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Undisclosed Foreign Income and Assets (Imposition of Tax) 2015 ( The Black Money Bill) – Explained

The parallel economy in India exists on a scale that is unrivalled anywhere else in the world, estimates of total unaccounted money generated by india and circulating around the world economy vary from anywhere between $1.2 trillion to south $500 billion. Such a substantial sum if brought into the mainstream would no doubt add significant impetus to India’s economy. No doubt everyone is clamoring for such money to be accounted for and for the perpetrator to be brought to  book.

Generation of Black money

Black money is generated either by the non-declaration/ concealment of legitimate business incomes, or through patently illegal activities. Either way, the monies are received in cash or other colorable devices. Such monies can then either be laundered to provide them certain undeserved legitimacy or spent in the same manner that they were earned, on the black market. Traditionally black money once generated was parked in swiss accounts whose secrecy laws provided unmatched freedoms from prosecution in India. Though it may not be the same situation as it was 40 years ago, a substantial sum of black money still remains parked in assets outside India.  The new law on such assets as enacted by parliament looks to bring such monies to account.

The Black money bill

The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 more commonly known as the black money bill was first announced by the honorable finance minister along with this budget speech on the 28th of February 2015. The bill was then produced before the lower house of parliament on the 20th of March 2015 and enacted as a law on 11th of May 2015.  The applicability of the bill extends to the entirety of India and shall be effective with effect from Financial Year 2015-16. The act is applicable to all ordinary residents of India, including companies and Associations of persons ( AOP). Illegal incomes that were previously taxed under Income tax Act, 1961 will now be exclusively taxed under this Act.

Key Provisions

Taxpayers shall need to declare details of any foreign assets held by them as a part of their Income tax returns under the income tax act, 1961, this act covers any undisclosed assets ( including any financial interest) that have not been declared by the taxpayer in his/her return. Such undisclosed assets shall be valued at fair market value in the year of Detection in the manner so prescribed under this act.  Foreign Incomes declared for the relevant years to which such assets pertain shall be allowed as a deduction in proportion to the cost of the asset at the time of acquisition whilst computing the value of the asset subject to tax under this act.  No other deductions shall be allowed from the determined fair market value of such assets

Tax Rates

Such undisclosed foreign incomes and assets shall be taxed at a flat rate of 30% in addition to the tax so levied, penalties shall be levied at the rate of 300% of the total tax so payable on the undisclosed foreign assets or incomes.
In addition to the above mentioned penalties, further penalties are leviable for 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 assesse wilfully fails to declare, or declares inaccurate particulars, to assets which would have been otherwise declared as part of such returns. Penalties recoverable from the tax payer in this case shall be Rs 10 lakhs.

Prosecution Provisions

In addition to the heavy tax and penal provisions the new act also carries with it a huge burden in terms of prosecution for non-compliance with its provisions.
Any attempt to wilfully evade taxes, penalty or interest charged under the act, or any repeat offences under the act shall be punishable with rigorous imprisonment ranging from between 3 to 10 years. Wilful non filing of returns, or non-declaration of foreign incomes or assets in returns shall be punishable by rigorous imprisonment for a period between 6 months and 7 years.
Persons holding balances with maximum balances of Rs 5 lakhs (aggregate) have been exempted from penalties and prosecution under the act

Transition Period

During the transitionary period, the act provides for a compliance opportunity whereby entities which have any undisclosed foreign assets or incomes which have not been so declared in their tax returns can file a declaration with the tax authorities and pay 30% tax along with penalty of the same amount on the same. Such entities will not be subjected to prosecution under the act.

Liabilities For executives of companies

As per the act,every person being a manager in a company, ay person being a participant in an unincorporated body, or the representative assesse of a deceased participant, which/who is liable for payment of any amounts due under this act shall be jointly and severally liable if the amount cannot be recovered from the company.

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Arkay & Arkay View
While the act may have the best of intentions, the undue powers, specifically the prosecution provisions that is provides to the tax officers are a cause of concern. Tax authorities need to be sensitized to tax payer needs and thrusting such power in their hands without due training can be dangerous.
The provisions will impact only a small percentage of tax payers in total but will end up creating enormous hassles for those who have multiple assets and inadvertently miss out of declaring as asset abroad.  The taxation of assets on fair market value (FMV) also seems excessive, as the total income that escapes assessment in such cases would equate to the cost of asset and not the fair market value. In this case where such an asset depreciates in value the tax department would also stand to lose precious revenue.
Criticisms of the bill aside, the repercussions of this bill will have to be dealt with. The collateral damage in this case will expatriates and their relatives living in India, as well as Indians who have moved back to India after stints abroad, provided all of them own foreign assets or maintain foreign bank accounts. Such Individuals will have to ensure that they diligently declare all such assets in their returns of income or they may be liable for heavy tax, penalties and prosecution under this act. [/su_note]

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