Very often, trust was the fulcrum of complex schemes: bungalows would be in the name of the chauffeur; loyal employees would own shares worth crores; and, a mountain of cash would be parked in the accounts of close relatives, or moved abroad using a well-oiled hawala machinery to some opaque trust having accounts with secretive, invincible offshore banks. Chartered accountants and lawyers honed their skills, taking advantage of lax laws and lack of information to perfect the art over decades. Even after tax rates came down dramatically, the old ways continued. It was too good to give up. By then, it had become a way of life.
HARSH LAWS, NEW COMPULSIONS
But all ‘good’ things must come to an end. The changes came one after another, triggered by forces that were beyond the control of those who had till then masked their wealth. The unveiling of tax havens began with the global meltdown of 2008 as sovereigns across the world scrounged for funds after bailing out big banks and saving their economies.
And, at home, a new government, projecting a righteous image, drastically changed the rules.
The music suddenly stopped with three harsh laws: The Benami Transactions (Prohibition) Amendment Act, which came into effect from November 1, 2016 following the amendment of a 28-year-old ineffective law which lay dormant amid whispers of missing files; the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, a draconian statute which came into force in 2015; and the Prevention of Money Laundering Act (PMLA), a 2002 law that was reactivated and recently endorsed by the Supreme Court.
On Tuesday, a ruling stripped the tax department of the power to retrospectively apply the Benami law, confiscate Benami assets and initiate prosecution – thus, letting men who had cut deals with chauffeurs and clerks before 2016 to go scot free. The 2016 law had widened the definition of ‘Benami’ – covering not just the ‘transaction’ but also ‘arrangement’ to facilitate Benami deals.
Besides confiscating assets, the tax office can demand a quarter of the asset’s market value as penalty, and throw offenders – ‘beneficial’ or ‘real’ owner, the ‘benamidar’ or the ‘front’ as well as abettors (CAs and consultants who arranged the deal) behind bars. Understandably, benami deals, at least the kind that used to happen, have become a lot tougher since 2016, except for cases of large cash deposits by third-parties post Demonetisation. The common Benami transactions, where promoters of companies used others to hold shares on their behalf to evade holding limits and Sebi’s takeover code, have turned more complex and expensive. Today, every report prepared by tax officials after the raid and seizure is shared with their colleagues in the Benami wing.
RING OF RETROSPECTIVITY
In every way the Benami Act is a criminal law – similar to the Black Money Act and PMLA. The retrospective use of such a statute to punish someone for an offence that was committed when the law did not exist is always questionable. So, the apex court ruling is legally sound, though many old crooks would now escape summons and prosecution under the Benami law. However, it’s unlikely that all of them would entirely fall off the radar of the I-T department. In all likelihood tax officials would scan all the information collected in the course of Benami investigation to check whether the PMLA or Black Money can be invoked against these persons.
The Supreme Court ruling on Benami would also turn the attention to court cases that have challenged the retrospective element in the Black Money law. It’s a law that was passed to overcome the limitations in the Income tax (I-T) Act, and tax undisclosed assets held as overseas bank accounts and properties – often ring-fenced behind discretionary trusts.
While the I-T Act can be used to claim tax on 10-year old undisclosed income, the Black Money (BM) Act empowers the tax department to go after assets that were acquired decades ago but discovered now. Thus, under the BM Act, the year in which the tax department gets hold of the information is the year for which income (or, asset) is deemed to have been earned (or, acquired) by the person.