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Declare foreign assets and income to avoid penalty

April 13, 2015 08:56 IST

Declare shares of foreign companies, money in foreign banks, paintings or jewellery purchased abroad as foreign assets and not under Income Tax, to avoid prosecution under the proposed 'black money' law

Image: Since company's equity compensation shares are listed abroad, they are foreign assets in the hands of the employees, who have to mandatorily file tax returns and declare these shares as foreign assets. Photograph: Reuters.

Recently, a multinational information technology company organised a workshop on tax filing for its employees. Nothing unusual, except that the workshop focused on how to account for shares received under the company's equity compensation scheme. Since these shares are listed abroad, they are foreign assets in the hands of the employees.

During the workshop, the employees were told they'd have to mandatorily file tax returns and declare these shares as foreign assets. If not, the tax returns would be considered not compliant with tax provisions. Employees would have to face inquiries from the tax department.

Is the company being too cautious? Maybe not, considering the provisions of the Undisclosed Foreign Income and Assets Bill, 2015. The Bill provides for separate taxation of any undisclosed income in relation to foreign income and assets. Such income will henceforth not be taxed under the Income Tax Act but under the provisions of the proposed new legislation on unaccounted money. Details about which forms to fill for declaring the assets and how the value of the asset will be calculated are awaited.

In some cases a resident might accumulate assets without being aware of it and hence, fail to disclose it. If you are not able to explain the source of the funds, the Bill allows for penalty and prosecution. Let us look at some situations:

Assets where the person is beneficiary

Apart from assets in the person's name, the Bill covers assets where the person is a beneficiary. "For instance, if there is a foreign trust where an Indian resident is a beneficiary, then such beneficial interest may also have to be disclosed," says Pranay Bhatia, partner, BDO India LLP.

Suresh Surana, founder, RSM Astute Consulting Group, says a resident who received any foreign assets by way of inheritance or gift also has to report this, being the beneficial owner.

Image: If you buy an expensive painting or jewellery, please keep the invoice. Photograph: Tamara Abdul Hadi/Reuters.

Purchases while on holiday

You go on a holiday abroad and take money with you under the Liberalised Remittance Scheme. Using this, you buy an expensive painting or jewellery. If you fail to disclose this purchase, you may be charged under the Bill. It is important to show documentary proof. In this case, you can show proof of funds transferred through LRS. In addition, keep the invoice of all purchases done with the money, to avoid a penalty.

"If an individual buys a house abroad, he will have documents. But what if he buys a painting at an art exhibition or a piece of jewellery at an auction? Typically, in such purchases, people don't save the receipts. Now, you have to do so and the assessing officer has to be convinced about it," says Bhatia.

Investments made from funds transferred abroad

If a wealthy individual transfers money to America over five years and uses part of that to buy shares of, say, a German company, he has to declare not only the money so transferred but also the money used to buy the shares.

"You have to declare not only the money transferred abroad but even the investments made out of that. It is important to explain the source of the money or investment to avoid penalty," says Sanjay Sanghvi, partner, Khaitan and Company.

Image: In certain cases, if you disclose the bank account and the salary transactions, then there is no tax. Photograph: Reuters.

Salary received in foreign accounts

People in certain jobs, such as in the merchant navy, will have to be extremely careful about declaring income under this Bill, says Divakar Vijayasarthy, co-founder of MeetUrPro, an online platform for investment and tax requirements.

Since most shipping companies are foreign, employees will have salary accounts in foreign banks, in locations abroad. While they may not be liable to pay tax under that country's tax laws, they will be liable to disclose their income under this Bill and pay tax.

"If you disclose the bank account and the salary transactions, then there is no tax. But if you don't disclose, you will have to pay a penalty," says Vijayasarthy.

Bank account opened while abroad

You had opened an account while you were a student. The money from your student loan was deposited in that account. You also got money from your family in India into that account. If the account had some balance and was not closed before you returned to India, you might get a query from the tax department. In this case, you will have to show the bank account statement, on how funds have been transferred to your account, either by way of loan or from family members.

Expatriate working in India

Any expatriate or foreign national working in India is taxed as an ordinary resident and so is liable to disclose his/her foreign assets under this Bill. But it will be easy for expatriates to show proof of their assets and, hence, there is no fear of penalty.

Taxation, one-time compliance

Under the Bill, undisclosed foreign income or assets will be taxed at a flat rate of 30 per cent. Further, penalty for non-disclosure of income or asset located outside India will be equal to three times the amount of tax payable, that is, 90 per cent of the undisclosed income or the value of the undisclosed asset. So, the total tax works out to 120 per cent.

But the Bill also allows one-time compliance for persons who have undisclosed foreign income and assets. Under this, the individual will be required to pay tax at a flat 30 per cent and an equal amount by way of penalty, with no prosecution, under the proposed legislation.

"Remember that exemption, deductions, set off and carried forward losses, etc, shall not be allowed while computing tax on an undisclosed income and asset," says Surana.

In case the tax authorities issue a showcause notice for non-disclosure of foreign assets, the onus is on the taxpayer to prove his innocence. "The present Bill does not provide for any 'human error' probability. The principal commissioner or commissioner may treat a disclosure as not valid if there was any misrepresentation or suppression of facts" says Sanghvi.

For instance, assume a businessman had opened a bank account in a foreign country years before. The account has some balance and he declares it under the one-time compliance scheme. If he erroneously mentions a wrong amount, his application for voluntary disclosure may be treated as invalid due to misrepresentation of facts, though the disclosure was made in good faith."

Vijayasarthy also agrees there is a presumption of guilt under the Bill. "The Bill gives enormous powers to the assessing officer. This could create a hostile environment," he says.

Surana says the Bill has far-reaching implications, as it will also apply to banks and financial institutions aiding in concealment of foreign income or assets of resident Indians or falsification of documents. In such cases, the prosecution provision shall equally apply to them.

For failure to furnish returns or in case of incorrectly furnished returns, the penalty is Rs 10 lakh (Rs 1 million) and imprisonment from six months to seven years. If a wilful attempt to evade tax is proved, imprisonment can range between three years and 10 years, with a fine.

"Considering the amount of the penalty, as well as prosecution provisions, the impact of the legislation seems to be draconian in nature and more severe as compared with the provisions of Fema (Foreign Exchange Management Act) regulations," Surana says.

Bhatia of BDO notes while the proposed law provides that the income or asset disclosed would not be subject to further proceedings under the Income Tax and Wealth Tax acts, it is silent on immunity from applicability of other laws such as Fema, IPC, PMLA, etc.

Bill coverage

Any asset that can be denominated in monetary terms has to be declared under the Bill. Some of these are:

  • Shares of foreign companies
  • Bank balance or deposits outside India, whether with a bank or any other company or entity
  • House, villa, apartment, land
  • Any tenancy interest (if recognisable) in line with domestic law in the foreign country
  • Paintings, jewellery, bullion, aircraft, yacht, vintage car
  • Precious gift articles purchased and kept outside India
  • Account(s) in which the person has signing authority
  • Inheritance or gift of any immovable or movable asset or cash
  • An expatriate working in India has to disclose assets and income
Priya Nair