These days, many economies in the world are concerned about stashing away of unaccounted money abroad by some citizens. The generation of unaccounted money has been a matter of significant concern, not only from a tax perspective, but also from a security perspective, since it is difficult to track the flow of unaccounted money.
The Supreme Court of India has also expressed concern over this issue. The Special Investigation Team constituted by the Central Government to implement the decision of the Supreme Court, has also expressed the view that measures need to be taken to curb the menace of unaccounted money.
Internationally, a new regime for automatic exchange of financial information is taking shape fast and India is a leading force in this effort.
During recent past, the Government of India has taken steps to tackle the menace of unaccounted money. One of the measures introduced by the Government was mandatory reporting of foreign assets held abroad by residents in tax return forms, irrespective of the level of income in India.
During his Budget Speech for 2015, the Finance Minister reiterated his commitment to track down undisclosed funds abroad. Accordingly, the Undisclosed Foreign Income & Assets (Imposition of Tax) Bill, 2015 was introduced in Lok Sabha on 20 March 2015.
Currently, the proposed Bill is applicable to Ordinarily Resident Taxpayers, who have undisclosed foreign income/assets (including financial interest in any entity). In its current form, the Bill is also applicable to expatriate employees including their family members, who qualify as Ordinarily Residents due to their physical presence in India.
According to the Bill, the “undisclosed foreign income & asset” comprises:
- Undisclosed income from a source located outside India
- Undisclosed asset located outside India
A foreign income/asset (from source located outside India) is “undisclosed” if the same has not been disclosed in the tax return or the tax return has not been filed.
The Bill proposes to tax undisclosed foreign income and assets at a rate of 30% and no claim for deductions, allowances or offsetting against losses will be allowed for such income. Income and assets taxed under this legislation will then not be subject to tax again under regular domestic income tax laws.
The Bill also proposes stringent provisions with respect to penalties up to 300% of the tax determined and prosecution, which could result in up to 10 years imprisonment, depending on the severity of the offence.
Moreover, a penalty of INR1,000,000 will be levied under the following scenarios if the taxpayer has undisclosed assets/income:
- Failure to furnish tax return within specified time under income tax laws
- Failure to furnishing information or furnishing inaccurate information in tax return under income tax laws
However, the above penalty will not be applicable in respect of one or more bank accounts outside India, having an aggregate balance not exceeding INR500,000 at any time during the respective year.
The Bill also provides for one time limited period opportunity for taxpayers to declare voluntarily any undisclosed asset located outside India, which he/she has acquired from income chargeable to tax under Indian tax laws for any year prior to 1 April 2015.
The taxpayer will need to file a declaration in the prescribed form before the specified tax authority within a stipulated time period, and pay tax at 30% of the value of asset, and an equal amount of penalty. In such cases, no prosecution proceedings will be initiated under the Indian tax laws and also some other specified laws. Such persons will enjoy exemption from levy of Wealth Tax for past years in relation to declared assets.
The Bill does not prescribe any limitation period for assessment and reassessment in relation to undisclosed income/asset. However, Income-tax law prescribes a limitation period of 16 years in case of assessment of undisclosed income in relation to any asset located outside India.
While the Bill is a great step to curb the generation of black money outside India, one of the main concerns emanating is applicability of the Bill to expatriates who come to work in India with their family members and have savings, assets/wealth outside India.
The Bill will not become law until approved by both the houses of the Indian Parliament and receives acknowledgement from the President of India. Once approved, the legislation will come into force as of 1 April 2015.
Considering the significant penalties applicable and the prosecution proceedings for the non-reporting or inaccurate reporting of overseas income or assets by taxpayers, it is recommended that taxpayers:
- Evaluate the impact of the new Bill with respect to different type of assets held outside India and their reporting requirements
- Ensure accurate reporting of overseas assets/income in the tax returns
- Review past compliance in order to benefit from one time disclosure opportunity