Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 Webcast by Taxpert Professionals 30 May 2015 || Saturday || O5: 30 P.M. to 6:30 P.M call us at 09769033172 || 09769134554 || 022 25138323 Write to Us at info@taxpertpro.com

Content of Discussion

1. Background and Global Scenario

2. Objective of Act

3. Key Features of Act

4.Who are the Tax Payers

5. Total Income

6. Computation of Income

7. Definitions

8.Procedural Provisions

9. Penalty and Prosecution

10. Assessment Proceedings

11. Voluntary Disclosure Scheme

12. Sources of Information

13. Issues & Recommendations

Black money is a term used in common

parlance to refer to money that is not fully

legitimate in the hands of the owner

Generated through illegitimate activities

Taxes not paid

Manipulation of Accounts for Tax Evasion

GLOBAL SCENARIO

US: FATCA

Foreign Account Tax Compliance Act (FATCA)

• The provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) became law in March 2010.

• FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts

• FATCA focuses on reporting: - By U.S. taxpayers about certain foreign financial accounts and offshore assets

- By foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest

- The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.

Australia : “DO IT”

• The Australian Taxation Office (ATO) announced in 2014 an initiative - ‘Project DO IT: Disclose Offshore Income Today’. Deadline : 19 December 2014

• It provides eligible taxpayers the opportunity to voluntarily disclose unreported foreign income and assets before these are identified by ATO activity.

• The ATO offers significant penalty and other concessions to encourage disclosure, including of structures established by earlier generations.

• Project DO IT is a major opportunity to reduce tax risks of penalties, other sanctions and reputation damage which have occurred for Australian and overseas business people, families and even politicians whose unreported foreign income has been identified by tax authorities.

Objectives of the Act

• To tax undisclosed foreign income (which has not been reported under existing Income Tax Act)

• To tax undisclosed foreign assets acquired from such undisclosed foreign income (which has not been reported under existing Income Tax Act)

• To punish the persons indulging in illegitimate means of generating money causing loss to the revenue

• To prevent illegitimate income and assets kept outside India from being utilized in ways which are detrimental to India’s social, economic and strategic interests and its national security.

PERSON COVERED

Resident and ordinarily resident shall be liable to pay tax (‘Assessee’)

Meaning of ‘resident’ and ‘ordinarily resident’ shall be as per provisions of Section 6 of the Income-tax Act (‘I-T Act’)

Assessee shall include every person who is deemed to be an assessee-in- default under I-T Act

RESIDENT AND ORDINARILY RESIDENT

A person is said to be “resident” in India in any previous year if he

• is in India in that year for an aggregate period of 182 days or more; or

• having within the four years preceding that year been in India for a period of 365 days or more, is in India in that year for an aggregate period of 60 days or more. The above provisions are applicable to all individuals irrespective of their nationality. However, as a special concession for

Indian citizens and foreign citizens of Indian origin, the period of 60 days referred above, will be extended to 182 days in two cases:

(i) where an Indian citizen leaves India in any year for employment outside India; and

(ii) where an Indian citizen or a foreign citizen of Indian origin (NRI), who is outside India, comes on a visit to India.

A person is said to be ordinarily resident if it has been resident in India in 9 out of 10 preceding previous years or he has during the 7 preceding previous years been in India for a period of, or periods amounting in all to, 730 days or more.

Key Features of the Act

The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 inter alia provides for the following, namely:—

(i) Concealment of income in relation to a foreign asset will attract penalty equal to three times the amount of tax (i.e., 90 per cent of the undisclosed income or the value of the undisclosed asset). Failure to furnish return of income by person holding foreign asset, failure to disclose the foreign asset in the return or furnishing of inaccurate particulars of such asset shall attract a penalty of Rs.10 lakh.

(ii) The Bill provides for criminal liability with enhanced punishment. Wilful attempt to evade tax in relation to a foreign income will be punished with rigorous imprisonment from three years to ten years and with fine. Failure to furnish a return of income though holding a foreign asset, failure to disclose the foreign asset or furnishing of inaccurate particulars of the foreign asset will be punishable with rigorous imprisonment for a term of six months to seven years. The provisions will also apply to banks and financial institutions aiding in concealment of foreign income or assets of resident Indians or falsification of documents.

(iii) Second and subsequent offence will be punishable with rigorous imprisonment for a term of three years to ten years and with fine of Rs.1 crore to Rs.25 lakh. In prosecution proceedings, the wilful nature of the default shall be presumed and it shall be for the accused to prove the absence of the guilty state of mind.

(iv) To facilitate enquiry and investigation, authorities under the Act have been vested with the powers of discovery and inspection, issue of commissions, issue of summonses, enforcement of attendance, production of evidence, impounding of books of account and documents.

(v) The Central Government has been empowered to enter into agreements with other countries, specified territories and associations outside India inter alia for exchange of information, recovery of tax and avoidance of double taxation.

(vi) Safeguards to prevent misuse have been embedded in the Bill. It will be mandatory to issue notices and grant of opportunity of being heard, record reasons for various actions and pass written orders. Appeal to the Income-tax Appellate Tribunal, and to the jurisdictional High Court and the Supreme Court on substantial questions of law have been provided for.

(vii) Persons holding foreign accounts with minor balances which may not have been reported out of oversight or ignorance have been protected from criminal consequences.

(viii) The Bill also proposes to amend Prevention of Money Laundering Act (PMLA), 2002 to include offence of tax evasion under the proposed legislation as a scheduled offence under PMLA.

IMPORTANT DEFINITIONS

• “resident” means a person who is resident in India within the meaning of section 6 of the Income-tax Act;

• “undisclosed asset located outside India” means an asset (including financial interest in any entity) located outside India, held by the assessee in his name or in respect of which he is a beneficial owner, and he has no explanation about the source of investment in such asset or the explanation given by him is in the opinion of the Assessing Officer unsatisfactory;

• “undisclosed foreign income and asset” 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 the manner laid down in section 5;

TOTAL INCOME

• Total undisclosed foreign income and asset shall be: – the income from a source located outside India, which has not been disclosed in the return of income

furnished

– the income, from a source located outside India, in respect of which a return is required to be furnished but has not been furnished

– the value of an undisclosed asset located outside India

4. 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 INCOME

No expenditure shall be allowed as deduction from undisclosed foreign income or asset

No loss can be set-off against such an income or asset

Any income which has been assessed to tax under I-T Act shall be reduced from value of undisclosed foreign asset if asset is acquired from such income.

Proportionate income, which was assessed to tax, shall be reduced from FMV of foreign undisclosed asset being immovable property and remaining amount shall be taxable under the Bill

Example: A foreign asset was acquired by an assessee in the financial year 2009-10 for Rs. 50 lakhs. Out of total investment, Rs. 20 lakhs was assessed to tax. When the Assessing Officer identified the undisclosed asset in the year 2017-18, the value of such asset was determined at Rs. 1 crore. In this case the amount chargeable to tax shall be computed after reducing the proportionate value of sum which was assessed to tax and invested in the foreign asset. It shall be Rs. 60 lakhs [Rs. 1 Crore less (Rs. 1 Crore X 20/50)]

Present Disclosures

FA Schedule FA Details of foreign assets

NOTE : This Schedule is not Applicable for NRI \(Non Resident Indians) as per Reseidential Status

A Details of Foreign Bank Accounts

Sr No Country Code Name of

the Bank

Address of the Bank Name mentioned in the

account

Account Number Peak

Balance

during the

year (in

Rupees)

B Details of Financial Interest in any Entity

Sr No Country Code Nature of

entity

Name of the Entity Address of the Entity Total Investment (at

cost) (in rupees)

C Details of immovable property

Sr No Country Code Address of

the

Property

Total Investment (at

cost) (in rupees)

D Details of any other Asset in the nature of Investment

Sr No Country Code Nature of

Asset

Total Investment (at

cost) (in rupees)

E Details of account(s) in which you have signing authority and which has not been included in A to D above.

Sr No Name of the Institution

in which the account is

held

(Note : If no entry is

made in this column,

then other columns

will not be considered

for that row)

Address of

the

Institution

Name of the Account

Holder

Account Number Peak

Balance/Investment

/ during the year (in

rupees)

F Details of trusts, created under the laws of a country outside India, in which you are a trustee, beneficiary or settlor

Sr No Country Code Name of

the trust

Address of the trust Name of Other trustees Address of Other

trustees

Name of

Settlor

Address of

Settlor

Name of

Beneficiar

ies

Address of

Beneficiar

ies

PROCEDURAL PROVISIONS

Important procedural provisions

Takes precedence on the Income Tax Act

Income Tax authorities to administer

No Separate return/form to be filled

Proceedings could be initiated any time when

the income Tax authorities notice undisclosed foreign

Income or asset

Any source of information to be used to initiate

proceedings

Various modes of recovery of taxes

Reassessment, appeals, revisions of order possible

Principal of natural justice to be followed

Proceedings to be completed within 2 years of intimation subject to

specific exclusion

Appellate options available to taxpayers similar to Tax

laws

VOLUNTARY DISCLOSURE SCHEME

AMNESTY SCHEME

• There is no amnesty scheme under the UFIA Bill because the Supreme Court’s verdict in the late

1990s had barred the Government from offering amnesty schemes owing to public interest litigation3

over the Voluntary Disclosure Income Scheme, 1997.

• Instead, the UFIA Bill offers a one-time disclosure & compliance scheme. It is not an amnesty scheme

as there is no immunity from penalty, although there is immunity from prosecution.

ONE TIME COMPLIANCE OPPROTUNITY

The bill provides for an one time compliance opportunity during the specified period to persons who have any undisclosed foreign asset. However, the Government has refused to call it as an amnesty scheme as no immunity from penalty is being offered (although lower penalty is charged) and only immunity from prosecution is offered. The striking points in this regard are as under:

• Any person may make a declaration in respect of any undisclosed assets located outside India which have been acquired from income chargeable to tax for any assessment year prior to assessment year 2016-17.

• A flat rate of tax at 30% on value of such undisclosed asset and an equal of amount of penalty would be recovered from a person availing of this opportunity. However, immunity from prosecution is being offered to such person.

• No interest under Section 234A, 234B and 234C of I-T Act.

• Amount of undisclosed investment in an asset located outside India shall not be included in the total income of the assessee for any assessment year under the Income-tax Act.

• Any person availing of this opportunity shall not be entitled to reopen any assessment or reassessment made under the Income-tax Act or wealth-tax Act and, further, he can not seek any appeal, reference or other proceedings in relation to any such assessment or reassessment.

• In other words, declaration so made would not affect the finality of completed assessment.

• Tax and penalty so paid shall not be refundable.

• Any declaration made by misrepresentation or suppression of fact shall be deemed as void-ab-initio

• Declaration so filed shall not be considered as an evidence against the declarant for initiating penalty or prosecution proceedings under the Income-tax Act, Wealth-tax Act, 1957, Foreign Exchange Management Act, 1999, Companies Act, 2013 or the Customs Act, 1962

• No wealth-tax shall be levied in respect of asset disclosed in the declaration form. Further, where a declaration is made by a firm, assets so declared shall not be taken into account in computing the net wealth of any partner or in determining the value of the interest of any partner in the firm.

PENALTY AND PROSECUTION

Nature Penalty Prosecution(if any)

Non Disclosure of Foreign Income or Asset

300% of the Tax Payable (Not yet determined)

Failure to disclose foreign asset or income in the return of income

300% of the Tax Payable and Rs.10 Lakhs

6 months – 7 years – if default can be proved to be wilful

If person wilfully attempts to evade any tax, penalty or interest

3 months – 10 years

Continuing default by assesse in making payment of tax

Amount of arrears of tax

If Assesse fails to answer any question, sign a statement he is legally bound to or fails to produce books and supporting evidences

Rs.50,000 to Rs.2,00,000

Nature Penalty Prosecution(if any)

Person makes false statement or delivers false evidences

6 months – 7 years

Abetment to make and deliver false return, account, statement or declaration relating to tax payable

6 months – 7 years

Subsequent offences under this act – where a person commits the second(or more) offence under this act

Rs.5 lakhs – Rs.1 crore 3 years – 10 years

ASSESSMENT PROCEEDINGS

Who has the burden of proof of culpability under the UFIA Bill?

• UFIA Bill presumes that the accused has the required culpable mental state for an offence under the

Act.

• It is presumed that the accused had the intention, motive or knowledge of a fact or belief in, or reason

to believe, a fact to commit an act considered an offence under the UFIA Bill.

• Onus to prove non-culpability beyond reasonable doubt is shifted to the accused - Considering that

penal consequences are being imposed, it is a cause of concern that legislators have sought to shift the

burden of proof on to the accused.

Time limit for completion of assessment

• Once the Revenue has issued a notice to a person for providing information, an order of assessment or

re-assessment cannot be made after the expiry of 2 years from the end of the financial year in which

the notice was issued. However, this period shall not include the time taken to receive information

under the exchange of information process provided under a tax treaty or exchange of information

agreement

• The Income Tax Authorities continue to levy taxes and administer revenues through the Income Tax Act,

however, will refer to this act with regard to any Foreign Assets and Foreign Incomes

• Tax authorities can make any inquiry or investigation into matters of the Assesse even though there are

no proceedings pending before it

• AO will serve notice on the Assesse before proceeding to take any action under this Act

• The principles of Natural Justice cannot be violated. The Assesse will be given an opportunity to be

heard and to appeal to the ITAT, High Court and Supreme Court(where substantial question of law is

involved)

SOURCES OF INFORMATION

Reporting made FATCA

Assessment and other proceedings under Income Tax

Act

Social and Digital Media

From Other departments like

RBI, FEMA etc

Through information sharing mechanism in Tax

Treaties

Action initiated by Enforcement Directorate

ISSUES & RECOMMENDATIONS

ISSUES

• The UFIA (IT) Act must carve our exceptions for bonafide cases like expatriates, his family members becoming resident merely becoming resident merely because of physical presence in India, returning NRI who hold assets overseas acquired from their non Indian sources of Income when they are non resident of India.

• The computation of tax on value of undisclosed asset provide for reduction from the value of asset only for income utilised in acquiring such asset which has been assessed under the Income Tax Act or under the UFIA(IT) Act.

• What about assets acquired from Income exempt from the tax in India or from loan or a gift or inheritance?

• Credit of Income should be allowed must be allowed in the basis of source that may be explained by the assesee instead of restricting it to Income “Assessed to Tax”

• The Scope of disclosure may be widened to other mode of disclosure beyond mere disclosure in the tax return

• No benefit of tax treaties for the tax payers

RECOMMENDATIONS

• Residents who have studied abroad and have returned or have lived abroad and have returned, should review their investments and assets(including bank balances) that they might have outside India

• The existing Income Tax law requires foreign assets to be disclosed, however, the proposed legislation has imposed serious punishment for negligence on the part of the Assessee

• Assesses are advised to disclose any foreign assets that they may own(including part ownership) outside India

RECOMMENDATIONS

• Expatriate employees living in India are normally on border of becoming a Resident and Ordinarily Resident. These employees are advised to keep the list of their bank accounts and other assets ready to disclose the same when the obligation arises

• Even if the Expatriate or other Assesse does not have any taxable income in India, he or she is under an obligation to disclose their assets and incomes outside India, and file their return of income, if they are a Resident and Ordinarily Resident

There will be changes made to the Bill to give more clarity to certain situations that will pose a practical difficulty in disclosure. However, one must not underestimate the impact this law will have on foreign asset disclosure

Partner in your Growth TAXPERT PROFESSIONALS Private Limited call us at 09769033172 || 09769134554 || 022 25138323 Write to Us at info@taxpertpro.com