National Security Apparatus, Money Laundering, Hawala transactions, FCRA , Black Money, Income Declaration Scheme , Benami Property, Pradhan Mantri Garib Kalyan Yojana, Participatory Notes

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Drawbacks in National Security Apparatus
  • No National Security Doctrine in spite of complex problems like Naxalism and insurgency
  • No coordination between agencies like NIA, IB, RAW, CBI and paramilitary
  • Law and order is state subject which Sorabjee committee asked to be made concurrent
  • Shortage of staff at all levels
  • No police reforms in spite of Prakash Singh case of 2006
  • Any centralization proposal is opposed like NCTC. 
Legal Framework
  • Terrorism and Disruptive Activities Prevention Act, 1987
  • Prevention of Terrorism Act, 2002- POTA
  • UAPA, 1967 and amendment in 2012 for FICN  State laws like MCOCA and similar law in Gujarat.
  • IT Act, 2000 deals with cyber security.
  • NCTC proposed.
Problems with all acts
  • Multiplicity- UAPA, 1967, NSA, 1980, MCOCA, 1999, etc.
  • Infringement on privacy
  • Human right violations due to arbitrary arrests, long detentions, etc. Eg- Malegaon case
  • No liability on state if violations take place.
  • All in the name of national security.

Non-State actors– those who are not related to any formal institutions but can exercise substantial influence in international sphere.

  • NGOs
  • Religious organizations
  • MNC
  • International media
  • Violent groups- organized criminals, terrorists, smugglers, etc.
Money Laundering

Camouflaging the illegitimate source of money and making it appear as white money is called money laundering.

Sources of money laundering 
  • Hawala transactions  Drug cartels.
  • Real estate: stamp duty evasion through under-reporting of transaction price.
  • Elections – it is the biggest reason for increase in supply of black money.
  • Bullion and jewellery market: The purchase allows the buyer the option of converting black money into gold and bullion.
  • Financial markets transactions: Usage of participatory notes for round tripping. Misuse of Liberalized Remittance Schemes to buy shares in foreign companies (Panama Leaks)
  • Non-profit organizations: Taxation laws allow certain privileges and incentives used to park funds of corrupt politicians and businessmen.
  • Informal Sector and Cash Economy: Cash transactions due to the large cash economy in India.
  • Transfer pricing: Transfer profit/income to no tax or low tax jurisdictions by MNCs.
  • Tax Havens: Tax havens are typically small countries/ jurisdictions, with low or nil taxation for foreigners who decide to come and settle there.
Laws in place for money laundering
  • Prevention of Money Laundering Act
  • FCRA
  • Benami transactions bill
  • Income Disclosure Schemes
  • National Drugs and Psychotropic substances act amendment in 2011.
  • Real Estate Regulation Act.
  • DTAA, BEPS and other international cooperation through FATF, Asia Pacific Group
Challenges in tackling money laundering
  • Money laundering is a predicate offence i.e it forms a part of a more serious offence and hence often neglected
  • Lack of coordination between center-stafes
  • Multiple agencies but no cooperation
  • Non-implementation of KYC norms
  • Use of tax havens and tax treaties still continues
  • Multiple avenues of smuggling exists
Hawala transactions
  • The word “Hawala” means trust.
  • It is an alternative or parallel remittance system, which works outside the circle of banks and formal financial systems. It is also sometimes referred to as “Underground Banking
  • In a hawala transaction, no physical movement of cash is there. Hawala system works with a network of operators called Hawaldars or Hawala Dealers.
  • A person willing to transfer money, contacts a Hawala operator at the source location. The hawala operator at that end collects the money from that person who wishes to make a transfer. He then calls upon his counterpart or the other Hawala operator at the destination place/country was the transfer has to be made.
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FCRA
Why is FCRA needed? 
  • A Intelligence Bureau report, “Concerted efforts by select foreign-funded NGOs to take down Indian development projects”
  • The CBI records filed in the Supreme Court in the case show that only 50 file their returns.
  • Also NGOs are getting money from all over the world and these may include enemy countries
  • Recently, Supreme Court (SC) voiced its concerns on the NGO becoming a “proxy litigant” and a front for settling corporate rivalry or personal vendetta
  • SC judgment suggested centre to audit nearly 30 lakh NGOs which receive public funds but do not explain their expenditure. Center has framed guidelines accordingly.
  • Recently, an NGO Srijan in Bihar laundered 700cr of public money.
Issues with FCRA
  • Abuse of legal procedures – Government seems to be rejecting licenses non-objectively. This has been observed by NHRC as well.
  • Arbitrarily curbing dissent – could be used to silence any opposition to government and target rights-based advocacy groups
  • Human rights issue – may affects human right of people as they have served basic facilities to citizens of India since decades
  • Non-conformity to international standards – India is a party to the International Covenant on Civil and Political Rights under which, right to freedom of association is incorporated.
Amendment to FCRA rules
  • The amendment effectively redefines Indian subsidiary of foreign companies as Indian companies, which was till now considered as “foreign source” under FCRA (Foreign contribution and Regulation Act). Although this was done to encourage CSR from these companies, it also paves way for foreign funds to flow in without hindrance as NGO and foundations run by these companies need not comply with FCRA rules.
  • Another amendment ensures donations by Indian companies with foreign shareholding to political parties. Even though it violates RPA which bans political parties from receiving foreign funds, it will bring transparency and reduce litigations.
Black Money

Black money can be defined clearly as income – which is illegal, which evades tax and which does not get accounted in national income estimates.

Black money is a triad. Corrupt businessmen, corrupt politician and corrupt executive. All work in cohesion

Sources of black money
  • Real estate: stamp duty evasion through under-reporting of transaction price.
  • Elections – it is the biggest reason for increase in supply of black money.
  • Bullion and jewellery market: The purchase allows the buyer the option of converting black money into gold and bullion.
  • Financial markets transactions: Usage of participatory notes for round tripping. Misuse of Liberalized Remittance Schemes to buy shares in foreign companies (Panama Leaks)
  • Non-profit organizations: Taxation laws allow certain privileges and incentives used to park funds of corrupt politicians and businessmen.
  • Informal Sector and Cash Economy: Cash transactions due to the large cash economy in India.
  • Transfer pricing: Transfer profit/income to no tax or low tax jurisdictions by MNCs.
  • Tax Havens: Tax havens are typically small countries/ jurisdictions, with low or nil taxation for foreigners who decide to come and settle there.
Ill-effects of black money- Categorize as social, economic and political
  • There is a distortion in investment in economy
  • Rise in inflation as the black money is used to buy and hoard essential goods.
  • Huge loss of taxes amounting to billions.
  • Black money leads to further corruption by creating a vicious cycle
  • High prices of real estate especially in big cities
  • National security is threatened because black money is used to finance drug and terror cartels.
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Steps to prevent creation of black money
  • Strict laws and implementation- like Benami transactions bill, income declaration scheme,etc
  • International cooperation- like BEPS
  • Strengthening of institutions- stricter surveillance through CBDT, FATF, Revenue Intelligence Unit,etc.
  • Simple tax structure- Wanchoo committee had said tax evasion is high due to high tax rates.
  • Electoral reforms
  • Move towards cashless economy
Government Actions to Tackle Black Money

Income Declaration Scheme

Rolled out in FY17 budget. It is a way of declaring undisclosed wealth and making it legitimate. The person will have to pay 30% tax, 7.5% penalty and 7.5% Krishi Kalyan Surcharge. 65000 crore collected. 

Drawback

  • Fear of being investigated under other legislations like Excise Act, Service Tax Act etc.
  • Very high tax rate of 45%.
  • Calculation of investment value based on Fair Market value as on 1st June 2016 can be higher than the original value of investment.
  • Assets will be liable for capital gains tax in future.
  • No immunity provided for cases covered under Black Money

(Undisclosed Foreign Income and Assets) Imposition of Tax Act, 2015 as well as FEMA

  • Under IDS, details to be kept secret. But it can create complications if a PIL is filed in SC to declare names
Benami Property Transactions (prohibition) Amendment Act 2017
  • A benami transaction is one where a property is held by one person and the amount for it is paid by another person.
  • The new law amends the 1988 Benami Transactions Act.
  • The law provides for up to seven years’ imprisonment and fine for those indulging in such transactions.
  • The amendments aim to strengthen the Act in terms of legal and administrative procedure.
  • The law prohibits recovery of the property held benami from benamdar by the real owner. As per the Act, properties held benami are liable for confiscation by the government, without payment of compensation.
  • An appellate mechanism has been provided under the act, in the form of an adjudicating authority and appellate tribunal
  • Impact- transparency in real estate, curbing on black money, bringing down prices, confidence among money lenders.

In first 8 months since act came into force from November 2016, data shows govt has provisionally attached 233 properties, mostly from big metros like Kolkata.

Amendment to Prevention of Corruption Act
  • Punishment for bribe taker as well as giver,
  • Prior sanction of prosecution expanded for retired public servants,  Trials to be completed within 2 years.
  • Maximum punishment raised to 7 years that makes corruption a heinous crime
  • The powers of attachment are proposed to be conferred upon the trial Court (Special Judge) instead of the District Court
  • Commercial entities also included in the factors of inducement of a public servant
  • Non-monetary gratification has been covered within the definition of the word gratification. 
Pradhan Mantri Garib Kalyan Yojana
  • Declarant of undisclosed income needs to pay 30% tax, 10% penalty and 33% Pradhan Mantri Garib Kalyan Cess on the tax, all of which add up to around 50%.
  • Besides, declarant must make mandatory deposit of 25% of undisclosed income in the zero-interest Pradhan Mantri Garib Kalyan Deposit Scheme, 2016 with lock-in period of 4 years.
  • The income declared under it will not be included in the total income of the declarant under the Income-tax (IT) Act for any assessment year.
  • Money to be used for benefit of the poor.

Income Tax Department (ITD) has initiated Operation Clean Money. Initial phase of the operation involves e-verification of large cash deposits made during 9th November to 30th December 2016.

  • Registration of 1 lakh firms and 37000 shell companies cancelled. Also SEBI cancels licenses of 331 companies suspected to be shell companies
  • Shell companies are not defined in Companies Act 2013 but are basically companies with no operations, assets or business. They are basically used for illegal activites and money laundering. PMLA, companies act and Benami property act is used to prosecute.
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Base Erosion and Profit Shifting

BEPS is tax planning strategy that exploits gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. According to OECD estimates, such tax avoidance has led to a global revenue loss of $100-240 billion every year

Transfer pricing is the price at which different divisions of a company transact with each other.

BEPS action plan deal with –

  • Opaque and harmful tax practices and brining in transparency
  • Issues relating to transfer pricing
  • Issues relating to avoidance related to Permanent Establishment  Issues of taxation in digital economy  Avoidance through interest deductions.

India recently signed the Multilateral Convention to implement Tax Treaty Related Measures to prevent Base Erosion and Profit Shifting (BEPS).

Impact– India to incorporate Country by Country reporting measure for MNC. Applicable for MNC with global turnover 750 million Euro. It has to report about its subsidiaries and file it with their tax authorities. They have to bring their accounting systems up to date, improve their compliance mechanisms, particularly with regard to country-by-country reporting standards and transfer pricing rules, and upgrade the manner in which they report data

India has levied a 6%equilization levy on foreign companies who get 1lakh or more from online advertising in India.

Problems with implementing BEPS could be about derailing investor sentiment in India, lack of infra to handle such large amount of info.

Participatory Notes
  • They are Offshore Derivative Instruments ODI used by hedge funds and other foreign institutions to invest in Indian stock market through the registered FII.
  • These notes are given to foreign investors who are not registered with SEBI. The dividends go back to these foreign owners and there is no way to trace it.
  • Shell companies are formed to route black money into the Indian market.
  • Tarapore committee had suggested removing the Pnotes.
  • The money in equity market through the P-notes is relatively high. One reason is because of the confusion on MAT that the FII are investing more through P-notes. This becomes an impediment to abolish P-notes in a country that is in dire need of investments.