13/05/2016
The Finance Minister in his Budget Speech on 29th February, 2016 surprised all by introducing the Income Declaration Scheme, 2016 which is proposed to come into effect from 1st June, 2016. For persons who have not paid full taxes in the past, the Scheme provides a one-time window to come forward and declare the undisclosed income of any financial year upto 2015-16 and pay tax, surcharge and penalty aggregating to 45% of such undisclosed income declared. The FM has indicated in his Budget Speech that the window will be open from 1st June till 30th September, 2016 with an option to pay amount due within two months of declaration. Post Budget the FM has mentioned that the four-month compliance window for domestic black money holders is not a VDIS (Voluntary Disclosure of Income Scheme) and it is not an amnesty scheme. Interestingly the FM has used the phrase 'past trangressions' recognising the past wrongdoings of tax evaders and offer them an exit door on payment of 45% of undisclosed income. Such persons would further enjoy immunity from prosecution under Income Tax Act, Wealth Tax Act, and Benami Transaction (Prohibition) Act, 1988. As per our FM, the Government is fully committed to remove black money from the economy. The Scheme as mentioned in clauses 178 to 196 of the Finance Bill, 2016 (in short referred as the 'Bill') is analysed hereunder:
1. Backdrop and comparison of present Scheme with some aspects of VDIS, 1997:
It would be relevant to mention that the prime reason for accumulation of black money has been the fact that our country had the maximum tax rate of 97.75% (tax @ 85% plus surcharge @ 15%) in seventies. That means a person declaring income of Rs. 10 Lakhs in those years was required to pay tax of almost Rs. 9,77,500/- only (if we ignore the initial exemption limit). In addition to that one was required to pay wealth tax. Now the maximum rate of tax is 30% plus education cess of 3% plus surcharge in some cases which is much reasonable to the tax rates in 1970's. The present Income Disclosure Scheme, 2016 announced in Budget, 2016 has some positive aspects as well as some not so positive aspects if we compare with the Voluntary Disclosure of Income Scheme, 1997 (VDIS) declared for Indian tax payers. The rate of tax payable under the present scheme is 45 per cent (tax @ 30% plus surcharge 7.5% plus penalty 7.5%) which is 1.5 times of the tax payable under VDIS, 1997. It may be noted there was no penalty in case of VDIS.
2. Declaration of Undisclosed income and Fair Market Value of asset to be taxed [clause 180 of the Bill]: On or after the date of commencement of the Scheme but before a date to be notified by the Central Government, any person may make a declaration in respect of any income chargeable to tax under the Income-tax Act for any financial year up to 2015-16:
(a)
which he has failed to furnish a return u/s 139 of the Income-tax Act;
(b)
which he has failed to disclose in a return of income furnished by him under the Income-tax Act before the date of commencement of this Scheme;
(c)
which has escaped assessment by reason of the omission or failure on the part of such person to furnish a return under the Income-tax Act or to disclose fully and truly all material facts necessary for the assessment or otherwise.
Where the income chargeable to tax is declared in the form of investment in any asset, the fair market value of such asset as on the date of commencement of this Scheme shall be deemed to be the undisclosed income. The fair market value of any asset shall be determined in such manner, as may be prescribed. No deduction in respect of any expenditure or allowance shall be allowed against the income in respect of which declaration under section 180 of the Finance Bill, 2016 is made.
In all likelihood, the Fair market valuation (FMV) rules will be determined in sync with the Determination of FMV Rules as prescribed for the purposes of sec. 56(2) of the Income Tax Act, 2961 and/or the Black Money Act, 2015. The FMV as on 1st June, 2016 is likely to be much more than the actual cost of any asset acquired by prospective declarant and may result into ultimate heavy tax burden. The people may not be so attracted to disclose the income under this scheme and the requirement of charging tax on present value of the asset may caste shadow on the very success of the Scheme and due. In other words, the Scheme needs to be modified to make it practical. Where the declarant has sufficient proof of acquiring an asset in past years at a certain amount, such amount only should be considered for levy of tax and penalty aggregating to 45 per cent and not the current fair market value. The tax on current FMV is not practical as the liquidity problem will also arise and making payment of the tax under the Scheme, will be almost impossible in some cases.
For example, if a person purchased, a self occupied house in Mumbai for Rs. 1 crore in year 1995 and its present fair market value is Rs. 20 crores, the aggregate tax payable under the Scheme will be Rs. 9 crores. It may not be possible for the person to organize such a huge amount to pay under the one time compliance window scheme as the amount payable is very high and secondly he may not have the liquidity of funds. Therefore the Government will do well if the Scheme is suitably modified to provide that the tax and penalty will be payable on the basis of cost of immovable properties as well as other assets. Under VDIS tax was payable on the cost of the asset for the year in which it was acquired. However, in case of declaration of jewellery value was to be adopted as per market value as on 1.4.1987.
As stated, the valuation of assets under the Income Disclosure Scheme, 2016 will be as per current market value and not at actual cost of the immovable property, jewellery or other asset.The fair market value in 2016 will be naturally much higher than cost of assets acquired much earlier and as a fall out tax will be also very high. This may prove to be a dissuading factor for taxpayers thinking to avail the new Scheme for declaring undisclosed income or assets.
3. Tax rate:
The 45% aggregate tax includes : tax @ 30% on the declared income as increased by surcharge @ 25% of tax payable (to be called the Krishi Kalyan cess to be used for agriculture and rural economy) and added with penalty @ 25%.
4. Manner of declaration and payment of tax [clause 183 and 184 of the Bill]:
A declaration shall be made to the Principal Commissioner or the Commissioner and shall be in a form, as may be prescribed. The declaration can be made by an individual, HUF, company, firm, association etc. The tax and surcharge is payable under clause 181 and penalty payable under clause 182 in respect of the undisclosed income, shall be paid on or before a date to be notified by the Central Government in the Official Gazette. The declarant shall file the proof of payment of tax, surcharge and penalty on or before the notified date, with the Principal Commissioner or the Commissioner, as the case may be, before whom the declaration is made. If the declarant fails to pay the tax, surcharge and penalty in respect of the declaration made, such declaration filed shall be deemed never to have been made under this Scheme.
5. Scheme not Applicability in what cases:
The scheme shall not be applicable in the following cases:
A.
In relation to any undisclosed income chargeable to tax under the Income-tax Act for any previous year relevant to an assessment year prior to asst. year 2017-18-
(i)
where a notice u/s 142 or 143(2) or 148 or 153A or 153C of the Income-tax Act has been issued in respect of such assessment year and the proceeding is pending before the A.O.; or
(ii)
where a search has been conducted u/s 132 or requisition has been made u/s 132A or a survey has been carried out u/s 133A of the Income-tax Act in a previous year and a notice u/s 143(2) for the assessment year relevant to such previous year or a notice u/s 153A or u/s 153C of the said Act for an assessment year relevant to any previous year prior to such previous year has not been issued and the time for issuance of such notice has not expired; or
(iii)
where any information has been received by the competent authority under an agreement entered into by the Central Government u/s 90 or 90A of the Income-tax Act in respect of such undisclosed asset.
B.
In cases covered under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015; or
C.
Persons notified under Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992; or
D.
Cases covered under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974: Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967, the Prevention of Corruption Act, 1988.
6. Immunities and Exemptions:
It has been proposed to provide that declarations made under the scheme shall be exempt from wealth-tax in respect of assets specified in declaration. It has also been proposed that no scrutiny and enquiry under the Income-tax Act and Wealth-tax Act be undertaken in respect of such declarations and immunity from prosecution under such Acts be provided. Immunity from the Benami Transactions (Prohibition) Act, 1988 has also been proposed for such declarations subject to certain conditions.
It is also proposed that nothing contained in the Scheme shall be construed as conferring any benefit, concession or immunity on any person other than the person making the declaration under this Scheme. In cases where any declaration has been made but no tax and penalty referred to the scheme has been paid within the time specified, the undisclosed income shall be chargeable to tax under the Income-tax Act in the previous year in which such declaration is made.
7. Declaration to be void in certain cases:
It has been provided that where a declaration under the scheme has been made by misrepresentation or suppression of facts, such declaration shall be treated as void. [clause 190 of the Bill]
8. Some other important provisions:
(i)
Undisclosed income declared shall not to be included in total income of the declarant for any assessment year under the Income-tax Act, if the declarant makes the payment of tax, surcharge and penalty under the Scheme.
(ii)
Undisclosed income declared will not affect the finality of completed assessments
(iii)
Tax in respect of voluntarily disclosed income will not be refundable.
9. Conclusion:
The Scheme as has been proposed, is more or less a replica of "The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015" which the FM had mooted last year to catch hold of the black money or assets held outside India. It is a matter of public knowledge that the Scheme was not success in so far as it could only garner around Rs. 4000 crores of tax. Prime reason for failure was because tax was charged on the present market value posing liquidity issues since most of the assets were in the form of immovable property and assets, other than liquid assets. It is felt that the declarant may find the overall tax burden very heavy due to requirement of calculation of tax on the basis of the current fair market value of the assets. Compared to VDIS, the present scheme is not attractive. We apprehend that this aspect may deter the people to declare their undisclosed assets and the Scheme may prove to be not practicable even though some people might be willing to declare but they will be helpless. The Finance Minister is urged to review the scheme and provide for charging tax on the basis of actual cost of assets to be declared by the assessee. If the scheme succeeds, it will prove to be a vehicle to bring black money into the main stream. The income shall then have multiplier effect in generating income in future years and the result will naturally be higher revenue for the Central Government. Sources:
