The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (the “Act”) was enacted on May 26, 2015 and made applicable from July 1, 2015 with a one-time compliance window (the “Compliance Scheme”) for declarations to be made under the Act ending on September 30, 2015.
The Act provides for separate taxation of undisclosed income in relation to foreign income and assets of individuals. Such income, when disclosed, would not be taxed under the Income Tax Act, 1961 but under the provisions of the new Act. The Act deals with the issue of black money arising out of undisclosed foreign income and assets, the procedure for dealing with such income and assets and the imposition of tax on any undisclosed foreign income and asset held outside India.
Since undisclosed foreign assets and income is the central theme of the Act, it is imperative to look at the term “undisclosed asset located outside India” and its implications. The Act defines Undisclosed asset located outside India as 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, and he has no explanation about the source of investment in such asset or the explanation given by him is in the opinion of the assessing officer unsatisfactory. Undisclosed foreign assets under this Act may include but are not limited to bank accounts, immovable property, jewellery, bullion, shares, partnerships, etc.
The department has issued FAQs circulars that provide that mere disclosure of the asset in Schedule FA of Form 2 of the Income Tax Returns of the assessee would not mean that the source of investment has been explained and such an asset would constitute an undisclosed foreign asset, requiring declaration under the Act. However, fully explained, when asked by the department, foreign assets acquired out of tax paid income did not need declaration under the Compliance Scheme even if not declared under Schedule FA. Additionally, the assets which are fully explained are not treated as undisclosed foreign assets and hence not required to be declared voluntarily under the Act. However, if these assets were not reported in Schedule FA of the Income-tax Return for assessment year 2016-17 (relating to previous year 2015-16) or any subsequent assessment year by a person, being a resident, then such person would be liable for a penalty. For compliance/declaration to be made under the Act, the foreign asset in question had to fall within the definition of an undisclosed foreign asset.
To gain a better understanding of the Act it is necessary to review its four main areas: who is liable under the Black Money Act for payment of tax? computing the amount of tax payable; penalties for noncompliance; and the process for availing of the one-time compliance window under its amnesty scheme.
Under the 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. The Act is applicable to a resident in India, other than not ordinarily resident in India. The Act levies a tax on any undisclosed foreign income assets and held abroad by a person who is a resident in India.
Undisclosed foreign income and assets are taxed at a rate of 30 percent of the fair market value of the assets, while a penalty is prescribed at the rate of 100 percent of the tax. The total combined tax rate, including penalty comes to 60 percent of the fair market value of the foreign assets. The Act provides methods for determining fair market value of various assets located outside India.
The Act provides for a penalty of 90% of the value of an undisclosed asset in addition to 30% tax and a sentence of rigorous imprisonment, to be imposed in certain cases. In addition to the above-mentioned penalties, further penalties are leviable for any failure to furnish returns of incomes before the end of the relevant assessment year to which such foreign income or assets pertain, or if a return is filed and the assessee wilfully fails to declare, or declares inaccurate particulars, to assets which would have been otherwise declared as part of such returns. Such activities could also result in a penalty of Rupees 10 lakhs, and subsequent offenses could be punishable by imprisonment for three to ten years and penalties of up to Rupees 25 lakhs. The burden of proof lies with the taxpayer to show that tax evasion is not wilful.
The Act introduced a one-time compliance opportunity for a limited period till September 30, 2015 under the Compliance Scheme for persons who were affected by the Act to provide a chance to come clean and declare the undisclosed foreign assets in the prescribed form with the prescribed authorities and by paying a maximum tax at 30% and penalty at 30% thereon without getting prosecuted under the Act.
The success of any law is mirrored in its results and the hallmark of a well drafted legislation lies in its ability to be clear, simple, effective and integrated with other laws. While an effective law may differ from a well drafted one, this Act seems to have failed on both counts.
Since the Act was aimed at bringing back, the black money stashed abroad, the first step to determining its success is finding out the total number of declarations made under the Act and the amount recovered. According to government reports, a total of 638 declarations were received under the Compliance Scheme declaring undisclosed foreign assets amounting to Rs 3770 crore. This amount was later revised to Rs 4147 crore, while the number of declarations remained the same.
These figures are considerably disappointing especially compared to a similar scheme (Voluntary Disclosure of Income Scheme) in 1997 where a much larger amount was declared. On account of achieving the stated objective, the Act seems to have failed miserably. Perhaps, a scheme with lower penalties would have generated more declarations. In fact, the Act may have tempted only minor holders of black money to declare, the reason being 60 percent of the value of the declared income getting paid in taxes. For Rs 10 crore of undisclosed income, it may make sense to declare it and pay Rs 6 crore in the hope of avoiding future prosecution under the Act. However, extracting 60 percent of the amount declared under the Act as a tax for a large amount is a bigger challenge. Therefore, it did not perhaps make much sense for big black money hoarders to give up 60 percent of their money when there was a remote possibility that the authorities would be able to locate this money if it remained undisclosed. So, this was a missed opportunity for a government whose agenda was to bring back the black money held abroad.
Interpreting the phrase “undisclosed asset located outside India” was another issue while making declarations under the Act. The definition of undisclosed assets located outside India under the Act states inter-alia an asset 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 is in the opinion of the assessing officer unsatisfactory.
This definition itself requires a lot of explaining in order to make it work. It creates the distinction between a fully explained foreign asset and a partially explained /unexplained foreign asset without providing well defined parameters contributing to making the declaration procedure for an assesse baffling especially in light of the time constraints under the Compliance Scheme. The confusion it created among the declarants can be gauged by the number of clarifications sought on the subject from the concerned department. The clarifications issued by the department by means of FAQs on the subject can at best be called only mildly helpful and to add to that the undue power provided to the assessing officer under the Act made the process subjective, thus bringing us back to the point where the Act fails, even on account of being an easy, implementable legislation.
Another issue was its implementation in catching the offenders. Although the Act provides for penalties and punishment for the offenders, there is no special mechanism in addition to what was already available under the Income Tax Act, 1961 so that the offenders would get caught. This again makes the legislation inefficient. On this front, it may be a good idea to take a cue from legislations being enacted in other countries such as the United Kingdom on dealing with the problems of undeclared income and tax evasion. One of the measures being undertaken by the United Kingdom is investing in their ability to use data and new and advanced technology to identify fraud and evasion risks such as improving the analytical computer system so that it is easier to identify areas of compliance risk in identifying and investigating fraudulent behaviour.
The Act failed miserably by restricting itself to foreign income and assets and not addressing and including the issue of black money in the domestic economy. The Government itself seems to acknowledge its failure to deliver on this count and this is apparent from the introduction of the Income Declaration Scheme 2016 a scheme underway to recover undisclosed domestic income and assets. While conceptually it appears to be an improvement over the Compliance Scheme under the Act, its implementation and practical efficacy is yet to be ascertained.
Fighting and taking measures to discourage the creation of black money and making businesses legitimate is imperative for the growth of our economy, but this cannot be achieved solely by a single legislation. It is essential to create an era of reforms in all connected sectors such as election funding, real estate, etc. which contribute to the creation and circulation of black money and, therefore, it is important to have a good legislation having the characteristic of integration with other laws. A harmonious approach and a realistic roadmap are what is needed to take stock of the present and change things in the future. Keeping in mind the intention of the NDA government and this being their initial attempt in tackling the issue of black money, it may not be correct to call the Act a complete failure, but a failed attempt with lessons learnt for any future endeavours on the issue of black money.
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