Act — Impact. Watch out for the Black Money Act

In his Budget speech this year, the Finance Minister acknowledged the limitations under existing law and conveyed the considered decision of the current government to enact a comprehensive new law to deal specifically with undisclosed money held abroad. In accordance, the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 (also called the Black Money Bill) was passed by. This Bill has now been passed by Parliament.

The Act has a few key features. One, it makes the possession of undeclared overseas assets (above a nominal amount) a criminal offence. Two, it provides for separate taxation of undisclosed income in relation to foreign income and assets. Three, for wilful attempt to evade tax, the punishment will be stringent.

Also, a more comprehensive Benami Transaction (Prohibition) Bill was passed by the Union Cabinet in May 2015 to curb generation and holding of black money. The Bill (likely to be passed in the monsoon session) provides for attachment and confiscation of benami properties and a fine with imprisonment.

The after-effects are many and are already flowing in. For instance, there is considerable consternation in the promoter community with regard to the Bill as it leaves promoters in a “no-win” situation. If they self-declare their undeclared overseas assets, they stand to lose 60 per cent of these assets (30 per cent tax and 30 per cent penalty). Even after that they are open to prosecution. If promoters don’t voluntarily declare these assets, they are open to criminal prosecution.

Also, real estate, along with gold, has been one of the most fertile grounds for creation and deployment of black money and will be among the most affected. We are already noting that transaction volumes in Mumbai property markets have slowed to a crawl. Not just in second-tier markets like Bhopal, Jaipur, Lucknow and Pune but also in the suburbs of Mumbai and Delhi, house prices already seem to have corrected 15-20 per cent.

As per research firm Liases Foras Realty, inventory for Mumbai and NCR has hit 80-85 months of current sales and with demand remaining subdued, the outlook looks challenging.

Demand for cement and paint has been adversely affected (as per 4Q 2014-15 results).

More bad news will almost certainly emerge, given that the top cement manufacturers are aggressively cutting prices on fewer real estate volumes and this is bound to deteriorate further as the Bill becomes a law.

The real estate sector is in for a double whammy; the positive real rates would gradually lead to channelling of incremental household savings into financial assets; buyers and sellers in primary and secondary market would find it difficult to deal with stricter restrictions and regulatory supervision.

As per news flows from multiple sources, thousands of Indian businessmen are heading abroad to escape the clutches of this Bill.

Indian tax experts are creating further distress by saying that just by becoming a non-resident, Indian citizens cannot escape. Apparently, the Government can seize the passport of non-resident Indians who have undeclared assets (from the perspective of the Indian taxman).

My reckoning is that this Bill is a big deal and it will have wide-ranging effects on the economy and on the flow of funds. In the near to medium term, this Bill is likely to create far more pain than most of us are anticipating. Expect lesser liquidity in the real estate market and be prepared for transient pain.