India’s Hunt For Black Money!

An American think tank says over the past 10 years, Indians have stashed over 400 billion dollars in black money abroad. Estimates may vary but the size of the problem cannot be undermined. PILs have been filed, Special Investigative Teams formed, Amnesty schemes offered – and now a new offensive is being launched by the Indian government – A new law that goes after undisclosed foreign income & assets. Will it do the trick? Aayush Ailawadi brings you this story.

If passed, the Undisclosed Foreign Income & Assets (Imposition of Tax) Bill, 2015 will apply from assessment year 2016-17. The bill provides for separate taxation of any undisclosed foreign income and assets, even though these are to be reported under the current income tax law as well. But, the UFIA bill goes a step further to levy a straight 30% tax & penalties of upto 3 times the tax. A one time compliance window has been provided for tax payers to come clean and this may protect them from criminal prosecution.

SR Wadhwa

Former Chairman, Income Tax Settlement Commission

Tax Advocate

“You see this bill has 3 different parts. One is where the department knows that a person has a foreign income or assets. To such persons this law will not be applicable and will be governed by the IT Act. Then we have those who will like to avail of the compliance window. So they will voluntarily disclose their foreign income and assets and pay tax at the rate of 30 percent and penalty at the rate of 30 percent. So total they will have to pay 60% of the income and there will be no other penalty for them. Lastly, you will have those people who the department has no knowledge and they also do not avail of the compliance window which may be open for 3 to 6 months, those people will be dealt with very severely under this law. They will be levied tax penalty three times and maybe even prosecuted.”

Rajesh Simhan

Head-International Tax, Nishith Desai Associates

“Here you are looking at a situation where in addition to the value of the asset you effectively have to pay incremental tax and here we are not even talking about income from the asset, we are purely talking about pure play the value of the asset and in addition to that a 3X the value of the assets that you have pay tax on. I think that is where we differ from most other jurisdictions which have similar laws in place because I don’t think any other country has this kind of stringent penalties as far as non disclosure is concerned. So much so, that you go beyond the actual value of the asset.”

These new provisions could have been brought in as amendments to the existing tax law. But, the other laws such as Prevention of Money Laundering Act would have needed separate amendments. Hence, this omnibus change. But, will this anti-black money law succeed where the Income Tax provisions have failed? Already, there are questions being raised about the implementation of several provisions. For instance, the ‘wide’ definition of resident, low thresholds, the lack of a definition for financial interest, no clear guidelines on fair market value, the impact on intermediaries and the stringent penalties!

The UFIA bill has jurisdiction over any person resident in India. For individuals, residency is determined by length of stay in India. For companies, it is determined by place of effective management. A new controversial provision in the Finance Bill says a foreign company would be deemed resident, if its place of effective management was in India at any time of the year. Consequently, the UFIA may also cast too wide a net!

Rajesh Simhan

Head-International Tax, Nishith Desai Associates

“This bill is an extension of the IT provisions. OF course the fundamental issue is that did I need new provisions or a new bill to cover these aspects. But, really you have to read it along with the IT act and its provisions and you have to take into consideration some of the issues around the new POEM, as to when a foreign company can be treated potentially as a resident of India. To that extent you have to read both in conjunction even as far as the disclosure under this Bill is concerned.”

The UFIA bill defines undisclosed financial assets as one or more foreign bank accounts with a maximum aggregate balance of more than 5 lakh rupees in the previous year. Experts say that’s too low a threshold and could lead to undue harassment by tax authorities.

Rajesh Simhan

Head-International Tax, Nishith Desai Associates

Even if somebody has gone abroad, lets say for an internship, unlike in India you will end up having substantial assets. 5 Lakh INR is 8000 USD, if I do an internship I will probably earn more money which may be lying in the foreign bank a/c. And again what you have to keep in mind is that from an IT perspective, just having that account doesn’t mean I am liable to tax in India. After I come back to India, if I earn any income from that amount, it is only under those circumstances that I am liable to tax in India. Second, from an exchange control perspective also I am allowed to keep that money outside of India and do whatever I want to do with that money. As long as I actually report the income that I derive from that asset that is there, those are the only circumstances which today you would be taxable in India. As opposed to it, you now have a situation where even if I have more than 8000 USD in my bank account abroad, I am potentially subject to penalties and tax on the whole amount in case I fail to disclose it and it is very much possible and really, if the idea of the bill was really to target black money, you would have ideally wanted to have a much higher threshold.

Mukesh Butani

Managing Partner, BMR Legal

“But, let’s take an instance of a person who is currently resident in India and he was a NRI at one point, he may be a student and he earned an income off shore and he didn’t disclose that income in India cause he was not resident for exchange control purposes and not even for IT purposes. I think that’s a legit way of keeping income abroad and don’t think the bill is targeted towards those persons as such.”

The UFIA bill applies to both undisclosed foreign income and assets and that includes financial interest in any entity. But, financial interest has not been defined.

Rajesh Simhan

Head-International Tax, Nishith Desai Associates

“The challenge that we face is to what extent, direct or indirect, what are the kind of interests that are covered – issues such as being a beneficiary of a discretionary trust or a contingent beneficiary, under those circumstances also does it mean that I have a financial interest. Those are still grey areas that are there today.

The UFIA bill says, Indians having undisclosed property abroad will have to pay tax and penalty on the basis of the current market value or fair market value of the asset, and not on the purchase price. But, the question is– who determines fair market value of an asset in a foreign country?”

SR Wadhwa

Former Chairman, Income Tax Settlement Commission

Tax Advocate

“Yes, that’s a difficult thing! The fair market value will be determined when the AO comes to know of the property and it will be difficult to ascertain what is fair market value. In India, the IT dept has got the District Evaluation Officers from the CPWD and other agencies who value such properties but properties located abroad some sort of mechanism will have to be found out, to find out fair market value.”

Mukesh Butani

Managing Partner, BMR Legal

“Fair market value will be determined as it is for any other asset under the wealth tax law.”

That leaves the most important question facing this law – why will it succeed when others have failed? Experts point to the stringent penalty & punishment provisions. 30% tax plus 3 times that amount in penalties plus upto 7 years of rigorous imprisonment for failure to furnish returns and 10 years in jail for wilful evasion. Worse still, is the presumption of ‘mens rea’ of guilty mind of the accused.

Rajesh Simhan

Head-International Tax, Nishith Desai Associates

“I don’t really look at it as a financial regulation but as a criminal regulation that is there today! And under criminal law, the basic tenet is that a person is innocent until proven guilty and here you are just shifting the burden of proof to say well, if the AO thinks that is the case, then you are effectively guilty unless you show me otherwise and here again, the AO has wide powers. Like I said, a wide overreach what really was the objective and what you really see in the Bill.”

SR Wadhwa

Former Chairman, Income Tax Settlement Commission

Tax Advocate

“I think it will increase litigation except where people will avail the tax compliance window and pay 60% where the matters are disputed, it will be a very prolonged litigation for the taxpayers and for the department and possibly the recovery in terms of actual tax may not be very significant.”

It’s a tough act –there are no compounding or settlement provisions. And an accused must pay up the full tax & penalty amount before disputing it. If a company can’t pay its penalties – its manager must. And abetment, by say a bank manager or an accountant could send him to jail for upto 7 years. The government is counting on this new era of exchange of information treaties and this threat of severe punishment to prompt disclosures. Will this treasure hunt hit gold or will this be yet another attack of tax terrorism?