Do you own foreign assets or earn income from abroad? Are you planning to repatriate/ relocate/ settle in India? Are you aware that foreign assets and income must be reported? Here is what you should know.
What is Black Money?
The term “black money” in common parlance means:
- Money made from illegal activities such as bribes, terrorism, smuggling, drug trafficking, among others
- Money that has not been reported to various Government authorities.
The objective of the Black Money Act
Many Indians have stashed multi-billion dollars’ worth of assets in foreign countries to avoid paying taxes in India. In many cases, the money has been earned from illegal sources. The Black Money Act, 2015, came into force on 01 April 2016 and sought to tax Undisclosed Foreign Income and Assets and impose tax and penalty on offenders.
Who is covered under this Act?
The Act applies only to an Assessee.
- A person who is resident in India OR
- A non-resident or not ordinary resident who was resident in India during the financial year to which the undisclosed asset relates or the previous year in which the undisclosed asset was acquired.
So, the important point that emerges is that to be an assessee under this Act, the person should have been a resident in India at the time when the foreign asset was acquired OR at the time when foreign income was earned.
Additionally, a resident may become an assessee, where he continues to hold foreign assets acquired when he was a non-resident. In that case, disclosure requirements should be complied with. If disclosure requirements have not complied, it may attract penalty provisions. In addition to taxes and penalty on taxes, the penalty for non-disclosure is up to Rs. 10 lakhs.
What does this Act seek to tax?
The Act seeks to tax two items:
- Undisclosed asset located outside India
As defined in section 2(11) of the Act, “Undisclosed Assets Located outside India” means an asset (including financial interest in any entity) located outside India, held by the assessee 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 the explanation given by him is in the opinion of the Assessing Officer is unsatisfactory.
- Undisclosed foreign income and assets
As per Section 2(12) of the Act, “Undisclosed Foreign Income and Assets” means the total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India, referred to in section 4 and computed in the manner laid down in Section 5.
Total undisclosed foreign income and asset of any previous year shall be:
- Foreign income which has not been reported in the return of income under the Income Tax Act
- Value of undisclosed asset located outside India
Tax rate and taxable value
Undisclosed foreign income and assets shall be charged to tax at the rate of thirty percent of such undisclosed foreign income and asset. Undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the assessing officer.
“Value of an undisclosed asset” means the fair market value of such asset in the previous year in which such asset comes to the notice of the assessing officer.
An important to note is that the year in which the asset was acquired, and the original cost of the asset is immaterial to determine value. Another key provision, unlike the Income Tax Act, is that no deduction is allowable from the undisclosed income in respect of any expenditure or allowance or set-off of loss.
However, the following are deductible:
- Any amount of income assessed to tax under the Income Tax Act prior to the year to which the Black Money Act applies
- Any amount of income that has been already assessed to tax under the Black Monet Act
Few important penal provisions
- In addition to tax, a penalty of up to 3 times the tax amount may be imposed.
- Failure to furnish a return in relation to foreign income and assets or furnishing inaccurate particulars in return may attract a penalty up to Rs 10 lakhs.
- Apart from imposing a penalty, rigorous imprisonment ranging from 3 months to 10 years may be imposed along with a fine at the court’s discretion.
Frequently asked questions
Is there a separate return of income to be furnished under the Black Money Act, apart from the return under the Income Tax Act?
There is no separate return to be furnished under the Black Money Act. But disclosure in respect of foreign income must be made under the return under the Income Tax Act. Apart from that, Schedule FA in return under Income Tax Act must be accurately filled in.
Mr. X, who has been a resident in Canada for many years, relocates and settles in India and becomes an Indian tax resident. Is Mr. X taxable in India in respect of his income earned from Canada after he becomes a tax resident in India?
Once a person becomes a resident and ordinary resident in India, his/ her global income is taxable in India. Irrespective of nationality, his/ her worldwide income becomes taxable in India.
In the above case, Mr. X continues to hold a residential house property in Canada from which he earns rental income. He also owns Canadian company shares on which he earns dividend income. The said house property and shares were acquired when he was a resident in Canada out of his income earned in Canada. Is there a ban on holding foreign assets by Indian tax residents?
Indian tax residents may hold foreign assets subject to the provisions of the Foreign Exchange Management Act (FEMA). There is no express ban on holding foreign assets. But disclosure requirements must be complied with.
In the above case, as far as Mr. X is concerned, what are the disclosure requirements under the Income Tax Act and Black Money Act?
Once Mr. X becomes a resident and ordinary resident, his global income becomes taxable in India. Hence, in his Indian income tax return, Mr. X should offer to tax his rental income and dividend income earned from Canada along with his income from Indian sources. Mr. X may use the beneficial provisions of the Double Tax Avoidance Agreement between India and Canada to reduce his tax liability.
Apart from offering foreign income to tax in India, the particulars of foreign assets must be disclosed in Schedule FA of the return under the Income Tax Act. If the disclosure is not made in Schedule FA, a penalty of up to Rs. 10 lakhs may be imposed, even if there is no tax liability.
Co-authored by Anshad L & CA. Antony Mathias Chirayath.