India is moving towards a lower tax regime with non-litigious approach. Thus, while compliant taxpayer can expect a supportive interface with the department, tax evasion will be countered strongly. Capability of the department to detect tax evasion has improved because of enhanced access to information and availability of technology. With the objective of “Reducing litigation and providing certainty in taxation”, the Central Government has launched a Scheme called Income Declaration Scheme, 2016, whereby one time opportunity has been given to all the persons, who have not complied with the provision of the Income-tax Act whether resident or non-resident so that they would come forward and take advantage of the scheme and buy peace with the Government.
The new Scheme is broadly framed on the lines of one-time compliance window provided under the Black Money Act, 2015. This Scheme doesn’t have any intention of modifying or altering the rate of tax, surcharge and penalty payable under the Income Tax Act which has been clearly specified in the Scheme itself.
The Scheme provides immunities under the Income-tax Act, 1961, the Wealth -tax Act, 1957 and the Benami Transaction (Prohibition) Act, 1988.
The Scheme: Salient features & Deadline
The Scheme shall apply to undisclosed income which is chargeable to tax and on assets in the form of movable, immovable or otherwise pertaining to AY 2017-18 or earlier years.
The applicant has to disclose income before 30 September, by making declaration in the Form 1 and shall be furnished by the way of
a) electronically under digital signature; or
b) through transmission of data electronically under electronic verification code; or
c) in print form, to the concerned Principal Commissioner or the Commissioner who has the jurisdiction over the declarant.
and an Acknowledgment will be issued in Form 2 to the declarant within 15 days from the end of the month in which the declaration has been furnished.
The declarant has to pay tax, surcharge and penalty as follows:
Total Amount (Tax, Surcharge and Penalty)
1. Minimum 25% of the total amount by 30.11.2016
2. further 25% of the total amount by 31.03.2017
3. Balance amount on or before 30.09.2017
The declarant shall furnish proof of payment of taxes to the tax authorities in Form 3 and the tax authorities shall issue a certificate in Form 4 within 15 days of submission. If the declarant fails to pay the entire amount of tax, surcharge and penalty within the specified date, the declaration shall become invalid.
Income chargeable to tax:
Section 183(1) of the Income Tax Act, 1961 states that any person can make a declaration in respect of any income chargeable to tax under the Income-tax Act. However, Section 183(4) of the act impliedly overrides the whole Income-tax Act and states that “No deduction in respect of any expenditure or allowance shall be allowed against the income in respect of which declaration under this section is made.”
It is therefore clear that the declarant shall not be allowed to claim any deduction of any expenditure against the declared income.
Technically, there is no clear restriction for set-off of losses against the income declared by the applicant. If we look at section 5(1) of the Black Money and Imposition of Tax Act, 2015, it clearly puts a restriction on “set-off of any loss” whether or not it is allowable in the Income-tax Act. However, the declarant may take the benefit of set off of losses against declarant’s income in this Scheme.
Furthermore, TDS shall be allowed in those cases where the related income is declared under the new scheme and the TDS has not already been claimed in the return of Income filed for any previous A.Y.
Determination value of the Assets
The Cost of acquisition of assets or Fair Market value of the asset declared by the registered valuer as on 01.06.2016, whichever is higher, shall be deemed to be the undisclosed income.
Rule 3 of this scheme overrides Section 43CA and 50C of the IT act. The value of property shall be computed as per Rule 3 even if it is lower than the value adopted by stamp valuation authority.
It is necessary for the declarant to obtain the valuation report but it is not mandatory for him/her to attach the same in Form 1.
Effective rate of tax to the Assessee: Favorable or Detrimental
|S.No.||Particulars of tax||Rate of tax (in %age)|
|1||Tax rate on undisclosed Income||30.00|
|2||Add: Krishi Kalyan Surcharge@ 25% on tax||7.50|
|3||Add: Penalty @ 25% on tax||7.50|
The department clarified that black money declarants using the one-time compliance window cannot pay tax and penalty from undisclosed income to bring down their liability and such acts will not get any immunity. For example, in case a person declares undisclosed income of Rs. 100 lakh and pays tax, surcharge and penalty of Rs. 45 lakh, then the declarant shall not get the immunity of Rs. 45 lakh if the payment is made from undisclosed income as utilization for tax payment.
Where the undisclosed income is invested in such assets whose FMV remains equal to the cost or nearer thereto as in the case of NSCs, Bank deposits, Loans & Advances, cash balances, etc., the effective rate of tax would not be distorted as shown in the examples here in above. But in case of assets such as immovable properties, jewelry, shares, etc., the increase or decrease in FMV of such assets would affect the effective rates of tax. It would be rare when the FMV would be lesser than the cost and in such a case, the effective rates would be lower. For example, in a case where the declarant earned undisclosed income of Rs. 90 lakh in PY 2010-11. Out of the same, he acquired an immovable property in the PY 2011-12 for Rs.50 lakh (FMV is Rs. 80Lakh on 01.06.16), made personal expenditure of Rs.20 lakh and Rs.20 lakh is left as cash in hand on 01.06.16. The declarant in this case has to declare the following: Rs. 80 lakh being FMV of the property, Rs. 20 lakh being the cash in hand and Rs. 20 lakh being the balance of undisclosed income which is not represented in the form of investment in any asset.
Thus, the total undisclosed income to be declared would be Rs. 1.20 crore as on 01.06.2016. However, on the assets in the form of cash and immovable property, he will have to pay tax, surcharge and interest @ 45% (i.e. effective 72% of the cost of asset respectively).
Suppose, this asset would sell on PY 2017-18, then holding period will be count from original acquisition i.e. PY 2011-12. However, it would be liable to Long term capital gain as holding period is six years and for Inflation index will be count from PY 2015-16 to PY 2016-17. However, overall it depends on the assets of person to person, whom the scheme is favorable and whom it is detrimental.
Situations where disclosure window shall not be allowed:
i. An undisclosed income, which has already been assessed by the tax department and the case is pending before the Assessing Officer, would not be eligible for disclosure under the scheme.
ii. If the undisclosed income relates to assessment year 2016-17 or any earlier assessment year, where the Income tax department has served a notice (on or before 31 May 2016) to the assessee under section 142, 143(2), 148, 153A or 153C.
iii. A person is not eligible to make a declaration if a search has been initiated and the time for issuance of notice under section 153A has not expired.
iv. The cases covered under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax act, 2015.
v. A person in respect of whom proceedings for prosecution of any offence punishable under Chapter IX or XVII of the Indian Penal Code or under the Unlawful activities (prevention) Act or the Narcotic Drugs and Psychotropic Substances Act or the Prevention of Corruption Act are pending. A person notified under section 3 of the Special Court (Trial of Offences Relating to Transaction in Securities) Act or a person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, subject to the conditions specified in the Scheme.
Important features of the scheme:
1. The Finance Minister Mr. Arun Jaitely assured in his budget speech that there will be no scrutiny or enquiry regarding income declared under this Scheme under the Income-tax Act or the Wealth-tax Act. This scheme puts the entire onus on the declarant to ensure that he/she doesn’t come under the prohibited category; for example, if the assessee declared a particular income of an A.Y. the department may enquire any Income other than a particular declared income.
2. Same like BM act and VDIS scheme, this scheme states that the information contained in the declaration shall not be shared within the Income-tax department for any investigation in respect of a valid declaration or any other tax or law enforcement agency.
3. The Scheme provides most attractive feature – immunity from the Benami Transaction (Prohibition) Act, 1988. This is subject to the asset existing in the name of a benamidar is transferred to the declarant (being the person who provides the consideration for such assets) latest by 30 September 2017. The Capital gain tax would not be levied on the Benamidar.