The government introduced an anti-black money bill to prevent stashing of illegally acquired money and penalise holders of illegal and undisclosed assets abroad in the Lok Sabha on 20th February 2015.The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill (UFIA) 2015 introduced in the House by Finance Minister Arun Jaitley provides:
Applicability and Extent (clause 1)
It shall come into force on 1st Day of April 2016 (i.e. from the financial year 1stApril 2015 –31stMarch 2016) and extends to the whole of India
- Whether is applicable from financial year 1st April 2015 to 31st March 2016?
- Whether it applies to the whole of India?
Scope (Clause 2)
The Act will apply to all persons residing in India.
“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.
In regards to Company:
As per section 6(3) of Income Tax Act(“ITA”):A company is said to be resident in India in any previous year if
- It is an Indian company or
- During that year, the control and management of its affair is situated wholly in India
The Finance Bill 2015 has proposed to replace this with the standard of ‘place of effective management’ (POEM). A foreign company will be considered tax resident in India if its POEM is in India at any time in the relevant financial year. POEM has been defined to mean “a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made”.
If POEM does become the test for corporate residence in the ITA going forward, the impact of the UFIA Bill may have a wider scope than intended. Consequences for Foreign MNCs as follows:
Foreign companies with legitimate business operations outside India would end up being treated as Indian tax residents and consequently, be subjected to tax in India on their global income. This could occur if, for example, a board member of the foreign company is present in India and participates in the decision-making process from India only in that single board meeting. This anomalous situation will result in double taxation of income which may not be mitigated by tax treaties as both countries (viz. India and the country of incorporation) will seek to tax the global income of the foreign company.
- Whether it applies to the resident of India only?
- Whether it will applies to the deemed resident of India in section 6(5) of income tax Act 1961? (if a person is a resident in India in a previous relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income)
- Whether it will apply to the foreign company? Whether a foreign company with control and management of its affair is situated in India has to comply with this Act? What if its control and management are in one year or just one board meeting only?
- What if the Indian company is merged with the foreign company before 31st March 2015? Whether it will attract this provision ?
Scope of Taxation (Clause 4)
It will apply to both undisclosed foreign income and assets (including financial interest in any entity).
It encompasses foreign income:
- which has not been disclosed under applicable tax returns under the ITA or
- for which a tax return should have been filed under the ITA but was not filed.
UFA refers to an asset (including financial interest in any entity) located outside India, held by a taxpayer in his name or in respect of which he is a beneficial owner and he has no explanation about the source of investment in such asset or his explanation is not to the satisfaction of the Revenue.
However, having one or more bank accounts with a maximum aggregate balance (at any time during a previous year) of Rs. 500,000 (Rs. 5 lakh) will be excluded from the purview of this Bill.
- Indian company merged with foreign company and consideration received in form of shares from foreign company will be covered?
- Whether the leeway of Rs. 5lacs is just for the bank accounts? If not amount of Rs. 5 lacs is to be checked at the time of purchase of current fair value?
Rate of TAX/Charge (Cluase3)
Undisclosed foreign income (UFA) or assets shall be taxed at the flat rate of 30percent. No exemption or deduction or set off of any carried forward losses which may be admissible under the existing Income-tax Act, 1961, shall be allowed.
To calculate the value of UFA, income already assessed under the ITA shall be deducted from the value of the UFA if the Revenue is provided satisfactory evidence of such prior assessment. A particular calculation method has been prescribed where the UFA is immoveable property. If the UFA is located outside India, its value shall be brought to tax in the relevant previous year in which such asset comes to the notice of the Revenue. For details calculation refers illustration as follows:
A house property located outside India was acquired by an assessee in the previous year 2009-10 for fifty lakh rupees. Out of the investment of fifty lakh rupees, twenty lakh rupees was assessed to tax in the total income of the previous year 2009-10 and earlier years. Such undisclosed asset comes to the notice of the Assessing Officer in the year2017-18. If the value of the asset in the year 2017-18 is one crore rupees, the amount chargeable to tax shall be A-B=C
B=Rs. (100 x 20/50) lakh= Rs.40 lakh,
C=Rs. (100-40) lakh=Rs.60lakh.
- Whether persons declaring under the compliance scheme or offenders will have the ability and resources to pay the large sums involved, especially since tax and penalty are to be calculated on the current price of the asset and not the price at which it was purchased?
Violation of the provisions of the proposed new legislation will entail stringent penalties. The penalty for non-disclosure of income or an asset located outside India will be equal to three times the amount of tax payable thereon, i.e., 90 percent of the undisclosed income or the value of the undisclosed asset. This is in addition to tax payable at 30%.
The other interest, penalty and imprisonment consequences are listed below:
- Failure to furnish return in relation to foreign income and assets : Penalty of INR 1 million (INR 10 lakhs)
- Willful failure to furnish returns in relation to foreign income and assets: Rigorous imprisonment (i.e. with hard labour) between 6 months-7 years and fine.
- Failure to furnish information in a return or furnishing inaccurate asset particulars in a return, in relation to foreign income and assets*:Penalty of INR 1 million (INR 10 lakhs)
- Willful failure to furnish information in a return or furnishing inaccurate asset particulars in a return, in relation to foreign income and assets: Rigorous imprisonment between 6 months-7 years and fine
- Default in payment of tax arrears : Penalty equal to the amount of tax arrears
- Other defaults such as failure to sign legal statements, provide accounts etc. : Penalty between INR50,000 to INR 200,000 (INR 2 lakhs)
- Wilful attempt to evade tax, interest or penalty chargeable under the UFIA Bill: Rigorous imprisonment between 3-10 years and fine
- Wilful attempt to evade paying tax, interest or penalty chargeable under the UFIA Bill: Rigorous imprisonment between 3 months-3 years and fine
- Making a false statement in verification which is known or believed to be false: Rigorous imprisonment between 6 months-7 years and fine
- Abetting or inducing another to make a false statement relating to tax payable or to wilfully attempt to evade tax, interest or penalty : Rigorous imprisonment between 6 months-7 years and fine
- Second and every subsequent offence : Rigorous imprisonment between 3-10 years and fine between INR 0.5 million (INR 5 lakhs)-INR 10 million (INR 1 crore)
PMLA and Foreign Exchange Management Act (FEMA) will be amended so that where undisclosed assets are held by a person abroad that cannot be attached, assets of equivalent value held by such person in India would be confiscated.
Prevention of Money Laundering Act (PMLA):
Concealment of income in relation to a foreign asset will be made a ‘predicate offence’ under the Prevention of Money-laundering Act (PMLA) so as to enable confiscation of such unaccounted assets held abroad. This will enable confiscation of unaccounted foreign assets. Enforcement agencies can then attach and confiscate unaccounted assets and launch prosecution against persons indulging in money laundering.
FEMA will be amended to permit attachment of Indian assets of equivalent value if the unaccounted foreign assets of a person cannot be attached. This will enable confiscation of Indian assets of equivalent value.
The foreign exchange management Act (FEMA) will be amended to the effect that if any foreign exchange, foreign security or immovable property situated outside India is held in contravention of this law, an action may be taken for seizure and eventual confiscation of assets of equivalent value situated in India. Such contraventions will be liable for levy of penalty and prosecution with imprisonment up to five years.
- Either of these actions will be possible only if information about such foreign assets is available with the authorities, and the evidence is such as can stand the scrutiny of a criminal trial.