Black Money Act

A first step in the right direction…

The Union Budget announced on February 28th 2015 has taken the first step towards a comprehensive Black Money Act. The act raises a few questions. Could this have been achieved by amending the FEMA or the PMLA? Was there the need for a separate Black Money Act and what would it achieve?

The size of the parallel economy…

There are varying estimates of the size of the black economy. Aggressive estimates put it at par with the legitimate economy. Even conservative estimates believe that it could run into several hundred billion dollars. The crux of the matter is that the amount of black money stashed away abroad and within India is massive, to say the least.

Why an act, at all…

The current FEMA is overtly focused on foreign exchange transactions only and does not include domestic black money within its purview. The Prevention of Money Laundering Act is an act that rides piggy back on a nefarious use or purpose of black money. For example if slush money is used for international terrorism then the PMLA becomes relevant. The idea of a Black Money Act becomes relevant because black money, per se, needs to be attacked. You also need an act that links the domestic and global angle of black money. Hence the Black Money Act surely makes sense.

Deterrence is the key…

The biggest change in the Black Money Act is that it defines rigorous penalties for creation and abetting the creation of black money. Penalties are stringent at up to 300% of the stash created. For the first time, black money has been made punishable with rigorous imprisonment. While one can raise questions over the implementation, it surely becomes a major deterrent for a person who would have otherwise chosen to take a chance with monetary penalties. The Act also promises to make global and domestic assets fungible. So black money created abroad will be punishable with confiscation of property in India. That is surely a long call.

Right first step, for sure…

The Black Money Act is surely the right first step in the direction. There are challenges. How do you handle multiple jurisdictions? How do you create investigation teams that crack down on over-invoicing, under-invoicing, portfolio flows and the hawala route? In the era of internet transactions, they could pose a major challenge. But the bigger challenge will be domestic. There is, probably, billions in illicit money in land, apartments, gold and precious stones. These will not only be difficult to track but will also be politically sensitive. This will be the real black money challenge for the government to overcome. ©

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