A person is an Indian resident. However, he was a non-resident Indian (NRI) earlier, when he had acquired foreign assets, which he continues to hold, out of income which was not chargeable to tax in India.
Will this person have to disclose foreign assets under Chapter VI of the new law on black money? If you go by the list of 'Frequently Asked Questions' put up by the government to explain this law, the answer would be No.
However, consider a real-life scenario. The senior executive of a large multinational firm receives employee stock option plans (ESOPs) when he was an NRI six years earlier. This person became a resident Indian a little more than a year before but forgot to declare these assets while filing his income tax return under Schedule FA. Today, the executive is mighty confused. Technically, he is not required to disclose this income under Chapter VI of the compliance window. However, since he forgot to mention these while filing returns last year, the ESOPs could be deemed 'undisclosed assets'.
This is only one example of the ambiguities dogging the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which has taken effect from July 1. The government has provided a 90-day compliance window to declare undisclosed foreign assets and income by September 30, and to then pay the requisite tax and penalty at 60 per cent of the value of the assets by December 31. Else, pay tax at 120 per cent and risk rigorous imprisonment of three to 10 years.
However, meeting the disclosure norms isn't so easy. "Taxpayers who desire to avail of the facility will need to speed up, as the compliance requirements involve collation of old records of various assets and bank statements, and documents from external agencies such as valuers," says Rakesh Nangia, managing partner, Nangia & Co.
Here are a few things to keep in mind if you opt for the 90-day window:
"A person can declare assets under the window only under two conditions. First, if the person has a foreign asset acquired from income that is chargeable/taxable in India. Second, the person is unable to explain the source of the funding," says Sanjay Sanghvi, partner, Khaitan and Company.
However, the benefit of the one-time compliance window is not available to taxpayers in certain cases. This could be if a notice in relation to any undisclosed asset chargeable under the Income Tax Act was served on or before June 30. Or if a search/survey has been conducted and the period for notice of initiation of assessment has not expired.
Assets under scrutiny from a tax treaty cannot be declared as well. Also, the window is not available to those against whom prosecution has been initiated under the Unlawful Activities (Prevention) Act or the Prevention of Corruption Act.
Bank account details
You have to declare undisclosed offshore bank accounts, foreign securities, property, gold/jewellery, etc, in Form 6. In the case of a bank account, the gross deposits need to be declared. The amount withdrawn and deposited back into the account need not be considered 'income', to avoid double taxation.
The disclosure requires you to sum up all the credits or deposits in the account since the date it was opened. "If you have 500 credit transactions, and a small amount has not been disclosed, it may be treated as an 'undisclosed asset' to that extent," says Homi Mistry, partner, Deloitte Haskins & Sells. The credits could include salary, pension credit, reimbursements, dividends, interest credit, capital gains and rental income. According to Mistry, declarants might face a problem if the account dates back more than 10 years. "Foreign banks might not have account details for more than five to 10 years," he says.
Valuation of assets can be a challenge. "There's only talk about fair value and no practical mechanism prescribed as to how the valuation needs to be done," says Divakar Vijayasarathy, chief executive, MeetUrPro.
Since the government has not specified a time-frame, even old assets have to be declared, whether they exist as on date or not. The valuation of real estate, jewellery, paintings and unlisted shares will have to be done by different valuers. Even assets that don't earn income such as paintings, yachts and aircraft will have to be disclosed. This could be time-consuming, particularly if the assets are spread across different countries, say experts.
"Costs could be high. You might have to pay one to two per cent of the value of the asset to the valuer, based on the jurisdication and the complications involved. In the case of paintings, sculptures and works of art, valuations could vary significantly, increasing the possibility of future disputes," says Vijayasarathy.
There is no clarity, either, on the taxability of the asset at the time of its future disposal. Suppose you have invested $1 million in shares and the fair value today is $3 mn. Let's say you declare these assets and pay tax on the present fair value. If you sell the shares next year at $4 mn, on what amount will you pay tax in the next financial year? Will you be taxed on $1 mn ($4 mn-3 mn) or $3 mn ($4 mn-1 mn)?
If your income from abroad is nil
A person may have to declare assets even if the present value of the asset is nil. Suppose a person opened a bank account 10 years ago and the account was shut about a year earlier. A disclosure will still have to made if the bank deposit or interest earned from the account was taxable in India and went untaxed. "You should not avoid declaration only because the account has zero balance or has been shut. If the undisclosed asset is unearthed later, the individual will have to face serious consequences, including a three-time penalty for tax evasion," says Sanghvi.
India is expected to start receiving information through the Automatic Exchange of Information (AEOI) route under the US' Foreign Account Tax Complaince Act this year. Further, under the multilateral agreement in this regard, India will start receiving information from other countries under AEOI from 2017 onwards.
Declaring white money
Suppose a Microsoft employee has worked in the US for 10 years and accumulated a certain salary, provident fund, etc, in the account. At a certain point, he moves back to India and becomes a resident Indian. However, he still has a bank account in the US and some corpus there. Even if this is 'white' (disclosed) money, he has to declare this while filing tax returns in India by August 31. Else, he can be levied a penalty of Rs 10 lakh for not reporting the account in the tax returns.
GUIDE TO DECLARING ASSETS
- Step 1: Determine whether you are eligible to make a declaration under the one-time compliance window
- Step 2: Check if a particular asset qualifies as a foreign undisclosed asset. For instance, foreign assets acquired by a NRI taxpayer, including expatriates, out of income which was not chargeable to tax in India, will not qualify as undisclosed assets. Also, foreign assets acquired by a resident taxpayer out of Indian tax-paid income are not considered undisclosed assets under the Act
- Step 3: Once the list of undisclosed assets has been drawn, collate all the details required to be furnished in Form 6 and obtain the valuation report in respect of all the assets, required to be sent along with the declaration
- Step 4: Declare in Form 6 that you have not been served any notice under sections 142, 143 (2), 148, 153A and 153C of the Income Tax Act on or before June 30, 2015. Double-check with the help of an expert or tax consultant, as the declaration shall be considered invalid if there is any misrepresentation or suppression of facts
- Step 5: If the government has already received information with respect to the declared asset before June 30, 2015, under sections 90 or 90A of the I-T Act, the I-T commissioner will intimate the taxpayer about it by October 31. The taxpayer will then have to file a revised declaration in Form 6, excluding such asset, within 15 days of receipt of intimation from the designated commissioner
- Step 6: Once the declaration has been filed, pay tax at 60 per cent of the fair market value of all the undisclosed assets by December 31
- Step 7: After the intimation of payment by the declarant, the I-T commissioner will issue an acknowledgement in Form 7 of the accepted declaration within 15 days of such intimation of payment by the declarant