Tax Hotline: Indian revenue issues clarifications on the Black Money Act

• Black Money Act covers residents with undisclosed foreign assets and income and non-residents who have invested Indian-sourced income in offshore assets
• Compliance Scheme window open only till 30 September for declaring assets and until 31 December 2015 to pay tax at 30% and penalty at 30%.
• Revenue recommends disclosure of nil-value assets now under Compliance Scheme to avoid tax at 30% and penalty upto 90% if information on assets received after 30 September 2015.

Background

The Government had promised in the 2015 Budget that it would take swift action to bring back to India undisclosed offshore income and assets of residents that had escaped being taxed in India. This resulted in the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 (click here to access our Hotline on the Bill) being introduced on March 20, 2015.

On May 11, the Lower House of Parliament passed the Bill, now called the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Bill, 2015 (with certain minor changes). The Upper House of Parliament assented to this Bill on May 14, 2015 and on May 26 the Bill received the assent of the President of India (the “Black Money Act”). Originally slated to come into effect from April 1, 2016, the Black Money Act has now come into effect from July 1, 2015. The stated purpose of the Black Money Act is to deal with the menace of black money and this Act seeks to, among other things, levy tax on the undisclosed assets and income held abroad by Indian residents and Indian-sourced income of non-residents invested in assets abroad.

The Black Money Act provides for a penalty up to 90% of the value of an undisclosed asset in addition to a tax at 30%, as well as sentences of rigorous imprisonment, to be imposed in certain cases. The legislature has introduced a one-time compliance opportunity for a limited period (“Compliance Scheme”) for persons who are affected by the Black Money Act to provide a chance to come clean and streamline their affairs. Residency for the purposes of the Black Money Act is to be determined in accordance with the provisions of the Income Tax Act, 1961 (“ITA”).

KEY DATES IN 2015

1 July: Black Money Act effective.

2 July: Black Money Rules on asset valuation & procedures notified.

6 July: FAQ Circular issued.

30 Sep: Deadline for declaring offshore assets under the Compliance Scheme.

31 Oct: Deadline for Revenue to intimate declarant about information it has from other sources on declarant’s assets.

31 Dec: Deadline for making payment of tax and penalty under Compliance Scheme.

The passage of the Black Money Act lead to numerous queries from taxpayers and advisors alike who were grappling with the confusion caused by the broad reach of the legislation. In an attempt to provide clarifications to these queries, the Indian Revenue issued Circular No.13 of 2015 (the “FAQ Circular”) on July 6, 2015. A circular of the Revenue is statutory in nature. It is binding on the Revenue and not open to the Revenue to deviate from the position it has taken on a certain issue in the circular. This hotline analyzes the Compliance Scheme and FAQ Circular.

1. Applicability of the Compliance Scheme

The Black Money Act imposes a tax at the rate of 30% and penalty of up to 90% on an assessee’s total undisclosed foreign income and assets of the previous year. ‘Previous year’ has a specific definition under the Black Money Act that is wider than the definition of ‘previous year’ under the ITA.¹ ‘Assessee’ has also been defined under the Black Money Act to mean a person being a resident of India as per the tests of residence under the ITA. However, under the Compliance Scheme, any ‘person’ may make a declaration in respect of any undisclosed foreign assets acquired from income chargeable to tax under the ITA may be made. The Black Money Act defines an undisclosed asset located outside India (“undisclosed foreign asset”) as “any asset (including a 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 in the opinion of the Assessing Officer is unsatisfactory.” Though the definition is assessee specific, the FAQ Circular has clarified that if income was accrued or received in India while a person was a non-resident, such income would be chargeable to tax in India. If such income was not disclosed in that person’s Indian tax returns, and a foreign asset was acquired from such income, then that foreign asset becomes an undisclosed foreign asset and he may declare such assets under the Compliance Scheme. The benefit of making use of the Compliance Scheme (available only for a 3 month period) is that a maximum tax at 30% and penalty at 30% is imposed. However, in the ordinary course a maximum tax at 30% and penalty of up to 90% is imposed under this Act.

Where a person is neither a resident in India nor owns any foreign assets acquired from India-sourced income, the foreign assets so acquired will not be undisclosed foreign assets and should not be required to be declared under the Compliance Scheme. It is not necessary that the undisclosed foreign asset should be held by the declarant on the date of making the declaration. For example, where a person held a foreign bank account but closed that account before the Black Money Act came into force; the account would still be regarded as an undisclosed foreign asset and should be declared under the Compliance Scheme. Similarly foreign assets acquired from income accrued or received in India, but disposed of before the Black Money Act came into force would also be regarded as undisclosed foreign assets and should be declared under the Compliance Scheme. The Revenue has also recommended declaring all foreign undisclosed assets, even if the fair market value (‘FMV’) is nil, to avoid initiation of any inquiry under the Black Money Act if the existence of the undisclosed foreign asset comes to the notice of the Assessing Office in future.

2. Impact of Income Tax notices already issued

If a person is affected by the Black Money Act and wishes to declare undisclosed assets under the Compliance Scheme, he cannot declare those assets acquired in an assessment year for which that person has already been issued and served a notice² from the Revenue on or before 30 June 2015. A person can declare other foreign assets which have been acquired during years for which no notice under the specific ITA sections have been received.

Where an undisclosed foreign asset has been acquired partly during a year relevant to the assessment year for which a notice has been received on or before 30 June 2015 (“Notice Year”) and partly during other years which are not pending for assessment, a person may declare the undisclosed asset under the Compliance Scheme. However, for the purposes of computing the amount of declaration, the investment made in the asset during the Notice Year must be deducted from the FMV of the asset. The investment amount deducted shall be liable to assessment under the ITA as per the usual assessment proceedings. If a notice under the specified section of the ITA has been issued after 30 June 2015, a person can declare the full value of the asset even if the asset has been acquired wholly or partly in the year relevant to an assessment year for which the ITA notice was issued.

*An example of an undisclosed foreign asset.

3. Impact of information received under tax treaties

Where information as to offshore assets and / or income has been received by the Government of India under a Tax Information Exchange Agreement (‘TIEA’) or a Double Taxation Avoidance Agreement (‘DTAA’) before June 30, 2015, the declarant may not declare under the Compliance Scheme those undisclosed foreign assets in respect of which information has been received. Once a person has filed a declaration under the Compliance Scheme by 30 September 2015, the Revenue will inform him by 31 October 2015 whether it already has information about the assets declared. If the Revenue had received information about the declared assets on or before 30 June 2015, those assets are ineligible for the benefits of the Compliance Scheme. If information was not received on or before 30 June 2015 on the declared assets, the assets are eligible for the benefit under the Compliance Scheme and the declarant has time till 31 December to pay tax and penalty. However, there is no way for such person to verify the correctness of the Revenue’s claims of having received the information before June 30, 2015.

A person who is a non-resident but who owns foreign assets acquired from income that accrued or was received in India must also be mindful of his obligations under the Black Money Act since such income is chargeable to tax in India. If such income was not disclosed in the Indian tax returns and a foreign asset was acquired from such income, the asset qualifies as an undisclosed foreign asset for the purposes of the Black Money Act. The person must consider declaring the asset under the Compliance Scheme. The FAQ Circular has clarified that if an undisclosed foreign asset was sold prior to being declared under the Compliance Scheme, the proceeds from the sale of such asset would be chargeable to tax under the Black Money Act. Income arising from an undisclosed foreign asset not yet declared under the Compliance Scheme would also be chargeable to tax under the Black Money Act. The FAQ Circular has also clarified that in a situation where a resident has earned foreign income, paid tax in the foreign country on such income but not declared it in India, that person must declare the foreign bank account (in which the income would have been deposited) or asset (purchased from the income) under the Compliance Scheme. However, no credit of foreign taxes paid shall be allowed in India since the Black Money Act specifies that such a relief under a treaty will not be allowable under this Act. Furthermore, the Black Money Act has also ruled out any agreement with a foreign country for the purpose of granting relief in respect of tax chargeable under this Act.

4. Select issues

A. Immunity from prosecution under the Prevention of Money Laundering Act (“PMLA”)

The FAQ Circular has clarified that where a declaration of an asset has been made under the Compliance Scheme, the offence of willful attempt to evade tax (which has been made a scheduled offence³ under the PMLA) will not apply. Therefore liability under the PMLA in respect of the declared assets will not get triggered. However, this may mean that under the PMLA, the declarant may be proceeded against on the basis of the nature of activities that resulted in the income used to acquire the asset where that activity may itself be a scheduled offence under the PMLA. For example, if the undisclosed foreign assets of the declarant were acquired by way of income got through ‘selling goods marked with a counterfeit property mark’ (a scheduled offence under the PMLA Act).

The FAQ Circular has reiterated that immunity under the Compliance Scheme is only with regard to offences under the ITA, the Companies Act, the Wealth Tax Act, FEMA and the Customs Act and no other Act. For example, if the undisclosed foreign asset was acquired out of the proceeds of the sale of protected animals, the declarant would not be eligible for immunity from the Wildlife (Protection) Act.

B. Capital Gains

In relation to real estate, the Black Money Rules require the fair market value of an immovable property to be the higher of the cost of acquisition of the property or the price that the property shall ordinarily fetch if sold in the open market on the valuation date. The declarant is required to obtain a valuation report from a valuer recognized by the Government (or any of its agencies) of the country or territory outside India in which the property is located, for the purpose of valuation of immovable property under any regulation or law. There is still ambiguity here in regard to who will be considered to be a valuer recognized by a foreign Government.

If an undisclosed asset is declared, tax and penalty paid under the Compliance Scheme, the declarant will be liable for paying tax on the capital gains incurred when that asset is sold in the future. The FAQ Circular has clarified that in such a case, there will be a step-up in basis, i.e. the cost of acquisition will be the fair market value as calculated for the Black Money Act. However, the period of holding shall start from the date of declaration of such asset under the Compliance Scheme. Therefore, even though the declared asset (e.g. immoveable property) may have been held by the owner for more than three years but is sold in 2016, the asset will be considered to have been held for less than three years and may be ineligible for the lower tax rate applicable to long-term capital gains.

C. Financial Interest

‘Financial interest’ has not been defined in the Black Money Act. However, the ITA requires any person holding as a beneficial owner, or being beneficiary of, any asset (including a financial interest in any entity) located outside India to furnish returns to the Revenue. The ITA provides however that where the income arising from the foreign asset or financial interest is included in the returns of the beneficial owner, the beneficiary will not be required to file returns in regard to such income. To understand what the terms ‘financial interest’, means for the purposes of the ITA, reference must be made to Section 139 of the ITA and the Instructions for filling Form 2 of the Income Tax Returns.

Since reliance is required to be placed on Instructions for filling Form 2 for filing Income Tax Returns, the ambiguity surrounding who will be regarded as having a financial interest continues. According to the Instructions, a financial interest would also be said to exist where the owner of a foreign asset is a trust where the resident has beneficial or ownership interest, or a corporation in which the resident owns, directly or indirectly, any share of voting power.

D. Fully Explained Foreign Assets

There appears to be some discrepancy regarding which assets will be regarded as being fully explained (although not disclosed in India) and which will be regarded as being undisclosed. The Black Money Act defines an undisclosed foreign asset as an asset held by the assessee in his name or in respect of which he is a beneficial owner and has no explanation about the source of investment in the asset or the given explanation is unsatisfactory in the opinion of the Revenue. The FAQ Circular has clarified that mere disclosure of the asset in Schedule FA of Form 2 of the Income Tax Returns does not mean that the source of investment has been explained, and such an asset will constitute an undisclosed foreign asset and should be declared under the Compliance Scheme. However, fully explained foreign assets acquired out of tax paid income need not be declared under the Compliance Scheme even if not declared in Schedule FA. The Revenue has offered no explanation as to how foreign assets may be regarded as fully explained, when they have not been disclosed in Schedule FA so that taxpayers can avoid queries if in the future information about these assets are received by the Revenue from other sources.

The FAQs have clarified key queries on the scope of application of the Act such as when a former non-resident becomes resident or vice versa or when foreign property is received via inheritance or queries in relation to valuation issues such as the new cost of acquisition or treatment of bank accounts from which amounts have been withdrawn. That said, the scope of the Act has been cast so wide that it has caused anxiety amongst many who would otherwise have not considered themselves as ‘tax evaders’. For instance, inherited house property which was acquired from an unexplained source of investment would be treated as an undisclosed foreign asset. Even if the house property has been sold, it would continue to be treated as an undisclosed foreign asset unless declared under the Compliance Scheme. Another concern is whether declarants have the ability and resources to pay the large sums involved, especially since tax and penalty is to be calculated on the current price of the asset and not the price at which it was purchased, or in the case of undisclosed bank accounts on the sum of all deposits made rather than the balance as on date. The short duration of the Compliance Scheme means that most taxpayers may not have sufficient time to obtain financial and legal advice to file (or not file) the necessary paperwork in time. This may end up causing harassment to those who were not meant to be targeted by the Act.

¹ Under the Black Money Act, ‘previous year’ means –

(a) The period beginning with the date of setting up of a business and ending with the date of the closure of the business or the 31^st day of March following the date of setting up of such business, whichever is earlier:

(b) The period beginning with date on which a new source of income comes into existence and ending with the date of closure of the business or the 31^st day of March following the date on which such new source comes into existence, whichever is earlier:

(c) The period beginning with the 1^st day of the financial year and ending with the date of discontinuance of the business other than business referred to in clause (b) or dissolution of an unincorporated body or liquidation of a company, as the case may be:

(d) The period of twelve months commencing on the 1^st day of April of the relevant year in any other case,

and which immediately precedes the assessment year.

² These provisions are Sections 142, 143(2), 148, 153A or 153C. Under section 142 the Revenue can issue notice to a Taxpayer asking him to file his Indian tax returns if he has not already filed them, or to furnish certain accounts or documents or information on certain points or matters (including a statement of all the Taxpayer’s assets and liabilities, whether included in the accounts or not). Under section 143(2) the Revenue can issue notice to a Taxpayer to submit himself to a scrutiny assessment. Under section 148 the Revenue can issue notice to a Taxpayer if it has reason to believe that any income chargeable to tax has escaped assessment. Under section 153A the Revenue can issue a notice to conduct a search and require documents from a Taxpayer. Under section 153C if the Revenue has reason to believe that the any money, bullion, jewellery or other valuable article or thing, or any books of account or documents, seized or requisitioned under section 153A belong to a person other than the Taxpayer then, it can proceed against each such other person after issuing notice and assess or reassess the income of the other person.

³ A ‘scheduled offence’ is any offence included in the schedule to the PMLA Act and includes certain offences under certain Acts including the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, the Explosives Act, the Explosive Substances Act, The Unlawful Activities (Prevention) Act, the Arms Act, the Wildlife (Protection) Act, the Immoral Traffic (Prevention) Act and the Prevention of Corruption Act.