HR and tax alert | August 2015
Indian Government provides one-off disclosure opportunity under the “Black Money Act”
On 1 July 2015, the Indian Government announced a one-off disclosure opportunity in respect of the “Black Money Act” enacted in May of this year. This allows those who are ordinarily resident for tax purposes to declare overseas assets acquired from previously undisclosed taxable income or gains and receive protection from prosecution.
Disclosures made under the Act need to be made by 30 September 2015 and the associated taxes and penalties must be paid by 31 December 2015.
The Indian Government has also published a set of Frequently Asked Questions (FAQs) relating to the disclosure opportunity which cover issues such as when an asset is purchased partly out of undisclosed income and partly out of other funds.
Scope of disclosure opportunity
A taxpayer who is ordinarily resident can declare undisclosed assets acquired from income taxable under Indian tax law for a tax year prior to 2015/16 where:
- The taxpayer has not submitted a tax return within the specified time period, or
- The taxpayer has failed to disclose such income in a tax return, or
- The income taxable under Indian tax laws was not assessed on account of omission by the taxpayer of all material facts necessary for assessment.
A partial disclosure of assets will provide protection only to the extent of the assets disclosed.
Tax rate and penalties
Taxpayers making a declaration under the scheme would be required to pay tax at the rate of 30% of the Fair Market Value (“FMV”) of the undisclosed foreign assets. In addition, the taxpayer would also be liable to pay an amount equal to the tax as a penalty. The total taxes and penalties would therefore represent 60% of the FMV of the assets.
The taxpayer is required to file a declaration on a prescribed form with the tax authorities on or before 30 September 2015. Once the application is accepted by the tax authorities, notification will be sent to the taxpayer of taxes and penalties due.
However, the declaration shall be invalidated if the taxpayer fails to pay all of the taxes and penalties before 31 December 2015, or if the declaration is tainted by misrepresentation or omission of information.
Any tax or penalty paid in relation to the declaration shall not be refundable.
Fair Market Value (“FMV”) of the assets
The Indian Government has set out rules for the valuation of assets under the Act and taxpayers must use these to determine the FMV of the undisclosed foreign assets. They may be required to obtain a valuation report in some cases. The valuation is to be done in one of the permitted currencies set out by the exchange control authorities and converted into Indian rupees using the official exchange rates set out for this purpose.
If an asset has been acquired using a mixture of undisclosed and disclosed income, then the valuation of the asset for assessing the tax due for this purpose depends on whether the asset is moveable or immovable. In the former case, tax would be due on the full value of the asset less the amount of disclosed income. Where the asset is immovable, only the portion of the asset value that relates to undisclosed income is considered.
For example, suppose we have £40,000 of undisclosed income, which we use along with other (disclosed income) to acquire an asset for £60,000. If the value of the asset goes up to £100,000, then:
- Where the asset is moveable, the value on which the tax is calculated is £100,000 less £20,000 = £80,000. The tax and penalty would each equal £24,000.
- Where the asset is immovable, the value on which the tax is calculated is £100,000 x £40,000/£60,000 = £66,667. The tax and the penalty would each equal £20,000.
For this purpose, we understand “disclosed income” will include income which is out of scope of Indian tax, for example, owing to non-residence or non-ordinary residence.
Where an asset is acquired from the proceeds of a disposal of another asset, and the former asset is acquired out of undisclosed income, both assets will need to be declared.
The Government has clarified in its FAQs that is advisable to report all undisclosed assets, even if the FMV is “nil” under the valuation rules.
Cases where the disclosure opportunity is not available
Taxpayers will not be able to take advantage of the disclosure opportunity in any of the following cases:
- Where a tax assessment audit has been initiated for the relevant tax year and the proceedings are pending closure under Indian tax laws.
- Where any information on the undisclosed assets has been received by the competent authorities, on or before 30 June 2015, under agreements entered into by the Indian Government.
- Where the taxpayer has any pending proceedings, prosecutions or offences under Indian law.
Protection from prosecution under other laws
Once the declaration is processed and taxes have been paid, the amount of undisclosed investment in the asset declared has immunity from prosecution under the Income tax Act, Foreign Exchange Management Act, Wealth tax Act, Companies Act and Customs Act.
The disclosure does not provide protection from prosecution under other Indian laws not listed above.
Frequently asked questions (FAQs)
On 6 July 2015, the Indian Government issued FAQs on the scope and procedure of the disclosure opportunity. Some of these details are set out below:
- Assets acquired by taxpayers when they were non-resident, from income which is not taxable under Indian tax law, will not be considered as undisclosed assets.
- Taxpayers who are non-resident in the current financial year are still eligible to make a disclosure if the assets are acquired from undeclared income which was taxable in India whilst they were resident.
- Failure to report an asset in an income tax return does not automatically mean it is an undisclosed asset. If a taxpayer is able to explain the source of acquisition of the asset and if the asset is acquired out of income which was taxed in India, the asset is not considered as undisclosed.
- In the case of ordinarily resident taxpayers, overseas assets are required to be reported in tax returns for the financial year 2015/16 and onwards, even if acquired from income not chargeable to tax in India. Failing this, a penalty of INR 1,000,000 (approximately $15,600 USD) will be levied.
- However, there is no levy of the INR 1,000,000 penalty if the undisclosed assets are foreign bank accounts having an aggregate balance not exceeding INR 500,000 at any time during the financial year.
- On the other hand, the mere reporting of a foreign asset in the income tax return for the current financial year or earlier years does not mean that the source of income for the asset has been explained and that it is not an undisclosed asset. If the taxpayer is unable to explain the source of the investment, then the asset is treated as undisclosed even though it was reported in the tax return. Thus, an individual is not exonerated by the mere reporting of the asset in the return.
- A declaration may be made if the foreign asset was acquired out of undisclosed income even if the asset has been disposed of and is not held by the taxpayer on the date of the declaration.
- An asset acquired by a non-resident from income which is no chargeable to tax in India is not an undisclosed asset under the Act even if the individual is a resident of India in the year under question. However, income (if accrued or received in India) is chargeable to tax even for a non-resident and thus, if such income was not disclosed in the return of income and the foreign asset was acquired from such income then the asset is treated as undisclosed.
- In case of undisclosed income deposited in a foreign bank account over a period, the FMV will be the sum of all the deposits made in the account and not on the balance appearing in the bank account. Further, even a bank account closed in the prior years will be considered as undisclosed, if the source is not explained and was acquired from untaxed income.
Where a resident of India earns income outside India, even though the income may be considered taxable overseas, and deposits this into a foreign bank account then that foreign bank account is considered as an undisclosed asset, since it was acquired from income considered taxable in India. No tax credits will be available to taxpayers in India for any foreign taxes paid on undisclosed income or assets now being declared under the Act.
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015, “the Black Money Act”, introduces stringent provisions with respect to penalties and prosecution where it is discovered that a taxpayer’s foreign assets have not been reported or have been incorrectly reported. It is therefore recommended that:
- Taxpayers review their historic tax affairs and consider whether they have reported these assets and income properly on their Indian tax returns.
- Where any under-reporting is identified, then the taxpayer should take advantage of the disclosure opportunity by 30 September 2015.
- Employers should also ensure that employees working in and outside India are informed of this new law, as well as the need for more stringent reporting of foreign assets in the Indian tax returns.
EYG no. DN0879