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12 May 2015

India’s proposed new legislation to tackle black money

On March 20, 2015, the Government of India took a step forward in the country’s battle against black money- especially that which is squirreled away outside India.  The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 proposes specific provisions under which foreign assets and income from such assets will be taxable in India.

Scope

The Bill applies to all persons resident in India (or ordinarily resident in India) and covers undisclosed foreign income and assets including also financial interests in any entity. In other words, anyone who fits the definition of a “resident” under Section 6 of the Income Tax Act is covered. The Bill empowers Indian Tax Authorities to bring under their purview all undisclosed assets held outside India by Indian residents and specifies penalties for violation.

In its current form, the Bill is so structured that even the spouse of an expatriate employee is required to file a tax return in India and disclose his/her overseas assets if s/he becomes ROR in India. Individuals not doing so are liable to the strict penalties imposed under the proposed new law. Similarly, Indian citizens relocating overseas for employment or to work on IT outsourcing projects will also fall under the ambit of this Bill once they attain residential status under Income Tax Act 1961.

Proposed Tax Rate

Undisclosed foreign income or assets are proposed to be taxed at a flat rate of 30%. Further, exemptions, deductions or set off of any losses carried forward which are otherwise allowed under the provisions of the Indian Income Tax Act are not admissible under the proposed legislation.

What constitutes undisclosed foreign income and assets?

This Bill identifies three broad categories of income/assets outside India:

  • 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;
  • 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
  • Any undisclosed asset(s) located outside India.

The value of an undisclosed asset (including financial interest in any entity) would be the fair market value as may be prescribed.

Implications of Default

Given that the intent of this Bill is to curb the insidious effects of black money on the nation’s exchequer, it is not surprising that severe penalties have been proposed for non-compliance. The penalty and punishment implications associated with different types of non-compliance under the Bill are summarized below.


Nature of non-compliance Financial penalty Charges and punishment
 Non-Disclosure of income or an asset located outside India Three times the amount of tax payable Rigorous imprisonment- 3 years to 10 years for willful attempt to evade tax, penalty or interest.
Failure to furnish a return of income before the end of the relevant year in respect of foreign income or assets (including financial interest in any entity) INR 1 Million  

Rigorous imprisonment up to  6 months to 7 years with fine for willful failure to furnish return of income before the end of relevant year in respect of foreign income or assets (including financials interest in an entity)

Non-furnishing of information or furnishing of inaccurate particulars in a return  INR 1 Million  

Rigorous imprisonment for 6 months to 7 years along with a fine for failure to disclose foreign income or asset or furnishing of inaccurate particulars of same.

Failure to answer questions, sign any statement in any proceedings, failure to produce books of accounts/documents/evidence  INR 50,000 to INR 200,000 Rigorous imprisonment of 6 months to 7 years with a fine for failure to make accurate statement or delivery of false accounts and statements.
Continuing default in payment of tax Amount equal to the amount of default in terms of payable tax Rigorous imprisonment- of 3 years to 10 years for continuing default in payment of tax

Adherence to the Principles of Natural Justice

Though the proposed legislation encompasses stringent penalties along with interest for violations of the prescribed norms in terms of black money and money laundering, the Bill also provides assessees the right to present their case via an appellate mechanism. The Bill requires and mandates issue of notices to persons put on assessment under the proposed Bill. The due process of law prescribed under the Bill provides assesses with an opportunity to be heard and present their contentions in the form of evidences and recording of statements. The Bill also includes in its provisions a period of limitations so to restrict the scope of actions of tax authorities after substantial time lapse.

However, the Bill also provides a one-time compliance opportunity for a limited period. Tax evaders who have undisclosed foreign assets may file a declaration before the specified tax authority within a specified period, along with payment of tax at the rate of 30 percent and an equal amount by way of penalty.

Existing legislation to be further strengthened to empower the government in its fight against black money

The Bill projects the intentions of the NDA government to curb black money and money laundering. To tighten the regulatory net, the government also proposes to amend the Prevention of Money Laundering Act, 2002, and the Foreign Exchange Management Act, 1999, to make concealment of income a punishable act. The offence of concealment of income or evasion of tax in relation to a foreign asset is a crime under the PMLA, 2002, enabling the Enforcement Directorate to attach and confiscate unaccounted assets held abroad and prosecute people laundering black money. The proposed legislation intends to make tax evasion an offence under PMLA, thus making it feasible to impose more severe penalties and punishments.

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