Panama Paper leaks: Disclose all foreign accounts, assets

If you fail to pay tax on foreign income, you could be penalised up to 300% of the tax due

The revelation that Mossack Fonseca, a Panamanian law company, helped many well-heeled Indians set up offshore entities in tax havens is probably causing many of the rich and powerful to spend sleepless nights. However, even ordinary Indians who have spent a few years working abroad need to be vigilant about their disclosure and tax payment obligations on foreign bank accounts and other assets upon their return here.

Before they return, such professionals should tie all loose ends. All foreign bank accounts they will not need should be closed. Since interest rates on deposits are higher in India than abroad, it makes good financial sense to move all your money here. A bank account should be retained abroad only if you plan to return to that country in a few years or have liabilities, such as a home or other loans yet to be fully repaid.

Once you have become a resident Indian, the foreign account should be disclosed when you file your income tax return.  Says Vikas Vasal, partner, KPMG in India: “Tax payers need to be very careful on disclosure requirements in their tax return, especially in respect of foreign income and assets, due to the stringent penalty and prosecution provisions prescribed under the Black Money law.”

WHAT PROFESSIONALS NEED TO BE VIGILANT ABOUT

• Rules regarding disclosure of foreign income and assets have turned more stringent after the passage of the 2015 Bill
   
• Close bank accounts before returning if you don't need them
   
• If you have foreign bank accounts, disclose them in your tax return
   
• Income from that account will be taxable in India
   
• Real estate assets, financial assets and pension accounts also need to be disclosed and taxes paid where applicable

According to the Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015, a person found to have not paid the due tax on foreign income will not only have to pay the entire amount due but could be charged a penalty up to 300 per cent more. And, could be prosecuted if it is decided there was a wilful attempt to evade taxes.

“Professionals who have worked abroad would have paid taxes already, so they will not be held liable for willful attempt to evade taxes. But, a penalty could be imposed for non-disclosure of foreign assets,” says Amarpal Chadha, tax partner, EY.  

According to experts, professionals don’t usually want to flout the law intentionally but are sometimes guilty of treating their compliance-related obligations casually. If they have a bank account abroad which holds only a small sum, they assume it is too insignificant to merit disclosure. Sometimes, if they have multiple accounts, they forget to mention one. The same goes for dormant accounts. Experts say that all such accounts need to be disclosed in your tax return.

If you are a resident of India for tax purposes in a particular financial year, and you earn income on a foreign account, say from interest, that income will be taxable in India. The pertinent rule here is that a resident Indian is taxable on his global income.

Besides bank accounts, you also need to disclose assets, such as real estate, in your tax return. If you own an apartment abroad, disclose it, even if you keep it under lock and key and earn no rental income from it. If you do earn rental income, then in all probability that income will be taxed abroad and it will also be taxed in India. However, you may be eligible to claim credit in India for taxes paid overseas, depending on the provisions of the tax treaty between the two countries.

Professionals who have worked abroad may also have pension accounts in that country which they have not closed. Such an account alsoneeds to be disclosed in your tax return. Whether pension income will be taxed in India will depend on the tax treaty that India has with that country. Usually, the income is taxable in India and the other country exempts it. If the other country taxes it, you should be eligible for tax credit in India. Once again you need to refer to the provisions of the tax treaty between the two countries.