19 August 2016 EY Tax Alert CBDT releases fifth round of FAQs on Income Declaration Scheme, 2016 Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent Circular [1] issued by the Central Board of Direct Taxes (CBDT), which contains the CBDT s clarifications, in the form of frequently asked questions (FAQs), in relation to the Income Declaration Scheme, 2016 (Scheme). Under the Scheme, taxpayers who have not paid full taxes in the past can come forward and pay tax on hitherto undisclosed income. On payment of tax, surcharge and penalty, totalling to 45% of such undisclosed income or value of asset declared, taxpayers would enjoy immunity from penalty and prosecution under the Income Tax Act (ITA), the Wealth Tax Act (WTA) and the Benami Transaction (Prohibition) Act (Benami Act), in respect of income or asset declared under the Scheme. In deference to representations made on various issues and concerns on the scope of the Scheme, as introduced by the Finance Act, 2016 (FA 2016), the CBDT has thus far issued four circulars [2] clarifying various aspects of the Scheme [3]. The CBDT has further addressed certain additional issues, in the form of 12 questions and answers (Q&As), vide this Circular. The Circular, inter alia, clarifies issues regarding valuation of immovable property, declaration of fictitious liability, deposit of taxes in cash in Banks etc. [1] Circular No. 29 of 2016 dated 19 August 2016 [2] Circular No. 17 of 2016 dated 19 May 2016, Circular No. 24 of 2016 dated 27 June 2016, Circular No. 25 of 2016 dated 30 June 2016 and Circular No. 27 of 2016 dated 14 July 2016 [3] Refer EY Alert CBDT releases FAQs on Income Declaration Scheme 2016 dated 21 May 2016, EY Alert CBDT releases second round of FAQs on Income Declaration Scheme 2016 dated 28 June 2016, CBDT releases third round of FAQs on Income Declaration Scheme, 2016 dated 1 July 2016, CBDT releases fourth round of FAQs on Income Declaration Scheme 2016 dated 14 July 2016
Background Chapter IX of FA 2016 introduced the Scheme to allow taxpayers who have not paid full taxes in the past to come forward and voluntarily pay tax on hitherto undisclosed income. On payment of tax, surcharge and penalty, totalling to 45% of such undisclosed income or value of asset declared, taxpayers would enjoy immunity from penalty and prosecution under the ITA, the WTA and the Benami Act, in respect of income or asset declared under the Scheme. The Scheme is operative for four months from 1 June 2016 to 30 September 2016 and the taxes on declared, undisclosed income can be paid by taxpayers in three instalments up to 30 September 2017. The Rules [4] provide for a valuation mechanism to determine the fair market value (FMV) of undisclosed assets, as also to prescribe forms for procedural matters [5]. The Rules have been amended [6] from time to time to give effect to the various clarifications issued by the CBDT [7]. In order to address a few additional issues, the CBDT has released this Circular, containing answers to another 12 questions on the scope of the Scheme. This Tax Alert summarizes the significant clarifications contained in the Circular. Key clarifications Clarifications on valuation of immovable property: Previously, CBDT clarified that where an immoveable property is declared under the Scheme, period of holding shall be deemed to begin from 1 June 2016 as the asset has been revalued on such date. It is now clarified, in supersession to the earlier clarification that the period of holding of asset declared under the Scheme shall begin with the actual date of acquisition of such asset. Further, the indexation benefit in respect of the amount declared under the Scheme shall, however, be available from the valuation date viz. 1 June 2016. Where acquisition of immoveable property is evidenced by registered deed, taxpayer is provided with an option to determine FMV [8] at stamp duty value increased by proportion of Cost inflation index (CII) of tax year 2016-17 to the cost inflation index of year of registration of property. If cost of immoveable property is partly evidenced by registered deed and partly not (e.g. construction of building on land acquired under registered deed), benefit of this option will be available only to that part of cost which is evidenced by registered deed (viz. land). A declarant who has already filed declaration under the scheme prior to this amendment is permitted to file revised declaration in respect of such registered property in accordance with the amended rules even if revision may result in reduction in declared value. [4] Vide Notification No. 33 of 2016 dated 19 May 2016 [5] Refer EY Alert The Income Declaration Scheme 2016 - Rules prescribing procedure and valuation mechanism dated 21 May 2016 [6] Notification No. 60 2016 dated 20 July 2016; Notification No. 70 of 2016 dated 12 August 2016 - Refer EY flash news dated 16 August 2016; Notification No. 74 of 2016 dated 17 August 2016- Refer EY flash news dated 19 August 2016 [7] Circular No. 17 of 2016 dated 20 May 2016, Circular No. 24 of 2016 dated 27 June 2016, Circular No. 25 of 2016 dated 30 June 2016 and Circular No. 27 of 2016 dated 14 July 2016; CBDT Office Memorandum dated 22 June 2016 and Notification No. 56/2016 [F No. 142/8/2016-TPL] dated 6 July 2016 [8] Notification No.74/2016 has suitably amended Rule 3 to this effect
Clarifications in relation to cash deposit under the Scheme: Clarifications pertaining to charitable trusts and donations: Taxpayers can make payment of taxes, surcharge and penalty under the Scheme in cash [9]. Further, taxpayers can also deposit cash declared under the scheme in bank account. The Reserve Bank of India (RBI) will be issuing instructions to banks to allow payment of tax under the Scheme in cash and also allow deposit of cash over the counter in accordance with existing guidelines governing the same. Registration of a charitable trust or institution registered under ITA shall not be cancelled solely on the basis of information furnished in the declaration filed under the Scheme. Where taxpayers have claimed weighted deduction of bogus donations, amount claimed as deduction is required to be declared under the scheme. Further, no adverse action shall be taken against the taxpayers either by the Tax Authority or by financial intelligence unit solely on the basis of cash deposit made in Bank account consequent to declaration made under the Scheme. Declaration of fictitious liability under the scheme: Fictitious liabilities such as loans, creditors, advance received, share capital etc. disclosed in the audited Balance Sheet and cannot be directly linked to acquisition of an asset in the Balance Sheet, can be declared under the Scheme. If, however, there is direct link between the fictitious liabilities and acquisition of asset, amount to be declared under the scheme is FMV of asset as on 1 June 2016. Other clarifications: Declaration under the scheme can be filed for those tax years for which time limit of filing return of income has not been expired under the ITA. Reiterating earlier clarification, Circular clarifies that taxpayer cannot file declaration under the scheme for tax years for which survey was conducted. However, the taxpayer is eligible to file declaration for undisclosed income of any other years. The valuation report prepared by a registered valuer shall not be questioned by the Tax Authority. Appropriate action shall be taken against the registered valuer in case of any misrepresentation. Declaration to explain future transactions: The declaration made under the Scheme shall not affect the finality of the completed assessments. But where any proceedings are pending before the Tax Authority in respect of tax year subsequent to the year/s for which declaration is filed under the Scheme, then the income declared under the Scheme can be taken into account to explain any transaction if the taxpayer is able to establish direct nexus between the income declared and transactions of subsequent years. [9] Refer FAQ No.6 of Circular 27/2016 dated 14 July 16
Comments So far, vide four circulars, the CBDT has addressed various concerns raised by taxpayers in connection with the scope of the Scheme. The clarifications reflect the Government of India s intention to remove ambiguities in the implementation of the Scheme. Clarifications in respect of (i) benefit of holding period of an asset from date of acquisition, (ii) no action against taxpayer basis cash deposits in bank consequent to the declaration under the Scheme are welcome. Under Indian jurisprudence, a circular issued by the CBDT, for proper administration, is binding on the Tax Authority, even if it is contrary to legal provisions. This Circular, however, will not bind the taxpayers or the Courts, if it is not in conformity with the law on any matter.
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