Recent clarification on income tax clearance certificate for all travelling abroad

Summary: The Finance Budget 2024-2025, presented on 23rd July 2024, amended Section 230 of the Income Tax Act, 1961. The amendment now includes liabilities under the Black Money Act, 2015, effective from 1st October 2024. This led to social media misinformation suggesting that all Indian residents traveling abroad must obtain an Income Tax Clearance Certificate (ITCC). However, the Ministry of Finance clarified that the requirement for an ITCC remains unchanged since 2003. The certificate is only mandatory for individuals involved in serious financial irregularities or those with outstanding direct tax arrears exceeding ₹10 lakh that are not stayed by any authority. The certificate can only be requested after approval from the Principal Chief Commissioner of Income Tax or Chief Commissioner of Income Tax. The clarification ensures that only certain individuals, under specific conditions, are required to obtain the clearance certificate, and not all residents traveling abroad.

Introduction: Recently, the Finance Minister of India, Smt. Nirmala Sitharaman, presented the Finance Budget 2024-2025 on 23^rd July 2024. Vide the said budget proposal, section 230 of the Income Tax Act was amended.

The present article covers the basics of income tax clearance certificate and recent amendment thereof. Further, article also covers the clarification provided by the ministry post social media outrage on the requirement of obtaining income tax clearance certificate for all travelling abroad.

Basics of Income Tax Clearance Certificate and recent amendment thereof –

Section 230 of the Income Tax Act, 1961 deals with the provisions and requirement of obtaining income tax clearance certificate.

Basically, tax clearance certificate is a certificate issued by the Revenue Department stating that the person has duly complied with their respective tax obligations and have cleared all the tax dues.

Notably, tax clearance certificate includes compliance with Income Tax Act; Wealth Tax Act; Gift Tax Act and/ or Expenditure Tax Act or any such taxes which are/ may become payable by the person.

Interestingly, the Finance Bill, 2024 proposed to include the Black Money Act, 2015 in the list above. The amendment is going to be effective from 1^st October 2024.

With the introduction of the said proposal, there was a huge hue and cry in the social media circulating that all the resident travelling abroad need to obtain tax clearance certificate before leaving India. One of the same is highlighted hereunder –

Recent clarification clearing huge social media outrage on the requirement of Income Tax Clearance Certificate –

Post tremendous social media outrage, the minister had come up with a clarification that “the proposed amendment doesn’t require all the residents to obtain the income tax clearance certificate”. Further, the clearance certificate is mandatory in the following circumstances –

• Person involved in serious financial irregularities –

Income tax clearance certificate is mandatory for the person who is involved in serious financial misconduct and it’s likely that tax demand can be raised against such person. Accordingly, the presence of such person is necessary for investigations under the Income Tax or Wealth Tax Act.

• Person having outstanding direct tax arrears –

Income tax clearance certificate is also mandatory for the person who is having direct tax arrears of more than ₹10 lakh and such arrears is not stayed by any authority.

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Section 230 (1A) of the Income-tax Act, 1961(the ‘Act’) relates to obtaining of a tax clearance certificate, in certain circumstances,by persons domiciled in India. The said provision, as it stands, came on the statute through the Finance Act, 2003 w.e.f. 1.6.2003. The Finance (No.2) Act, 2024 has made only an amendment in Section 230(1A) of the Act, vide which, reference of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (the ‘Black Money Act’) has been inserted in the said Section. This insertion has been made to also cover the liabilities under the Black Money Act in the same manner as the liabilities under the Income-tax Act,1961 and other Acts dealing with direct taxes for the purpose of Section 230(1A) of the Income-tax Act,1961.

There appears to be a mis-information about the said amendment emanating from incorrect interpretation of the amendment. It is being erroneously reported that all Indian citizens must obtain income-tax clearance certificate (ITCC) before leaving the country. This position is factually incorrect.

As per section 230 of the Act, every person is not required to obtain a tax clearance certificate. Only certain persons, in respect of whom circumstances exist which make it necessary to obtain a tax clearance certificate,are required to obtain the said certificate. This position has been in the statute since 2003 and remains unchanged even with the amendments vide Finance (No. 2) Act, 2024.

In this context, the CBDT, vide its Instruction No. 1/2004, dated 05.02.2004, has specified that the tax clearance certificate under Section 230(1A) of the Act, may be required to be obtained by persons domiciled in India only in the following circumstances:

1. where the person is involved in serious financial irregularities and his presence is necessary in investigation of cases under the Income-tax Act or the Wealth-tax Act and it is likely that a tax demand will be raised against him, or
2. where the person has direct tax arrears exceeding Rs. 10 lakh outstanding against him which have not been stayed by any authority.

Further, a person can be asked to obtain a tax clearance certificate only after recording the reasons for the same and after taking approval from the Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax.

In view thereof, it is reiterated that the ITCC under Section 230(1A) of the Act, is needed by residents domiciled in India, only in rare cases, such as (a) where a person is involved in serious financial irregularities or (b) where a tax demand of more than  Rs.  10 lakh is pending which is not stayed by any authority.