New Law for Black Money of Indians in Foreign Jurisdiction

Introduction

In common parlance, Black money is a term used to refer to money that is not fully legitimate in the hands of the owner. The term “black money” is not defined per se in the Indian Tax laws. However, a definition of black money was adopted in the “White Paper issued on Black Money” by Government of India in May 2012. As per the above report, ‘black money’ is defined as an assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession. The Parliament has already enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“Act”). This Act is applicable to whole of India and has come into force from April 2016. The article reflects on the new law.

A. Source of Black Money

Black money could arise broadly due to two possible reasons outlined below:

(a) Illegitimate/Illegal Activities: The first is that the money may have been generated through illegitimate activities not permissible under the law, like crime, drug trade, terrorism, and corruption, all of which are punishable under the legal framework of the State. Some of these offences are included in the Schedule of the Prevention of Money Laundering Act, 2002.

(b) Failure to Pay Tax but Income undisclosed is through Illegal Activities: The second and perhaps more likely reason is that the wealth may have been generated and accumulated by failing to pay the dues to the public exchequer in one form or other. In this case, the activities undertaken by the perpetrator could be legitimate and otherwise permissible under the law of the land but s/he has failed to report the income so generated, or comply with the tax requirements, or pay the dues to the public exchequer, thereby converting such income into black money.

B. The Objective Behind the Act

The Act was legislated due to following developments taking place: Supreme Court directives regarding the issue
(a) Disclosure of Swiss Bank about the bank account held by Indians

(b) India signs the Multilateral Competent Authority Agreement (MCAA) pact on Automatic Exchange of Information (AEOI) wide in scope and obliges the treaty partners to exchange a wide range of financial information, including that about the ultimate controlling persons and beneficial owners of entities.

(c) To deal with problem of black money that is undisclosed foreign income and assets

(d) To lay down procedures to deal with such foreign income and assets (punishment and prevention of such income and asset outside India)

(e) To impose of tax on any undisclosed foreign income and assets and matters connected or incidental

(f) Noted jurist and former law minister Ram Jethmalani along with many other well known citizens filed a Writ Petition (Civil) No. 176 of 2009 in the Supreme Court of India seeking the court’s directions to help bring back black money stashed in tax havens abroad and initiate efforts to strengthen the governance framework to prevent further creation of black money.

C. Global Automatic Exchange of Information on Tax Matters

Once the global exchange system comes into force, the holders of black money will have no escape routes. India, Switzerland and 45 other nations had agreed upon automatic exchange of tax information, which is seen as a major step forward in global efforts against banking secrecy practices. The endorsement of the ‘Declaration on Automatic Exchange of Information in Tax Matters’ under the aegis of think-tank OECD last week had paved the way for finalising a single global standard in this regard later this year in September. “The effectiveness of AEOI (Automatic Exchange of Information) will come only when the standard is translated into domestic legislations and hardware in banks’ IT. This means that AEOI will take place in 2017 at the earliest,” Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, told PTI from Paris. Paris-based Organisation for Economic Cooperation and Development (OECD) sets the global tax standards and frames conventions against tax frauds, among others.

D. Important Clauses and Terms to understand the Act

  • The Act extends to whole of India
  • The Assessment year would commence from first day of April each year
  • The meaning of Assessee within the Act is:
    •  The person being resident other than not ordinarily resident within India within the meaning of section 6 (6) of the Income Tax Act
    •  Tax in respect of an undisclosed income and assets is payable under the Act
    •  Assessee in default under the Act
  • The definition of person not defined under the UFIA Act but the definition under ITA will be adopted. Thus, it will include
     – Individuals
     – Hindu Undivided Family (HUF)
     – Company
     – Firm
     – Association of Persons (AOP)
     – Body of Individuals (BOI)
     – Local authority
     – Every other artificial and jurisdictional person
  • The undisclosed foreign income and assets under the Act would mean:
    • Assets and income located outside India
    • Value of undisclosed income outside India
    • Assets held by assesse in his own name or name of beneficial owner
    • This income is not disclosed otherwise in source of income
  • The Income Tax Authorities for the purpose of the Act are:
    • The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),
    • Principal Directors General of Income-tax or Principal Chief Commissioners of Income-tax
    • Directors-General of Income-tax or Chief Commissioners of Income-tax,
    • Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals)
    • Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals),]
    • Joint Directors of Income-tax or Joint Commissioners of Income-tax,]
    • Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),
    • Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
    • Income-tax Officers,
    • Tax Recovery Officers,
    • Inspectors of Income-tax
    • The tax authorities have power of a civil court. The appeal from the appellate tribunal of Income Tax would go to the High Court which can be heard minimum of two judges bench

Summary of Key Highlights of the Act

The Act deals with menace of black money and following are key highlights:

  • Flat 30% tax rate (without surcharge and cess) on the value of undisclosed foreign income and assets and assets would be valued on current FMV.
  • No set off of foreign tax credit would be allowed
  • No exemption, deduction or carry forward of losses under the Income Tax Act,1961
  • Additional 300% penalty for non-disclosure of foreign income and assets
  • Rs. 10 Lakh for non-filing of return and not furnishing of complete details of foreign assets
  • Prosecution for violation is rigorous imprisonment from 3 to 10 years
  • Tax and penalty would be assessed on current value of assets and not on purchase value.
  • Only bank account upto Rs. 5 lacs are exempted
  • One time compliance opportunity is available before September 30, 2015
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