CA Ashwani Rastogi

ASHWANI RASTOGICommitting to carry forward the fight against black money, Prime Minister Narendra Modi, in his address to the nation on the 69th Independence Day, said “So far, Rs. 6,500 crore of undisclosed income have been declared, which will be used for the welfare of the people.”

Why should anyone keep money abroad? All the more when they have to pay heavy amount just to park their funds outside India particularly in Swiss Bank as they charge hefty amounts even for a deposit. That essentially means that only those having undisclosed source of income popularly known as black money would be relying upon such costly options.

Another supporting fact to this is that India has the one of the highest rate of return approximately about 15-18% annually, way above global standards. And above all in recently RBI has announced Liberalised Remittance Scheme(LRS) allowing upto $250,000 per person per year as foreign investment. Similarly there lot more that can be allowed as foreign investment through various routes.

Target Black Money

So, are there benefits of the one time amnesty under Black Money Act, specially if someone has huge amount of cash stashed abroad and has never been declared in his or her IT returns in all these years? The answer would be definitely yes, if you are ready to part with 60% (30% tax and equivalent amount of penalty) of the fair market value(FMV) of the asset till 30th September 2015. And, what one gets in return is a clean chit from the government.

The best feature of this one time window is that there are no questions asked what-so-ever in relation to your foreign undisclosed assets. The only consideration that will count is the FMV of such an asset and a lump-sum tax payment.

To explain the stringent clauses in the Act here are some illustrations:

Situation 1:

I have some properties in USA which were actually inherited from my father in 1981 originally worth $ 1,00,000 (present FMV–$ 10,00,000) but now I fail to satisfy my assessing officer(AO) on the source of that property as per the provisions of this particular act.(BMA requires you to explain how my father owned such a property) Hence, the one time amnesty scheme would be beneficial for me. I just have to pay 60% of the present value. Here I may not have any choice as now Income Tax Act allows the AO to go back upto 16 years in case tax evasion is suspected in respect of foreign assets.

Situation 2:

If I as an American citizen became resident of India in 2010 all my global incomes would be liable to Income tax since that particular year. However, I might have a liability under the latest BMA. In case I have a million dollar deposit with a US bank dating back to pre-2010 period and I have not disclosed it in my returns in India. I might not be able to explain my situation to the AO, as procuring old bank statements, receipts etc might be a difficult if not impossible task. Under the provisions of BMA if I am unable to prove source of my income while I was not a resident, I will still be liable to tax on all credit entries in my foreign bank account.

Important Dates for Amnesty:

The Central Government has notified 30th September, 2015, as the date on or before which a person may make a declaration in respect of an undisclosed asset located outside India under the compliance provisions of the Black Money Act.

The last date by which a person must pay the tax and penalty in respect of the undisclosed foreign assets so declared shall be the 31st December, 2015.

Highlights of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015

  • Act is effective from 1 April 2016 onwards (Assessment Year 2016-17) and extends to whole of India.
  • Applicable to all persons resident in India. In case of Individuals, it applies to ordinary resident under ITA.
  • Flat 30% tax rate (without surcharge and cess) on the value of total undisclosed foreign income and asset plus penalty 90% additional to tax however penalty reduced to 30% if self-declaration made in one time opportunity by 30th September.
  •  If self-declaration is in respect of UFAs then tax would be levied at 30% plus penalty (equal to tax) i.e. total 60%
  • One time compliance scheme window for disclosing any UFA acquired from income chargeable to tax under ITA for any assessment year prior to AY 2016-17.
  • Self-declaration is an opportunity for persons to come clean and become compliant before the stringent provisions of the new Act come into force
  • Tax will be on value of UFA as on the date of enactment of this new legislation
  • No exemption, deduction or set-off of any carried forward of losses
  • Amount of UFA so declared shall not be included in the total income of any assessment year in ITA
  • No reopening of assessment due to disclosure under this scheme – Declaration will not affect finality of completed assessment
  • Contents of declaration cannot be used as evidence for imposing penalties under any other law or for prosecution under ITA, Wealth tax, FEMA, Companies Act 2013, or Customs Act 1962
  • No Wealth Tax on UFA declared. Assets declared by firm shall not be considered in computing net wealth of individual partner or value of interest of any partner

Computation of tax on UFIA

  • UFIA will be taxed @ 30% – no surcharge and cess
  • Tax will be charged on its value in the previous year in which UFIA same is noted by AO
  • Value of UFA means fair market value of an asset ‘including financial interest in any entity) in the previous year in which it comes to AO’s notice– method of valuation to be prescribed
  • Manner for Computation of total UFIA (Section 4)
Computation of total UFIA
Income from source located outside India (foreign income ‘FI’) which has not been disclosed in IT Return 100
FI in respect of which no IT return has been filed 200
Total UFA 300
FMV of UFA (no explanation or unsatisfactory explanation about the source of income has been provided – Section 4(3)) 300 including appreciation or depreciation
  • If UFIA is taxed under this new legislation, it will not be taxed under ITA
  • Hardship to the assessee as tax and penalties proposed to be calculated at current value of assets instead of original purchase price.
  • However, Finance Bill 2015 proposes that the Enforcement Director under FEMA can directly seize equivalent value of Indian assets (without asking any questions) and merely on the reason to believe or suspicion – similar amendments are also proposed under Prevention of Money-laundering Act, 2002 (PMLA) vide Finance Bill 2015

Coming back to what Prime Minister quotes, it seems to be a good figure, which is expected to grow many folds by September 30th, 2015. However, there are a few irritants like no relief has been given against double taxation under UFIA and corresponding laws in foreign jurisdiction. CBDT has already released first set of FAQ’s on related issues, second set is also expected soon to clear the grey areas in the law.

The moot question is whether this is a good enough opportunity? Theoretically speaking it is a decent product. As for a 10 lakh dollar asset abroad a 6 lakh dollars tax & penalty is much better than paying 12 lakh with imprisonment and other harassment.

On a lighter note as you might be thinking of paying 60% on FMV—I feel many with hefty liabilities may be thinking of finding the way-out for immigration abroad instead of getting a clean chit from India under BMA.

(Author can be reached at [email protected] for any queries, suggestions and comments)

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June 2021