Non-disclosure of foreign assets and implications under the black money law

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Black money or unaccounted money or undisclosed income have long been key issues for government and tax authorities. More than ten years ago, tax officials obtained information through various sources about black money or undisclosed income hidden in many overseas accounts, pointing to massive outflows of undisclosed money. authorized and tax evasion of residents. Tax evasion is a major threat to the economy of any country as it leads to loss of revenue, increased inflation and increased corruption.

Even former finance minister Arun Jaitley in his budget speech in 2015 said that “problems of poverty and inequality can only be eliminated if the generation of black money and its concealment are addressed. with efficiency and strength”.

To effectively deal with this issue, the government felt the need to put in place a legal framework that could regulate black money transactions and capture unauthorized outflows as well as undisclosed accounts outside India. This need led to the Undisclosed Foreign Income and Assets (Imposition of Taxes) Bill 2015 being passed by Parliament. This resulted in the introduction of black money (undisclosed foreign income and assets) and the Imposition of Taxation Act 2015 (“Black Money Act”).

Simultaneously, the legislature also imposed the disclosure requirements for every resident and ordinarily resident taxpayer holding any asset (including financial interests) or having income from any source outside India.

IT guidelines require taxpayers to adequately disclose on Schedule FA foreign accounts, shares of foreign corporations, mutual fund shares of a foreign fund, real estate, income held, etc., including beneficial interest, if any, in the tax return each year. It is important to point out that the scope of disclosures regarding foreign assets/income is broad enough to cover even transactions such as shares in a foreign entity allocated to employees of an Indian company under a plan employee stock option schemes (ESOPs) or similar schemes even if tax is withheld by the Indian entity on the indirect value of such ESOPs.

Taxpayers should note that these returns include assets held during a year, even when no income has been earned on them. Thus, the simple calculation of the tax payable on income earned during a year does not end the obligation of a taxpayer when filing the income tax return (ITR). It is of the utmost importance to ensure that all required disclosures for all income and assets (including offshore income and assets) have been properly completed.

Penalty and criminal responsibility

In recent times, tax regulators have actively collected information regarding undisclosed offshore investments and assets through the exchange of information provisions of tax treaties, allowing the automatic flow of information between jurisdictions. This has helped the government to tap the taxpayers’ black money or unaccounted/undisclosed money, investigate the cases in detail and prosecute under the income tax law as well as in under the black money law.

The Black Money Law provides a separate and stricter tax framework for undisclosed foreign income and assets. It not only levies taxes and imposes criminal consequences on any undisclosed foreign assets or income, but also has criminal consequences for failure to disclose/incorrectly disclose the details of the foreign asset/income in return for deposited income by taxpayers.

Failure to fully and truthfully disclose foreign income/assets results in a penalty of 10 lakh according to black money law. In addition, it carries a risk that these will be considered “undisclosed foreign income and assets” which may result in a 30% tax liability and a penalty of three times the amount of tax payable on this income and undisclosed foreign assets, not to mention that it may also result in criminal liability for attempting to evade tax in connection with such income.

The relevant point of taxation of an undisclosed foreign asset is when that asset comes to the knowledge of tax regulators and the taxpayer has no proper explanation to offer as to the source of their investment. Further, based on recent rulings in this regard, said implications would apply regardless of whether these assets existed at the time of taxation or even before the enactment of the black money law.

To protect against taxes, penalties and other legal consequences, taxpayers should ensure that they have accurately disclosed all foreign assets/income in their ITR.

Even though the due date for filing the ITR for the current tax year has passed, resident taxpayers should review their ITR and carefully check whether the information on foreign assets and income has been correctly made in the declaration. income deposited. If the same has been inadvertently omitted or if the ITR is not yet filed, taxpayers can provide details of the missed disclosures by filing a revised and late return no later than December 31, 2022.

Sachin Garg is Partner – Direct Tax, Nangia Andersen LLP. Sanjoli Maheshwari, Principal, Nangia Andersen LLP, contributed to this article.

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