Chairman: Justice K.N. Wanchoo), 1971, Extracts on Black Money and Tax Evasion

Bibliography

Index

In recent years, the issue of corruption and black money has come in the forefront after a series of financial scandals. Generation of black money—and its stashing abroad in tax havens and offshore financial centres—has dominated discussions and debate in public fora during the recent past. Members of Parliament, the Supreme Court of India and the public at large have unequivocally expressed concern on the issue, particularly after some reports suggested enormous estimates of such unaccounted wealth being held abroad.

After uproar in Parliament, Government of India came out with a White Paper on Black Money in May 2012. The White Paper presented the different facets of black money and its complex relationship with policy and administrative regime in the country. It also reflected upon the policy options and strategies that the Government had been pursuing in the context of recent initiatives, to address the issue of black money and corruption in public life.

To meet the deadline set by the Honourable Supreme Court for the previous Government, the new Government of Prime Minister Narendra Modi constituted a Special Investigation Team (SIT), soon after assuming office on May 26, 2014. Headed by Justice M.B. Shah, a former judge of the Supreme Court, SIT was notified on May 27, 2014 to look into the issue of black money.

The objective of this book is to explain various facets and dimensions of black money and tax evasion and their complex relationship with the policy and administrative regime in the country. It describes the factors which lead to the generation of black money, and records various estimates of black money and tax evasion. It also presents the measures/strategies that the Government of India has been pursuing to tackle this issue, especially recent initiatives and developments.

The work, using simple and non-technical language, is descriptive in nature and designed for a cross section of readers for easy understanding of this rather complex branch of fiscal economics.