The Central Government brought out a comprehensive legislation named “The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015” (Black Money Law-BML) as part of its abiding commitment of tracking down and bringing back the black money stashed out of India. BML contains 88 sections and has become operative from 1st July, 2015
vide Notification no. 56/2015. The Government has notified (Notification No. G.S.R. 529 (E) dated 2nd July, 2015) the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015 (the Black Money Taxation Rules) containing the timelines and procedures of the disclosure in relation to the undisclosed foreign assets.
A one-time compliance scheme which is part of the Act was explained vide Circular No. 12 of 2015 dated 2nd July, 2015, to facilitate voluntary declaration of undisclosed foreign assets on or before 30th September, 2015 and providing time for payment of tax up to 31st December, 2015. In this regard, two circular Nos. 13 of 2015 dated 6th July, 2015 and No. 15 of 2015 dated 3rd September, 2015 have been released in question and answer format to clarify various issues relating to this one-time compliance scheme.
1.1 It is extremely important to understand the nuances of this legislation to analyse whether the avowed objective would be achieved without any unintended consequences. G-20 summit of 2008 and the subsequent meetings identified the tax leakages in large proportions and all economies in Europe, US and other countries gave a clarion call to conduct multilateral attack on unearthing black money and taxing the same with requisite penal consequences. In this backdrop exchange of information became very critical and India spearheaded with Tax Information Exchange Agreements (TIEA) with various countries with whom already Double Taxation Avoidance Agreements (DTAA) exist. The existing articles dealing with Exchange of Information (EOI) in DTAAs have been replaced with more elaborate and effective procedure of EOI. In this direction Government of India brought in Prevention of Money Laundering Act, 2002 (PMLA). India signed the Multilateral Competent Authority Agreement (MCAA) to facilitate automatic exchange of information. This pact is signed by as many as 60 countries as of now and the number is likely to increase in the years to come. In order to step up and accelerate this mission, Government has come up with Black Money Law. In this article, I propose to deal with this topic of Black Money Law in the following modules:
a. Scope of the Legislation
b. Assessee, Undisclosed Asset located outside India and Basis of charge
c. Tax Management including Appeals
d. Penalties and prosecution
e. One-time Compliance scheme
f. Amendment in Prevention of Money Laundering Act, 2002 (PMLA) & Amendment in Foreign Exchange Management Act, 1999 (FEMA)
2. Scope of the legislation
BML applies to all persons who are resident and ordinarily resident as per sec. 6(6) of the Income-tax Act, 1961. Hence, it does not apply to non-residents and not ordinarily residents. As per section 1, this Act maybe called The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. It extends to whole of India and shall come into force on the 1st of April, 2016. However, the Central Government through a notification preponed the effective date to 1st of July, 2015.
3. Assessee, Undisclosed Asset located outside India and Basis of charge
• “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
– he has no explanation of the source of investment in such asset
– the explanation given by him, is in the opinion of the Assessing Officer unsatisfactory.
• “Undisclosed foreign income and asset” means a total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India, as referred to in section 4 of this Act.
• “Assessee” means a person being a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income-tax Act, by whom tax in respect of undisclosed foreign income and assets, or any other sum of money, is payable under this Act and includes every person who is deemed to be an assessee in default under this Act.
• 2(15) of this Act says “all other words and expressions used herein but not defined and defined in Income-tax Act shall have the meanings respectively assigned to them in that Act”.
Hence, any word not defined in this Act, shall have the meaning assigned to such word in Income-tax Act, 1961 (ITA).
• The term “person” is not defined in this Act and accordingly the definition of term “person” under the ITA is to be adopted and so it will include individual, HUF, company, firm, AOP, BOI, Local Authority and every Artificial Judicial Person.
3.1 Section 3 is the charging section which provides that every assessee for every assessment year commencing on or after 1st of April, 2016 (AY 2016-17 onwards) shall be charged a tax at the rate of 30 per cent against total undisclosed foreign income and asset of that previous year. An undisclosed foreign asset located outside India shall be charged to tax in the previous year in which such asset comes to the notice of the Assessing Officer.
It is to be noted that an undisclosed foreign asset is brought to taxation in the year in which it is noticed by the Assessing Officer. Whereas, undisclosed foreign income can be brought to tax only when it is converted into an asset and not otherwise. In other words, if undisclosed foreign income is spent by the assessee which pertains to an earlier year prior to this Act coming into force, the same cannot be brought to tax as per Section 3. Only when such undisclosed foreign income of the earlier years which is available in the form of an asset such as deposits or bank balance, the same would be treated as undisclosed foreign asset and taxed in the year in which it is noticed by the AO.
3.2 Section 4 of this Act defines the scope of total undisclosed foreign income and asset to be aggregate of
a) the income from source located outside India which has not been disclosed in the return of income within the time specified in Explanation to sub-section (1), or under sub-section (4) or sub-section (5) of Section 139 of the ITA or no return has been filed in respect of such source.
b) the value of an undisclosed asset located outside India
It is to be examined whether a tax authority under this Act can consider a source of foreign income as undisclosed only after the expiry of time limits for filing return of income as per Section 139(1) or belated return under Section 139(4) or revised return under Section 139(5).
Section 4 which defines the scope provides that an income from source located outside India will become undisclosed only after the time limits of returns as mentioned above have been exhausted. Can it be understood that till such time limits of returns have not been exhausted such source of income cannot be classified as undisclosed for the purpose of this Act?
It is provided that any variations made to income from a source outside India in the assessment or re-assessment of an assessee in accordance with provisions of the head Profits and Gains of Business or Profession or Income from Other Sources or a transfer pricing adjustment under Section 92C shall not be included in the total undisclosed foreign income under this Act.
3.3 As per Section 5 of this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee, whether or not the same is allowed under the provisions of the ITA. The value of undisclosed asset located outside India shall be reduced by income which has been assessed in the period prior to the assessment year to which this Act applies or such income which is already assessed under this Act (BML). While reducing the value of undisclosed foreign asset, the amount of deduction shall be inflated in the same proportion as the assessable/assessed income bears to the total cost of the asset.
The value of undisclosed foreign asset shall be taken at “Fair Market Value” determined as per Valuation Rules in the previous year in which such asset comes to the notice of the officer or the cost whichever is higher.
4. Tax Management
There is no requirement to file a separate return under BML. The Assessing Officer shall serve a notice on the assessee on obtaining any information regarding undisclosed foreign income or asset from an Income tax authority under ITA or any authority under any law or on coming of any information to his notice, requiring the assessee to produce accounts documents or other evidence as per Section 10 of this Act. As per Section 11, a time limit for completion of assessment or re-assessment is set as two years from the end of financial year in which the notice under sub-section (1) of Section 10 was issued by the Assessing Officer.
It is obvious that there will be two assessment orders in respect of single previous year, one under Section 143(3) of ITA and another under Section 10(3) of BML.
All the appellate mechanisms like CIT (Appeals), ITAT, High Court and Supreme Court is put in place similar to what we have under the ITA. Rectification of mistakes, revision of orders and recovery mechanism is also put in place in the same manner what is available under the ITA.
5. Penalties and prosecution
Chapter IV (Sections 41 to 47) deals with penalties and Chapter V (Sections 48 to 58) deals with offences and prosecutions. Penalties and prosecution prescribed under this Act are summarised as under:
Prosecution (if any)
Attempt to evade tax, interest and penalty
300% of the Tax Payable
3 years – 10 years
Failure to disclose foreign asset or income in the return of income **
Rs. 10 Lakh
6 months – 7 years
Attempt to evade payment of tax, interest and penalty
Amount of Tax arrear
3 months – 3 years
Subsequent offences under this Act — where a person commits the second (or subsequent) offence
3 years – 10 years Plus Fine Rs. 5 lakh to
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
If assessee 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
**Failure to report bank accounts with a maximum balance of up to
Rs. 5 lakh at any time during the year will not entail penalty or prosecution.
5.1 In respect of prosecution proceedings Section 54 of this Act prescribes that a culpable mental state on the part of the accused shall exist. The onus is on the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution.
Explanation provides that “culpable mental state” includes intention, motive or knowledge of a fact or belief in, or reason to believe, a fact.
Section 54(2) of the Act provides that a fact is said to be proved only when the Court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.
6. One-time Compliance scheme – Chapter VI (Sections 59 to 72)
Circular No. 12 of 2015 dated 2nd July, 2015 was issued by CBDT to explain the substance of One-time Compliance scheme. A declaration under Chapter VI can be made in respect of undisclosed foreign assets of a person who is a resident other than not ordinarily resident as per Section 6(6) of the ITA. The salient features of the compliance scheme are as under:
• A declaration may be made by a person in respect of any undisclosed asset located outside India and acquired from income chargeable to tax under the ITA in respect of which he failed to furnish a return under Section 139 of the ITA or failed to disclose such income in the return filed or such income escaped assessment by reason of omission or failure on the part of such person to make a return or to disclose fully and truly all material facts necessary for the assessment.
• Person making a declaration shall pay tax at the rate of 30 per cent of the value of such undisclosed asset. In addition, he has to pay another 30 per cent to the value of asset towards penalty. This special rate of tax and penalty specified under the compliance provisions will override any rates specified under the ITA or annual Finance Acts.
• BML shall come into force on 1st April, 2016. However, in exercise of its power to remove difficulties under Section 86 of the Act, the Central Government by an order has clarified that that Act shall come into force on 1st July, 2015 and accordingly compliance provisions under Chapter VI also come into effect from 1st July, 2015.
• Central Government has notified 30th September, 2015 as the last date for making the declaration before the designated Principal Commissioner or Commissioner of Income-tax. It is also notified that 31st December, 2015 as the last date by which the tax and penalty amounting to 60 per cent of the value of the undisclosed asset shall be paid.
• Form 6 has been prescribed as form for declaration under Chapter VI of the Act.
• Designated Principal CIT/CIT will issue an intimation in the proforma annexed to the circular to the declarant by 31-10-2015, whether any information in respect of the declared asset has been received by the competent authority on or before 30th June, 2015 as per Exchange of Information Article of a DTAA.
• In case of any such information being received on or before 30th June, 2015 as mentioned above, the declarant shall file revised declaration in Form 6 excluding such asset against which the information was already received by the Revenue. However, it is clarified that the declarant shall not be liable to any consequences under the Act in respect of any asset which has been duly declared but has been found ineligible for declaration as Central Government had prior information on such asset. However, such information will be used under the provisions of the Income-tax Act.
• Revised declaration shall be filed within 15 days from the date of receipt of intimation from the designated Principal Commissioner/Commissioner
• However, in all cases declarant is required to pay the requisite tax and penalty on the assets eligible for declaration latest by 31st December, 2015.
• After the intimation of payment by the declarant, the designated Principal CIT/ CIT will issue an acknowledgement in Form 7 within 15 days of such intimation of payment by the declarant against the accepted declaration.
6.1 Declaration not eligible in certain cases
No declaration under Compliance window can be made in respect of any undisclosed foreign asset which has been acquired from income chargeable to tax under the ITA for assessment year 2015-16 or any earlier year in the following cases:
a) Where a notice under Sections 142/ 143(2)/148/153A or 153C in respect of such assessment years and proceedings are pending before the AO and such notice has been served upon the person on or before 30th June, 2015.
b) Where a search has been conducted under Section 132 or requisition has been made under Section 132A or a survey has been carried out under Section 133A of the ITA in a previous year and the time for issuance of notice under Section 143(2) or Section 153A or Section 153C for the relevant assessment year has not expired.
c) Where any information has been received by the competent authority under a DTAA on or before 30th June, 2015 in respect of such undisclosed foreign asset.
d) A person in respect of whom proceeding for prosecution of any offence punishable under Chapter IX (Offences relating to Public Servants) or Chapter XVII (Offences against property) of the Indian Penal Code or under Unlawful Activities (Prevention) Act or the Prevention of Corruption Act are pending, shall not be eligible to make declaration under Chapter VI.
6.2 Instances where declaration shall be invalid
In the following situations, a declaration shall be void and shall be deemed never to have been made:
a) If a declarant fails to pay the entire amount of tax and penalty within the specified date i.e. 31-12-2015.
b) Where the declaration has been made by misrepresentation or suppression of facts or information.
If the declaration is held to be void and is deemed to have been never made then, all penalties and prosecution provisions shall apply. Any tax or penalty paid against such invalid declaration shall not be refundable under any circumstances. This would be the most dangerous situation for a declarant of having lost money in the form of tax and penalty; he would be susceptible to all penalty and prosecution provisions.
6.3 Valid declaration — benefits to the declarant
In respect of a valid declaration, the following consequences will be there:
a) The amount of undisclosed asset in the asset declared shall not be included in the total income of the declarant in any of the income tax assessments.
b) The contents of the declaration shall not be admissible in evidence in any penalty or prosecution proceedings under the ITA, Wealth Tax Act, FEMA, Companies Act or Customs Act.
c) The value of the asset shall not be chargeable to wealth tax in any assessment years.
d) A declarant will not be entitled to affect the finality of the completed assessments on account of declaration of undisclosed foreign asset.
7. Amendment in Prevention of Money Laundering Act, 2002 (PMLA)
The PMLA has been amended to include tax evasion and non-payment of interest and penalties as determined under the BML as ‘scheduled offences’.
7.1 Amendment in Foreign Exchange Management Act, 1999 (FEMA)
The Finance Act, 2015 has amended FEMA by inserting section 37A to provide for seizure of Indian assets equivalent to value of foreign exchange, foreign securities or immovable properties situated outside India and held in contravention of section 4 of FEMA.
BML though brought in with a very laudable objective there are issues and concerns that are coming up from law abiding genuine tax payers. Some of these need urgent attention of the law makers and deserve redressal at the earliest opportunity. Some of the vital issues are as under:
a) Returning Indians
b) Valuation rules – whether it is wealth tax or income tax?
c) Compliance window – too short a period
d) Overlapping Claims- BML vs. ITA
The above issues are dealt with at length as under:
8.1 Returning Indians
It is commonly known that many IT professionals who worked in USA and opened 401K pension accounts have never reported them to Indian tax authorities after they became residents on returning back. Such individuals have to face the rigours of BML as such undisclosed foreign pension accounts are undisclosed assets under BML. Plans where contributions vest immediately and subscribers are certain to get their money will have to make disclosure of such balances under BML. Even future benefit plans would be covered under BML. In US there are also schemes known as Individual Retirement Accounts (IRA). Even these accounts come under the scanner of BML, if not declared by the account holders on turning residents in India. Question No. 3 in clarifications issued by CBDT on 3rd September vide Circular no. 15 clarifies that such pensions received abroad after a person becoming a resident are taxable in India and the same may be declared under Chapter VI of the Act (one-time compliance) if not declared in the returns filed in India earlier.
It was further clarified that the person is not entitled to any credit of taxes paid, if any, in the foreign country.
If such pension amounts which are taxable in India were spent out, what would be the course of action for such person? In other words, the income pertaining to the period prior to commencement of BML earned abroad and spent is not available in the form of any asset today. In such case there is no undisclosed asset available as on today for declaration. Clarification is required for such cases.
8.2 Valuation rules – is it wealth tax or income-tax?
In respect of an undisclosed foreign asset the valuation is prescribed to be higher of Fair Market Value (FMV) or cost of acquisition of the asset. In respect of FMV the declarant must obtain a report from a valuer recognized by the foreign Government. In most of the foreign countries there is no system of empanelling valuers by the respective Governments similar to the system what we have in India. In this scenario it would be a challenge for the declarant to get his undisclosed foreign assets valued by a recognized Government valuer, failing which his declaration would become invalid. This would lead to totally undesirable consequences of getting exposed to penalties and prosecution. A clarification is urgently required to sort out this impractical restriction.
In respect of a foreign bank account the valuation rules prescribe that the sum of all the deposits made in the account with the bank since the date of opening of the account after removing such deposits made out of withdrawals from the same account. In case any declaration is already made in respect of such bank account, the sum of all deposits made in the account since the date of such declaration. It is a challenge for the declarant to get the bank statements for all the years since opening of the bank account. Generally foreign banks do not keep data beyond ten years of the past period.
In respect of unquoted equity shares, the formula prescribed by the valuation rules is the net asset value on the basis of FMV of all the assets of the investee company. It is a practical difficulty in obtaining FMV of all the assets of the investee company.
In the category of any other asset whether an intangible asset is covered is to be clarified. If so, valuation report of an intangible asset is a subjective issue.
It is a debatable issue whether the levy of tax under BML is an income tax or wealth tax. Considering FMV of an asset and applying an income tax rate is a legally questionable issue. If such asset which is declared at its FMV and taxes were paid, is sold, such FMV would become the cost of acquisition and the period of holding shall start from the date of declaration of such asset under Chapter VI of the BML. (Question No. 5 of Circular 13)
8.3 Compliance window- too short a period
It is widely thought that the timelines given for the compliance window is too short, especially when a declarant has to cull out details of the past beyond ten years (as there is no time limit under BML) and ensure that his declaration is properly filed and treated as valid. The time limit of three months given from 1st July to 30th September is too short for a person to prepare the documents and come clean. Any hurried approach of compiling data could prove out to be disastrous in case the declaration is filed with incorrect details unknowingly, as the very declaration will become invalid.
In view of paramount significance that BML commands in the present scenario, it is highly appropriate to extend the deadline by at least another three months.
8.4 Overlapping claims — BML vs. ITA
In case a declaration is found to be void under Section 68 of the Act then the tax and penalty paid would not be refunded. As the declaration is held to be void in such a case the Assessing Officer may issue notice under the normal provisions of the Act. As of now the tax would be collected again under the normal provisions in respect of undisclosed assets and there is no mechanism under the BML to claim refund or set-off of taxes paid in respect of a wrong declaration. This is a severe hardship a declarant has to face which requires redressal from CBDT.
This piece of legislation is extremely important in view of severe penalties and prosecution for those assessees who want to come clean through the compliance window. This article is meant to initiate brainstorming on this important topic.
[Source: Article published in Souvenir of 18th National Convention held on 26th and 27th December, 2015 at Hyderabad]