With the focus of bringing the existing black money stashed abroad to tax, the government had enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 ('Foreign BMA') in July 2015 which covered tax payable by Indian tax residents. In a step further to collect tax on unaccounted money from all taxpayers, a new Income Declaration Scheme,2016 ('Scheme') is introduced as a part of the proposals in Union Budget 2016. Let us take a little closer look at the Scheme.
The Scheme provides taxpayers a one-time opportunity to come clean by declaring their undisclosed income and assets acquired from such income. As per the FM's speech, the Scheme is intended to come into force from 1 June 2016, with the compliance window for making the declaration likely to run from 1 June to 30 September 2016. The declarant may be allowed another 2 months to pay the tax, surcharge and penalty under the Scheme on the declared amount.
The declarant is allowed to report any income earned upto 31 March 2016,which is not offered to tax under the Income-tax Act, 1961 ('IT Act'). A declaration can also be made under the Scheme in respect of an investment in the form of an asset acquired from such undisclosed income. The income in question should be such, where:
* No tax return is filed in the past reporting the income; or
* The tax return was filed, but income was not disclosed; or
* Complete material facts in respect of such income were not disclosedbefore the tax authorities
The undisclosed income reported under the Scheme would be subject to tax at a flat rate of 30 per cent, without allowing for any expenses, deduction, exemption or set-off, even if otherwise allowable. Further, surcharge at the rate of 25 per cent of the tax amount (i.e., 7.5 per cent on the amount of undisclosed income) will be payable by the declarant. This surcharge is to be called as Krishi Kalyan Cess and proceeds of this cess is intended to be used by Government for welfare of farmers. The declarant would also be liable to pay penalty at the rate of 25 per cent of the tax amount (i.e., 7.5 per cent on the amount of undisclosed income), in addition to tax and cess. Thus, the declarant would need to shell out 45 per cent on the amount of undisclosed income or fair market value of assets representing the undisclosed income pursuant to a declaration made under the Scheme.
Any amount paid under the Scheme shall be non-refundable.
The rules to determine fair market value of assets declared under the Scheme will be prescribed at a later date. It is provided that such fair market value would need to be determined as on 1 June 2016, i.e., date of commencement of the Scheme.
The declarant would need to submit the proof of payment of such tax, cess and penalty withthe prescribed authorities. If the declarant fails to make such a payment within the prescribed timeline, the declaration would be considered to be voidand such undisclosed income would be chargeable to tax under the IT Act in the year of declaration. The declarant would then be liable to pay applicable tax and interest under the IT Act. Further, the tax officer can also levy penalty as well as initiate prosecution proceedings under the IT Act against the declarant.Any declaration made by misrepresentation or suppression of facts will also be considered as void and deemed to have never been made.
Once the income is declared under the Scheme, the same would not be liable for being taxed again under the IT Act in the declarant's hands. The assets reported under the Scheme would also be exempt from levy of wealth-tax, which may have been payable upto 31 March 2015. The declarant would be granted immunity from any further penalty or prosecution under the IT Act or the Wealth-tax Act, 1957.
Let us consider an example of Mr A, who had earned income of Rs 1 crore in year 2011-12, which was not offered to tax. If tax authority takes action against him under the IT Act, in addition to penalty (ranging from 30 to 90 per cent of income) and potential prosecution, he would have to pay tax @ 30 per cent and interest of over 50 per cent on tax amount. Hence, it appears favourable for him to declare this income under the Scheme and get away by paying 45 per cent on income.
Further, if the asset declared under the Scheme is a Benami property, the penal provisions of Benami Transaction (Prohibition) Act, 1988('BTA') would not be applicable in respect of such asset, if the same is transferred in name of declarant (who is the real owner) within the period to be notified by the Central Government. A Benami transaction is defined to be a transaction in which property is transferred to one person for a consideration paid or provided by another person and person in whose name the property is held is termed as Benamidar.
It is also worth noting that the present Scheme is different than the one announced under the Foreign BMA, where the total amount payable on undisclosed foreign income and assets was much higher at 60 per cent.
Therefore, given the opportunity in the form of compliance window to move from non-compliant group to compliant group is now available, optimum use should be made. As they say,'it is always better to be safe than sorry'.
(
Manish Shah and Kinjal Pandya also contributed to this article. Manish Shah and Kinjal Pandya are Senior Manager and Assistant Manager in Deloitte Haskins & Sells LLP respectively)
