SOME FACTS ON INVESTMENT IN PROPERTY OUTSIDE INDIA AND COMPUTATION OF TAX UNDER “BLACK MONEY (UNDISCLOSED FOREIGN INCOME AND ASSETS) AND IMPOSITION OF TAX ACT, 2015”;

Dear Friends,

As you are aware that the Foreign Exchange, Management Act, 1999 (FEMA) empowers the RBI to frame regulations to prohibit, restrict or regulate the acquisition or transfer of immovable property outside India by persons residents in India. The regulations governing acquisition and transfer of immovable property outside India are notified under Notification No. FEMA 7(R )/2015-RB dated January 21, 2016 as amended from time to time.

The RBI has came out with Foreign Exchange Management (Acquisition and Transfer of immovable property outside India) Regulation, 2015 through Notification No. FEMA 7( R)/2015-RB dated January 21, 2016.

PLEASE NOTE THAT The extant regulation provides that a person resident in India is permitted to acquire property outside India subject to above RBI Regulations and if so permitted.

i) These restrictions , however ,do not apply to the property held by a person resident in India ,who is a foreign national; or

ii) if the property was acquired by a person resident in India on or before July 8, 1947 , and continued to be held by him with the permission of RBI.

iii) These restrictions also do not apply to acquisition of property outside India by a person resident in India on a lease not exceeding five years.

MODES OF ACQUIRING PROPERTY OUTSIDE INDIA BY A RESIDENT; acquisition and transfer of any immovable property outside India by a Person Resident in India(PRI) would require prior approval of RBI except in below mentioned cases;

i) Property held outside India by a Foreign Citizen Resident in India;

ii) Property acquired by a person on o before July 8, 1947 and held with the permission of RBI;

iii) Property acquired by way of gift or inheritance from;

a) Persons referred to (ii) above;

b) Persons referred to in Section 6(4) of the FEMA, 1999.

ACCORDING TO SECTION 6(4) OF THE FEMA,1999; a person resident in India can hold, own, transfer or invest in any immovable property situated outside India if such property was acquired, held or owned by him/ her when he/ she was resident outside India or inherited from a person resident outside India.

Provisions under section 6 (4) of Foreign Exchange Management Act, 1999 – Clarifications

Attention of Authorized Dealers is invited to Section 6 (4) of FEMA, 1999 in terms of which a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

2. We have been receiving representations with regards to nature of transactions covered under Section 6(4) of FEMA, 1999. In this regard it is clarified that Section 6(4) of FEMA, 1999 covers the following transactions:

i. Foreign currency accounts opened and maintained by such a person when he was resident outside India;

ii. Income earned through employment or business or vocation outside India taken up or commenced while such person was resident outside India, or from investments made while such person was resident outside India, or from gift or inheritance received while such a person was resident outside India;

iii. Foreign exchange including any income arising therefrom, and conversion or replacement or accrual to the same, held outside India by a person resident in India acquired by way of inheritance from a person resident outside India.

iv. A person resident in India may freely utilise all their eligible assets abroad as well as income on such assets or sale proceeds thereof received after their return to India for making any payments or to make any fresh investments abroad without approval of Reserve Bank, provided the cost of such investments and/ or any subsequent payments received therefor are met exclusively out of funds forming part of eligible assets held by them and the transaction is not in contravention to extant FEMA provisions.

3. Authorised Dealer Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

4. The directions contained in this circular have been issued under Section 10(4) and Section 11(1) of the FEMA, 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law.

iv) Property purchased out of funds held in Resident Foreign Currency ( RFC) account held in accordance with FEM( Foreign Currency Accounts by Persons resident in India) Regulations, 2015;

v) Property acquired jointly with a relative ,who is a person resident outside India provided there is no outflow of funds from India; and

vi) Property acquired by way of inheritance of gift from a person resident in India ,who acquired such property in accordance with the foreign exchange provisions in force at the time of such acquisition.

Investment In Immovable Property Outside India and Black Money Act, 2015

MODE OF PAYMENT;

a) A resident can purchase immovable property outside India out of foreign exchange held in his/her Resident Foreign Currency ( RFC) account.

b) A resident can acquire immovable property outside India jointly with a relative ,who is a person resident outside India , provided there is no outflow of funds from India.

c) A resident individual can send remittances under LRS( Liberalised Remittance Scheme) for purchasing immovable property outside India.

Foreign Exchange Management (Acquisition and Transfer of immovable property outside India) Regulation, 2015 does not provide for remittance of funds outside India for acquisition of immovable property outside India otherwise those laying in RFC account.

The residents are given Special Facility for remittance of USD 2,50,000 /- p.a. through LRS. Through LRS a resident Indian is allow to remit total USD 2,50,000 during a financial year to outside India for business or personal purposes as may be specified by RBI and without permission of RBI.

IT MEANS THAT : A resident individual can send remittances under the Liberalised Remittance Scheme (LRS) for purchasing immovable property outside India. In case members of a family pool their remittances to purchase a property, then the said property should be in the name of all the members who make the remittances.

REGULARISATION OF ASSETS HELD ABROAD BY A PERSONS RESIDENT IN INDIA UNDER FEMA,1999.

The Government has enacted The Black Money( Undisclosed Foreign Income and Assets) and Imposition of Tax ,2015 on May 26,2015 to address issue of undisclosed assets held abroad by persons resident in India. It provides for separate taxation of income and assets acquired abroad from income not disclosed but chargeable to tax in India.

PLEASE NOTE THAT : As per Section 3 of The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 provides that there shall be charged on every assessee for every assessement yer commencing on or after 1st day of April, 2016, subject to the provisions of this Act, a tax in respect of his total undisclosed foreign income and assets of the previous year at the rate of 30(thirty)% of such undisclosed income and asset. An undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset come to the notice of the Assessing Officer.

WHAT IS BLACK MONEY?

Black money is generally money that is earned (either legally or through illicit activities) but has not been reported to authorities and, consequently, has not been taxed.

In its White Paper on Black Money, the Ministry of Finance, Government of India defined black money as “…assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession…”.

However, the term ‘black money’ has not been defined in the Black Money Act and one must rely on the Statement of Objects and Reasons appended to the Black Money Act which vaguely refers to black money as ‘tax-evaded income’.

Given that the Black Money Act deals only with ‘undisclosed foreign income’ and ‘undisclosed assets located outside India’, for the purposes of the Black Money Act, ‘black money’ does not include undisclosed income or assets within India.

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 is an Act of the Parliament of India. It aims to curb black money, or undisclosed foreign assets and income and imposes tax and penalty on such income. The Act has been passed by both the Houses of the Parliament. The Act came into force from 1st July,2015.

UNDISCLOSED ASSET LOCATED OUTSIDE;- means an asset ( including financial interest in any entity) located outside India, held by the assessee in his name or in expect of which he is a beneficial owner , and he has no explanation about the source of investment in such asset o the explanation given by him in the opinion of AO is unsatisfactory.

IT MEANS THAT : An ‘undisclosed asset located outside India’ is an asset (including financial interest in any entity) outside India held by the assessee (either directly or as a beneficial owner) and in respect of which the assessee either has no explanation regarding the source of investment in the asset or where the explanation tendered is found unsatisfactory by the assessing officer.

When assessing tax on an undisclosed asset located outside India, the relevant date is the date on which the asset comes to the notice of the assessing officer (and not the date of acquisition of the asset). Consequently, an assessee will be taxed on an asset even if he has disposed of the asset prior to the Black Money Act coming into effect.

Under the Black Money Act, an undisclosed asset located outside India is to be charged to tax based on its value in the year preceding the year in which the asset came to the notice of the assessing officer.

UNDISCLOSED FOREIGN INCOME & ASSETS;- means the total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India referred to in Section 4 and computed in manner as may be prescribed in Section 5.

LET’S CONSIDER SOME IMPORTANT DEFINITIONS OF The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015;

CHARGE OF TAX

SECTION 3. (1) There shall be charged on every assessee for every assessment year commencing on or after the 1st day of April, 2016, subject to the provisions of this Act, a tax in respect of his total undisclosed foreign income and asset of the previous year at the rate of thirty per cent of such undisclosed income and asset:

Provided that an undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer.

(2) For the purposes of this section, “value of an undisclosed asset” means the fair market value of an asset (including financial interest in any entity) determined in such manner as may be prescribed.

SCOPE OF TOTAL UNDISCLOSED FOREIGN INCOME AND ASSET

SECTION 4. (1) Subject to the provisions of this Act, the total undisclosed foreign income and asset of any previous year of an assessee shall be,—

(a) the income from a source located outside India, which has not been disclosed in the return of income furnished within the time specified in Explanation 2 to sub-section (1) or under sub-section (4) or sub-section (5) of section 139 of the Income-tax Act;

(b) the income, from a source located outside India, in respect of which a return is required to be furnished under section 139 of the Income-tax Act but no return of income has been furnished within the time specified in Explanation 2 to sub-section (1) or under sub-section (4) or sub-section (5) of section 139 of the said Act; and

(c) the value of an undisclosed asset located outside India.

(2) Notwithstanding anything contained in sub-section (1), any variation made in the income from a source outside India in the assessment or reassessment of the total income of any previous year, of the assessee under the Income-tax Act in accordance with the provisions of section 29 to section 43C or section 57 to section 59 or section 92C of the said Act, shall not be included in the total undisclosed foreign income.

(3) The income included in the total undisclosed foreign income and asset under this Act shall not form part of the total income under the Income-tax Act.

COMPUTATION OF TOTAL UNDISCLOSED FOREIGN INCOME AND ASSET

SECTION 5. (1) In computing the total undisclosed foreign income and asset of any previous year of an assessee,—

(i) no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee, whether or not it is allowable in accordance with the provisions of the Income-tax Act;

(ii) any income,—

(a) which has been assessed to tax for any assessment year under the Income-tax Act prior to the assessment year to which this Act applies; or

(b) which is assessable or has been assessed to tax for any assessment year under this Act, shall be reduced from the value of the undisclosed asset located outside India, if, the assessee furnishes evidence to the satisfaction of the Assessing Officer that the asset has been acquired from the income which has been assessed or is assessable, as the case may be, to tax.

(2) The amount of deduction referred to in clause (ii) of sub-section (1) in case of an immovable property shall be the amount which bears to the value of the asset as on the first day of the financial year in which it comes to the notice of the Assessing Officer, the same proportion as the assessable or assessed foreign income bears to the total cost of the asset.

ILLUSTRATION

A house property located outside India was acquired by an assessee in the previous year 2009-10 for fifty lakh rupees. Out of the investment of fifty lakh rupees, twenty lakh rupees was assessed to tax in the total income of the previous year 2009-10 and earlier years. Such undisclosed asset comes to the notice of the Assessing Officer in the year 2017-18. If the value of the asset in the year 2017-18 is one crore rupees, the amount chargeable to tax shall be A-B=C
where, A=Rs.1 crore, B=Rs. (100 x 20/50) lakh= Rs.40 lakh, C=Rs. (100-40) lakh=Rs.60 lakh.

ASSESSEES AND ASSESSMENT- UNDER BLACK MONEY ACT,2015

Unlike the Income Tax Act, 1961 (Income Tax Act) (which taxes residents, non-residents and persons not ordinarily resident), the Black Money Act applies only to persons (assessees) who have been resident in India in the relevant year. As the taxable components under the Black Money Act are, by their very nature, undisclosed, their taxation differs significantly from the Income Tax Act (which provides for self-assessment).

Under the Black Money Act, assessment of undisclosed foreign income and, or, assets and computation of tax and penalty thereon are undertaken by the assessing officer.

The assessing officer may act:

(i) upon receipt of information from authorities under the Income Tax Act or any other law in force; or

(ii) suo motu upon coming across any information, if, based on such information, he is of the opinion that assessment is required.

RATE OF TAX, PENALTY AND RECOVERY

Under the Black Money Act, undisclosed foreign income and, or, assets are subject to tax at 30% of the taxable value of such income and, or asset. Further, the assessee is also liable to a penalty of 3 times of the tax computed. As a consequence, the assessee ends up paying 120% of the taxable value of undisclosed foreign income or asset.

The Government may recover the applicable tax and penalty by issuing notices in the nature of garnishee notices to debtors and, or, employers of the assessee. Default in complying with such notices exposes the debtors and, or, employers to proceedings under the Black Money Act. Additionally, the sums may be recovered by attachment and sale of the assessee’s movable or immovable property, or by appointing a receiver for the management of the assessee’s movable and immovable property.

The consequences of contravention of the Black Money Act are both civil and criminal. A range of monetary penalties are imposed for various non-compliances such as failure to file returns on time, failure to disclose foreign income and, or, assets, etc.

In addition to the civil consequences, the Black Money Act also provides for criminal prosecution for non-compliances, in the event such non-compliances are determined to be wilful. For such wilful non-compliances, evasion of tax, etc., a person may be prosecuted and imprisoned for anywhere between 3 months and 10 years depending on the nature of the offence.

Like the Income Tax Act, the Black Money Act, also provides for a presumption of culpable mens rea(i.e. a presumption of the intention to commit the offence) which is to be disproved by the person accused of the offence.

PLEASE NOTE THAT- to effectively deal with assets abroad by persons resident in India in violation of the FEMA, 1999 for which deflations have been made and taxes and penalties have been paid under the provisions of the Black Money Act, RBI has issued FEM( Regularisation of assets held abroad by a person resident in India) Regulations, 2015, notified through Notification No. FEMA 348/2015-RB dated September 25, 2015 vide G.S.R. No. 738(E ) dated September 25, 2015.

It was clarified that;

a) No proceedings shall lie under the FEMA,1999 against declarant with respect to an asset held abroad for which taxes and penalties under the provisions of Black Money Act, have been paid.

b) No permission under FEMA ,1999 will be required to dispose of the asset so declared and bring back the proceeds to India through banking channels within 180 days from the date of declaration.

c) In case the declarant witches to hold the assets so declared and RBI within 180 days from the date of declaration if such permission is necessary as on date of application. Such applicable will be dealt by RBI as per extant regulations.

d) In case permission is not granted , the asset will be disposed within a period of 180 days from the date of receipt of communication from RBI conveying refusal of permission or within such extended period as may be permitted by RBI and proceeds brought back to India immediately through banking channels.

CONCLUSION: from above discussion we find that a resident Indian can acquire an Immovable property outside India after complying below mentioned conditions :

i) Under section 6(4) of FEMA.

ii) As an inheritance/ gift from a person (i) referred to in sec 6(4) of FEMA; or (ii) who has acquired it prior to July 8, 1947 (iii) who has acquired such property in accordance with the foreign exchange provisions in force at the time of such acquisition.

iii) Purchased with balances in the Resident Foreign Currency (RFC) account of the resident.

iv) As a gift from persons at (b) & (c) above, provided he is a relative of such persons.

v) Purchased with remittances made under the Liberalised Remittance Scheme (LRS).

vi) Jointly with a relative provided there are no outflow of funds from India.

vii) By an Indian company having overseas offices, for housing its business or for residence of staff.

Please note that the government has enacted The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 for prohibition and prevention of accumulation of Black Money. As you are aware that Black Money is untainted money and earned from various types of illegal and prohibited businesses. It is duty of every resident to disclose all his assets and incomes and pay taxes according to applicable taxation laws.

DISCLAIMER: the article produced here is only for information and knowledge of readers. The views expressed here are the personal views of the author and same should not be taken as professional advice. In case of necessity do consult with professional for more clarification and understanding on the subject matter.

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