Tax Practioner Association

THE BLACK MONEY (UNDISCLOSED FOREIGN INCOME AND

ASSETS) AND IMPOSITION OF TAX ACT, 2015

CA Deepak Mantri24 July 2015

Contents Objectives of the Act Analysis of the Act Rules of Valuation of Asset One time compliance procedure FEMA and UFIA Case Studies Summary of Discussion

Genesis and objectives of UFIA

2015

Stashing awayof black money

abroad byIndian

residents withintent to evade

taxes / othermalafides

Supreme Courtdirectives and

SpecialInvestigation

Team (SIT)findings

Swiss Bankdisclosures onbank accounts

owned byIndians and

media reports

Raised publicconscience

andparliamentarydebates andpressures byopposition

PrimeMinister’s one

of the keyelection

manifestoesbefore last Lok

Sabhaelections

Co-ordinatedawareness anddrive against

black money byglobal andemerging

economies andabsence of

comprehensivelaws

International Cooperation• EU, SWISS SIGN AGREEMENT TO END BANK SECRECY- The

European Commission and the Swiss government May 27 signed a landmark new tax transparency agreement, which will effectively end bank secrecy for Europeans, strengthen the fight against tax evasion and prevent tax evaders from hiding undeclared income in Swiss accounts.

• India signs the Multilateral Competent Authority Agreement (MCAA) pact on Automatic Exchange of Information (AEOI) – - Previously, 54 countries had joined the MCAA.– - India is among six countries that joined this taking the number to 60.– - The target is to reach 94 countries by 2017.

Objectives

To deal with problem of black money that is undisclosed foreign income and assets

To lay down procedures to deal with such foreign income and assets (punishment and prevention of such income and asset outside India)

To impose of tax on any undisclosed foreign income and assets and matters connected or incidental

Analysis of the UFIA Act

Analysis• Arrangement of UFAI ACT

• UFIA Key Terms

• Definations in the UFIA Act

• Undisclosed foreign income and assets

• Computation of tax on UFIA

• Assessment procedures

• Levy of Interest

• Penalties, offences and prosecution

Arrangement of UFAI ACT

Black Money act has 88 sections and 7 chapters :

Preliminary (Sec 1-2 )

Basis of charge (Sec 3-5)

Tax Management ( Sec 6 - 40 )

Penalties ( Sec 41-47 )

Offences and Prosecution

(48-58)

Onetime disclosure

window ( 59-72 )

General Provisions ( Sec

73- 88 )

Rules, FAQ etc

12 Rules ( Notf 58/2015)

Explanatory Notes ( Circular 12 dt 2 July 15)

FAQ ( Circular 13 dt 6 July 15 )

Form 1 to Form 7

Key Term- Assessee

• Section 2(1) defines “Assessee” as under: • “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”

• This Act will not apply to any person who is Not Ordinary Resident and Non Resident.

Assessee -Analysis

Meaning of ‘Person’

• Not defined under the UFIA Act• Definition under ITA will be adopted• Thus, it will include

– Individuals – Hindu Undivided – Family (HUF) – Company – Firm – Association of Persons (AOP) – Body of Individuals (BOI) – Local authority – Every other artificial jurisdictional person

Residence in case of individuals

• To apply to Resident and Ordinarily Resident (ROR)* who is required to pay tax on undisclosed foreign income and assets or any other sum of Money

• It will not apply to an Individual who is:

– Resident but Not Ordinarily Resident (RNOR) – Non-resident (NR)

Residence in case of Companies

• To apply to companies incorporated in India or having its place of effective management (POEM) in India

– POEM: A place whether key management decisions in substance are made

– More clarity awaited on scope of POEM

Residential status should be ‘Resident and ordinarily Resident’ in the year of detection of undisclosed income and asset

Applicability -Chart

Irrespective of his residential statusbeing NR/NOR in previous AYs

Person Person

Person Resident under ITA in Previous Year

PersonNoPersonYes

Person

Non-resident in 9 out of the 10 preceding previous years ORPresence in India during preceding 7years been in India for 729 days or less

PersonUFIA notapplicable

PersonPerson

Person Person

PersonRNORYesNo

ROR UFIA applicable

Undisclosed foreign income and assetsSection 2(11), 2(12) and 4

Undisclosed Foreign Income and Asset (UFIA) [Section 2(12)]

• Total amount of undisclosed income from source located outside India [as referred in Section 4(1)], and• Value of UFA located outside India• UFIA shall be – Income from a source located outside India which has not been disclosed in the Return of Income filed under the ITA – Income from sources, in respect of which return is not filed under the ITA and – Value of undisclosed foreign asset (UFA) located outside India (fair market value in the previous year in which AO notices UFA- method of valuation prescribed by rules)• Computation of UFIA laid down under section 5 of the Bill

Undisclosed Asset located outside India (UFA) [Section 2(11)]

• An asset (including financial interest in any entity) located outside India• Asset can be held by the assessee in his name or in respect of which he is a beneficial owner, and• Assessee has no explanation about the source of investment in such asset or the explanation given by him is the opinion of the Assessing Officer is unsatisfactory

Test of undisclosed foreign asset is toexplain the source of investment

Asset not taxable as UFA if its source isexplained (even though it is not declared in the return of income)

---- Contd• UFA is not defined under the Act. It will include all assets either movable or immovable

(including financial interest in an entity)

• A cue can be taken from the Instructions of Schedule FA to the Income Tax Returns:

“Financial interest would include, but would not be limited to, any of the following:-

(1) if the resident assessee is the owner of record or holder of legal title of any financial account,

irrespective of whether he is the beneficiary or not.

(2) if the owner of record or holder of title is one of the following:-

(i) an agent, nominee, attorney or a person acting in some other capacity on behalf of the

resident assessee with respect to the entity.

(ii) a corporation in which the resident owns, directly or indirectly, any share or voting power.

(iii) a partnership in which the resident assessee owns, directly or indirectly, an interest in

partnership profits or an interest in partnership capital.

(iv) a trust of which the resident has beneficial or ownership interest.

(v) any other entity in which the resident owns, directly or indirectly, any voting power or

equity interest or assets or interest in profits.”

Computation of tax on UFIA• UFIA will be taxed @ 30% - no surcharge and cess• Tax will be charged on its value in the previous year in which UFIA is noted

by AO and notice is issued• Value of UFA means fair market value of an asset ‘including financial

interest in any entity) in the previous year in which it comes to AO’s notice–

method of valuation prescribed by Rule 3• If UFIA is taxed under this new legislation, it will not be taxed under ITA• Any variation made to the foreign sourced income as per section 29 to 43C

or section 57 to 59 or section 92C of the ITA will not be included in total

undisclosed foreign income

Computation of tax on UFIA

Computation of total UFIA Sec 4

Income from source located outside India (foreign income ‘ FI’) which has not been disclosed in IT Return

xx

FI in respect of which no IT return has been filed xxFMV of UFA (no explanation or unsatisfactory explanation about the source of income has been provided – Section 4(3))

xx

Hardship to the assessee as tax and penalties proposed to be calculated at current value of assets instead of original purchase price

Computation of tax on UFIA

• As per Section 5,

– No expenditure, allowance, set off of any loss shall be allowed as deduction from total

UFIA – no mention about liabilities incurred against undisclosed foreign assets

– If any income is assessed prior to AY 2016-17 under ITA or any income is assessed / assessable under UFIA Act shall be reduced from the value of UFA outside India –

subject to producing evidence that the UFA was acquired from such income

– Proportionate income which was been assessed to tax under ITA or UFIA Act shall be reduced from FMV of UFA being immovable property

Value of UFA as onfirst day of FY (inwhich AO noticessuch asset)

Assessed / assessable foreign income

Total cost of the asset

Computation of tax on UFIAComputation of total UFIA

Income from source located outside India (foreign income ‘ FI’) which has not been disclosed in IT Return

xx

FI in respect of which no IT return has been filed xxFMV of UFA (no explanation or unsatisfactory explanation about the source of income has been provided – Section 4(3))

xx

Less

Income which has been assessed to tax for any assessment year under the ITA prior to relevant AY in which UFIA applies

(XX)

Income which is assessable or has been assessed to tax for any assessment year under UFIA

(XX)

In case of immovable properties, the deduction will be:Value of UFA as on first day of FY in the same proportion as assessed / assessable foreign income bears total cost

(XX)

Total value of UFIA XX

Tax @ 30% XX

The quantum of penalty may vary between 100% to 300% of the tax amount, depending on whether voluntarily disclosures are made under one time disclosure window or UFIA is detected by Assessing officer

Illustration• Mr. A acquired foreign asset (immovable property) in the AY 2010-11 for

Rs.60 lacs. Out of the total investment, Rs.40 lacs was assessed to tax in an earlier year.

• In AY 17-18, AO identified the value of such undisclosed asset as Rs.2 crore for which no explanation was provided.

Computation of total UFIA Rs. (in crores) FMV of UFA (no explanation provided or explanation not satisfactory) 2.00 Less Income which has been assessed to tax for any (1.33)assessment year under the ITA prior to relevant AY in which the Black Money Act [Rs.2crore -(Rs.2crore X 0.40 lacs / 0.60lacs)]

Amount chargeable to tax under Black Money Act 0.67

Assessment ProcedureChapter III (Sec 6- 40) Tax Management

No requirement to file a separate return under UFIA Act. Assessment / reassessment by AO in respect of undisclosed

foreign income or asset on the basis of information received Issue of notice for assessment / reassessment (no timeline

provided), opportunity of being heard and furnishing of

evidences / documents will be given – principles of natural

justice to be followed Inquiry or investigation by Tax Authorities into matters of the

assesse even though there are no proceedings pending before it

Tax Management- Contd Time limit for completion of assessment and reassessment shall

be 2 years from the end of the financial year in which notice was

issued It is expected that two assessment orders will be passed in

respect of period covered by a single return of income: under

section 143(3) of ITA and 10(3) of UFIA Act Remedial measures provided - appeal to CIT(A) / ITAT / High

Court and Supreme Court (for substantial question of law),

rectification of mistakes, revision of orders, recovery of arrears

Under UFIA, the AO will be able to re-open the assessments beyond 16 years.

Levy of interestSection 40

Interest will be levied for undisclosed foreign income

Non-filing of Income-tax Return disclosing foreign assets and income

Non-payment of advance tax inrelation to undisclosed income

Nature of default Penalty Prosecution

Concealment of foreign income and asset

Failure to disclose foreign income and asset 300 % (inaddition to tax) ( Sec 41)

3 years – 10 years (sec 51)

Failure to furnish return of income

Failure to disclose foreign asset or income in the return of income

Note: No penalty shall be levied under Clause 42 or 43 if any foreignasset, being one or more bank accounts, has an aggregate balance of Rs 500000 or less

Rs 10 lakhs(Sec 42/43 )

6 months – 7 years (Sec 49-50)

Default in payment of tax arrears

Attempt to evade payment of tax, interest and penalty Equal to the amount of tax arrears (Sec 44)

3 months – 3 years

Penalty & Prosecution

Penalty Contd…

Nature of default Penalty

Failure to furnish documents before tax authority [Section 45]

If any person fails to:a) answer any question asked by tax authorityb) sign a statement which he is legally bound to do soc) attend or to give evidence or produce books of account

Rs.0.5 Lakhs to Rs.2Lakhs

Punishment for second and subsequent offences [Section 58]

If a person, who has been convicted for an offence as mentioned above,is again convicted for an offence under this Bill

Rs. 5 lakhs to Rs. 1Crore

Rules of Valuation of Asset

Value of bullion, jewellery etc

Higher of• Its cost of acquisition• The price it will fetch if sold in the open

market -Report from a valuer recognised by the

Government of a country

Valuation of shares and securities

Higher of• Its cost of acquisition• The average of the lowest and highest price of such shares on valuation date

(unquoted shares to be valued on the formula )

Valuation of Immovable property

Higher of• Its cost of acquisition• The price it will fetch if sold in the open

market -Report from a valuer recognised by the Government of a country

Value of Bank Account

The Sum ofall the deposits made in the account with the bank since the date of opening of the account;

One time compliance procedure Genral Who can declare Procedure- Rate of Tax etc Procedure-How to declare Procedure of declaration Benefit of Scheme Who can not declare

General• Sections 59 to 72 provide for one time voluntary declaration to

avoid any penal action under this legislation• Positioned as not being an amnesty scheme – there is no

immunity from penalty• Merely an opportunity for persons to come clean and become

compliant before the stringent provisions of the new Act come into force

• No additional interest u/s.234A, 234B and 234C of the ITA will be levied

• No exemption, deduction or set-off of any carried forward losses• No reopening of assessment due to disclosure under this

scheme - Declaration will not affect finality of completed assessment

Who can declare

• Failed to furnish a return of income u/s. 139

• Failed to disclose in a ROI furnished by him under the I T Act before the commencement of this legislation.

• It has escaped assessment by reason of the omission or failure on the part of the assessee to file the return of income

Procedure- Rate of Tax etc

• Declaration to be filed by 30 sep 2015• Tax at 30% of the value of the undisclosed foreign

asset• Penalty at 100% of the above tax.• The payment of the above tax and penalty shall be

made on or before the date notified ie 31 Dec 2015 and proof of payment to be submitted to the persons notified

Procedure-How to declare

• The declaration to be made in Form 6

• The above declaration is to be made to the CIT Delhi

• This declaration is to be signed by the authorised person as stated in section 62(2).

Procedure of declaration

• If the above tax is not paid before the due date, the declaration filed will be deemed never to have been made.

• Any amount of tax and penalty paid by the person making the declaration shall not be refundable.

• Amount of undisclosed investment shall not be included in the computation of total income

• Misrepresentation or suppression of facts by the declarant would make declaration void.

Benefit of Scheme

• No wealth tax shall be payable in respect of the assets declared under the voluntary declaration scheme sec69

• No prosecution for declarants under the UFIA Act• Contents of declaration cannot be used as evidence for

imposing penalties under any other law or for prosecution under-– ITA ,– Wealth tax, – FEMA, – Companies Act 2013, or – Customs Act 1962

Who can not declare

• Order of detention under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

• Prosecution has been launched for any offence punishable under –– Chapter IX or XVII of the Indian Penal Code, – the Narcotic Drugs and Psychotropic Substances Act, 1985, – the Unlawful Activities (Prevention) Act, 1967 or – the Prevention of Corruption Act, 1988.

• Person notified u/s. 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

When declaration cant be made

One time window not open for the following persons:- Any person against whom notice of assessment has been

issued under ITA Any person against whom time limit for furnishing of notice

of assessment has not expired due to search, survey under

the ITA Any person against whom information has been received in

respect of UFA from competent authority under a formal pact

(cases like account holders of HSBC Geneva which has not

been disclosed, whether or not having any balance)

The Process-In a Nutshell- Declaration in form 6 till 30/09/15-to CIT Delhi or Online

- UFIA for any AY prior to 2016-17 for which the resident either failed to furnish a return or did not disclose or the income escaped assessment.

- By October 31, a designated officer will intimate the declarant if the authority has received information under the tax treaty, - Revised declaration in 15 days of receipt of intimation . If declarant has received the intimation on October 10, he can file a revised declaration or before October 25.- In all case the declarant is required to pay the requisite tax and penalty on the assets eligible for declaration by December 31, 2015. The assets will be valued on fair market price.

FEMA and UFIA

FEMA and UFIAForeign assets held in accordance with FEMA - examples Any resident individual (under FEMA or ITA or both) who is holding assets

abroad acquired from LRS

Any Indian resident company holding assets abroad under Overseas Direct

Investments (ODI) Guidelines

A resident person who continues to hold assets abroad which were acquired

when non-resident as permitted under section 6(4) of FEMA

Inheritance of foreign asset by Indian resident from non-resident relative and

continues to hold the same as permitted under section 6(4) of FEMA

FEMA and UFIA

Onus is on the Tax Payer to prove that they are holding foreign assets legally and proper disclosures / filings were made. If so, the Income-tax Commissioner / RBI / Enforcement Director under FEMA cannot take any penal action / prosecution without any proper enquires

However, Now it is proposes that the Enforcement Director under FEMA can directly seize equivalent value of Indian assets (without asking any questions) and merely on the reason to believe or suspicion – similar amendments are also proposed under Prevention of Money-laundering Act, 2002 (PMLA) vide Finance Bill 2015

Black Money is different from criminal money – Harsh implications and arbitrary penalties under UFIA read with proposed PMLA amendment not justified

CASE STUDIES

Case Study 1

• A person has a foreign bank account in which following undisclosed income has been deposited over several years. – 20 sep 1975 $ 100000– 1 jan 1980 $ 50000

?1.He has spent the money in the account over these years and now it has a balance of only $500. Does he need to pay tax on this $500 under the declaration.?2. What would be position if he withdraw all money and close the account in 2014.

Case Study- 2

• A person inherited a house property in 2003-04 from his father who is no more. Such property was acquired from unexplained sources of investment. The property was sold by the person in 2011-12.– Does he need to declare such property ?– what will be the fair market value of such property

for the purpose of declaration?

Case Study - 3

Mr George is a non-resident. He was a resident of India earlier and had acquired foreign assets out of income chargeable to tax in India which was not declared in the ROI in respect of that income. Can that person file a declaration under Chapter VI of the Act?Ans - Yes

Case Study- 4

Mr Patel is a resident now. He was a non-resident earlier when he had acquired foreign assets (which he continues to hold now) out of income which was not chargeable to tax in India. Q-Does Mr Patel need to file a declaration in respect of those assets under Chapter VI of the Act?A- No

Case Study- 5Ms Dhawal resident earned income outside India from his house property in US .It was deposited in his foreign bank account. The income was charged to tax in the foreign country when it was earned but the same was not declared in the return of income in India and consequently not taxed in India.

Q- Does he need to disclose such income? Will he get credit of foreign tax pa id? 26

SUMMARY

Summary of Key Highlights of the UFIA Act

1.

2.

3.

Act is effective from 1 July 2016 onwards (Assessment Year 2016-17) and extends to whole of India

Applicable to all persons resident in India. In case of Individuals, it applies to ordinary resident under ITA

Flat 30% tax rate (without surcharge and cess) on the value of total undisclosed foreign income and asset, Asset to be valued on Current FMV

No exemption, deduction , set-off and carry forward of losses under ITA, no set off foreign tax credit will be allowed on UFIA

Additional 300% penalty for non-disclosure of foreign income or an asset.

4.

5.

6.

7.

8.

9.

10.

Rs.10 Lakhs penalty for non-filing of return / not furnishing complete details of foreign assets.

Prosecution for various violations (including abetment) including rigorousimprisonment from 3 to 10 years.

Tax and penalty proposed to be calculated at current value of assets as per rules instead of purchase value , Bank asset value is total of deposit original purchase price

One time compliance opportunity to be availed before 30 sep 2015, by paying 30% tax and equal penalty, no interest and prosecution

Only bank account up to total balance of Rs 5 lac exempt

Summary of Key Highlights of the UFIA Bill

Thank You

By-CA Deepak Mantridmantri@hotmail.com+919425064725