SIT stumbles on ‘tremendous’ surge in illicit cash outflow from 2006-2011
The investigation by the Supreme Court-constituted Special Investigation Team on black money has found that the outflow of black money increased “tremendously” from 2006 to 2011 and one of the major reasons was overall bad governance in the country. Incidentally, during that period a number of mega scams, including 2G spectrum allocation, coal block allocation and Commonwealth Games, rocked the country.
“From 2006 to 2011, illicit financial flow has increased tremendously. Illicit financial flow in India was maximum in the year 2011, i.e. 84,933 millions of US dollar,” according to an analysis of the report of Global Financial Integrity (a Ford Foundation study) on “Illicit Financial Flows from Developing Countries 2002-2011.”
The GFI report has concluded that maximum illicit financial flow from the total of 15 developing countries was 946,677 million dollars in 2011. Outflow of black money from India in 2011 was at its peak with 84,933 million US dollars. The GFI analysis suggests six of the top 15 exporters of illicit capital in the world are in Asia (China, Malaysia, India, Indonesia, Thailand and the Philippines).
The SIT has so far submitted two reports before the Supreme Court on its investigation into unaccounted wealth generated in the country or stashed illegally in foreign banks. The SIT investigation has found that growing illicit financial flows are most devastating economic issue impacting global South.The investigation also revealed mis-invoicing as one of the methods for illicit outflow.
The reasons for mis-invoicing include Export Proceeds Surrender Requirement (EPSR), extent of capital account openness (if openness is not accompanied by stronger governance) and overall governance in the country (mis-implementation of law and corruption). Other reasons for outflow of black money are mis-invoicing of trade in services, Hawala transaction, and dealing in bulk cash (for drug trafficking, smuggling, other criminal activities).
With over-invoicing of exports and under-invoicing imports being the prime drivers of illicit financial flows, the panel is learnt to have directed the Central Board of Excise and Customs (CBEC) to cover all ports under the Electronic Data Interchange (EDI) and avoid manual billing.
The SIT has also sought a detailed list of individual companies where export transaction was more than Rs 50 crore for the last three years. The CBEC is expected to furnish the name of the firms, directors of the company, nature of items exported and destination of the exported items, sources said.
The SIT has further directed the (Directorate General of Foreign Trade (DGFT) and Central Board of Excise and Customs (CBEC) that for all the export cases where the value of transaction is more than Rs 1 crore, it should necessarily be done through digital means/EDI.
In its bid to check Trade-Based Money laundering, the SC-constituted body is believed to have directed the DGFT to exercise due diligence while issuing the Import Export Code which is the unique number of shipping bill. The move comes in the wake of a large number of instances especially in Mumbai where bogus Import Export Code were detected which can be a major source of generation of black money. To check this, the DGFT has been advised to introduce a column in the Shipping Bill for mentioning the World Market Price.
Following the SIT investigation, the Government is planning to amend Section 24 of the Customs Act, 1962 so that the reply to Show Cause notices issued by Department of Revenue Intelligence could be given in a time bound manner, possibly within 21 days. The expression “reasonable time” under Section 24 of the Customs Act is vague CBEC and DRI are formulating a proposal to do away with the provision.
The Revenue Department is developing a software application on a common platform where 360 degree information about financial transactions is available for seamless transfer for data from one department to another for tax realisation.
India is also taking an initiative to sign separate Tax Information and Exchange Agreement with such countries/jurisdictions that are reluctant in signing the Double Taxation Avoidance Agreement (DTAA). The move is being taken as a legislative framework with a foreign jurisdiction is the first requirement for exchange of banking information as well as information without domestic interest.
Specific changes in Foreign Exchange Management Act and Prevention of Money laundering Act are also being contemplated. This includes comprehensive examination of definition of the concept of beneficial ownership to check illicit financial transactions.
The cause for illicit financial flow and generation of black money is greater openness and liberalisation in an environment of weak regulatory enforcing mechanism. The panel has also expressed concerns over the cases of Income Tax Department and Customs Department pending for years together in relevant courts.
In view of the regulatory laws failing in creating a deterrent effect on the tax offenders, substantial improvements in tax administration are underway. The tightening of the provisions relating to punishment of tax evaders, statutory backing to the present system of door-to-door surveys and transforming the tax enforcement system more officer-based than clerk-based can go a long way in checking generation and transaction of black money, sources said, adding measures should be taken to provide for presumption in favour of tax department in case of seizure of articles or written submission made by the tax offenders. During tax-related proceedings in courts, the offenders often shift the onus of veracity on the tax department.