21 May 2016 EY Tax Alert The Income Declaration Scheme 2016 - Rules prescribing procedure and valuation mechanism 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) containing explanatory notes on the provisions of the Income Declaration Scheme, 2016 (Scheme). The Tax Alert also summarizes a recent Notification [2] issued by the CBDT, notifying The Income Declaration Scheme Rules, 2016 (Rules). The Scheme provides an opportunity to persons who have not paid full taxes in the past to come forward and declare the undisclosed income/asset and pay tax, surcharge and penalty totalling in all to 45% of such undisclosed income. A taxpayer, who avails the Scheme, enjoys certain specified immunities in respect of undisclosed income and asset declared under the Scheme. The Scheme, however, does not apply to undisclosed income and assets covered under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA). The Circular explains the provisions of the Scheme in brief and prescribes the procedure of filing declaration. The Scheme is effective from 1 June 2016. Taxpayers will need to furnish declaration of undisclosed income and assets to the Tax Authority by 30 September 2016 and pay up tax, surcharge and penalty thereon by 30 November 2016. The Rules prescribe methods for valuation of various assets, as also prescribe forms for certain procedural matters. The valuation mechanism will apply for determining value of undisclosed assets as on 1 June 2016. [1] CBDT Circular No. 16 of 2016 dated 20 May 2016 [2] S.O. 1831(E) dated. 19 May 2016
Background Last year, a new law, BMA was enacted with a view to tackle the menace of undisclosed overseas income/assets. It incorporated a one-time compliance scheme wherein an opportunity was given to taxpayers to voluntarily come forth and declare undisclosed overseas assets and income within a limited period window of compliance and avail immunity from penalty and prosecution under the Black Money Act, as also under other specified Acts. This year, the Finance Act, 2016 (FA 2016) introduced the Scheme under Chapter IX of the FA 2016. Under the Scheme, taxpayers who have not paid full taxes in the past can come forward and declare the undisclosed income or asset, pay tax, surcharge and penalty, totalling in all to 45% of such undisclosed income and avail immunity from penalty and prosecution under the Income Tax Act (ITA) and the Wealth Tax Act (WTA). The declaration, in the form of undisclosed asset, is to be at fair market value (FMV) of the asset as on 1 June 2016. The Scheme required the manner of valuation of the undisclosed asset to be prescribed by the CBDT. Under the delegated authority, the CBDT has now prescribed the valuation rules. The Rules provide for valuation norms for assets such as bullion, jewellery, shares/securities, immovable property etc. Additionally, the Rules also prescribe forms for various procedural aspects of filing of declaration under the Scheme. This Tax Alert summarises significant provisions of the Circular and the Rules. 1. The Scheme: Scope of the Scheme Under the Scheme, a taxpayer can declare undisclosed income or asset acquired from income taxable under the Indian Tax Laws (ITL) for tax year prior to 2016-17 where: The taxpayer has failed to furnish a tax return within the stipulated time period; or The taxpayer has failed to disclose such income in a tax return furnished before commencement of the scheme; or Such income escaped assessment on account of omission/failure by the taxpayer while filing the return of income or to disclose fully and truly all material facts necessary for the assessment. Rate of tax, surcharge and penalty Under the Scheme, the taxpayer is to pay tax at 30%, surcharge and penalty each being 25% of such tax. The aggregate tax outgo is 45% of the amount of the undisclosed income/asset. No additional tax/penalty will be levied under the ITL. Scheme period The Scheme is effective from 1 June 2016 and a declaration is required to be furnished before 30 September 2016. Furthermore, the taxpayer is to pay requisite tax, surcharge and penalty in relation to the value of the undisclosed income and asset declared under the Scheme by 30 November 2016. Ineligibility criteria A taxpayer will not be eligible to make declaration under the Scheme where: Undisclosed income pertains to a year in respect of which notice of assessment has been served on or before 31 May 2016 and the proceeding is pending before the Tax Authority.
Undisclosed income pertains to a period covered by search/survey action. Undisclosed income is covered under the BMA. Prosecution proceedings have been initiated against the taxpayer under Unlawful Activities (Prevention) Act or the Prevention of Corruption Act etc. Circumstances under which declaration is invalid The declaration shall be invalid if: The taxpayer fails to pay the entire amount of tax and penalty before 30 November 2016; or Declaration is made by misrepresentation/suppression of facts/ information. Any tax, surcharge or penalty paid in pursuance of the declaration shall, however, not be refundable. 2. Valuation Mechanism The Rules prescribe valuation methods for different assets. These methods provide guidance on determination of the FMV of each of the assets as on 1 June 2016 (Valuation Date). In certain cases, the valuation is to be supported by a valuation report from the valuer recognized under the WTA. The valuation mechanism, as prescribed, is tabulated at Annexure 2. Prescribed forms The Rules also prescribe forms for various procedural aspects in relation to a declaration made under the Scheme. Effect of valid declaration Consequences of a valid declaration are as follows: Undisclosed income will not be included in the total income under the ITL or the WTA for any tax year. Declaration will not be admissible as evidence against the taxpayer in any penalty/prosecution proceedings under the ITL or the WTA. Immunity from the Benami Transaction (Prohibition) Act, 1988, subject to the condition that the benamidar transfers the declared asset to the declarant before 30 September 2017. But, declaration of the undisclosed asset will not affect the finality of closed assessments. Accordingly, the taxpayer cannot claim reassessment or revision of any past order nor claim any benefit of set off/relief. Procedure under the Scheme The procedure for the Scheme is tabulated at Annexure 1.
Comments Last year, the Government of India (GOI) enacted a new legislation to deal with cases of black money being stashed abroad by providing for stringent consequences of default. The law also provided a one-time declaration opportunity in relation to undisclosed foreign assets/income. This year, vide the FA 2016, the GOI has introduced the Scheme with a view to provide an opportunity to taxpayers to come clean by declaring past untaxed income. The Scheme is open for a limited period of 4 months. The last date by which taxpayers may make declaration of undisclosed income under this Scheme is 30 September 2016. The taxpayers have to deposit the requisite tax, surcharge and penalty by 30 November 2016. Taxpayers availing of the Scheme will be relieved of stringent actions, including penalty and prosecution under the onerous provisions of the ITA and the WTA. Taxpayers will have to exercise care and caution as any misrepresentation or suppression of facts or information will make the declaration void and will expose taxpayers to stringent consequences of penalty and prosecution under the ITA Furthermore, taxes, surcharge and penalty paid will also be forfeited. Taxpayers who desire to avail the facility will need to speed up as the compliance exercise, apart from being time sensitive, will involve collation of old records of various assets, as also coordination with external agencies such as valuer.
Annexure 1: Chart capturing procedure for declaration under the Scheme Sr. Procedure Time limit Content of form Other particulars, if any No. 1. Taxpayer to file declaration in Form 1 to the Principal Commissioner or Commissioner At any time from 1 June 2016 to 30 Sept 2016 Name, address and PAN of declarant Status as to individual, company etc. Residential status resident, non-resident or not ordinarily resident Information about tax year of last return of income filed if any and details of Tax Authority Statement of undisclosed income to be annexed giving details of: 2. Principal Commissioner of Income Tax /Commissioner to issue an acknowledgement to the declarant in Form 2 and indicate disqualification, if any, in relation to undisclosed income 3. Intimation by declarant in Form 3 of payment of tax, surcharge and penalty in respect of undisclosed income declared 4. Acknowledgment in Form 4 by Principal Commissioner/Commis sioner for acceptance of declaration Within 15 days from the end of the month in which declaration is filed No specific timeline. But, should be within reasonable time from 30 November 2016 Within 15 days of declarant s intimation of payment of tax, surcharge penalty o o Year-wise amount of undisclosed income with nature thereof. If amount is credited to bank account, details of the bank account, together with balance as on 1 June 2016 In case where undisclosed income declared is in the form of investment in assets, the asset-wise information, including cost of acquisition, date of acquisition, FMV as on 1 June 2016 etc. Total amount of declaration, tax, surcharge and penalty payable thereon Details of payment of taxes and balance tax payable, if any Name of the declarant Declaration date Tax year, undisclosed income declared, undisclosed income ineligible for declaration [3], tax, surcharge and penalty on eligible undisclosed income Name, address and PAN of declarant Details of acknowledgement certificate number issued in Form 2 by Principal Commissioner Details of payment of taxes including BSR code of bank etc. Name, address and PAN of declarant Receipt number and date of filing declaration Tax year, amount of undisclosed income declared and accepted, description of assets where undisclosed income declared is in the form of investment in asset, tax, surcharge and penalty payable on undisclosed income, details of taxes paid. Application can be filed in physical mode to jurisdictional Principal Commissioner/Commissioner or online by using digital signature of declarant or through transmission of data in the form electronically under electronic verification code If PAN is not held, declarant to obtain PAN Form is to be signed by declarant with solemn declaration that declarant is not ineligible under the disqualification criteria of the scheme. Acknowledgement of the declaration is to be signed and sealed by the Principal Commissioner/Commissioner Proof of payment of taxes to be attached with Form 3. Form 3 is to be signed by the declarant. Acknowledgement of the declaration is to be signed by the Principal Commissioner/Commissioner Form carries a note that the declarant shall furnish a proof of transfer of benami property in the name of real owner on or before 30 September 2017. Failure thereof will disentitle the declarant immunity under the Benami Transaction (Prohibition) Act, 1988 [3] Reasons for ineligibility for disclosure under the Scheme to be provided. No adverse consequences if ay income declared but has been found to be ineligible other than use of such information under the ITA
Annexure 2: Prescribed method for FMV of undisclosed assets as on 1 June 2016 (valuation date): Sr. No. Asset Method for valuation 1. Bullion, jewellery or precious stone Higher of 2. Archaeological collections, Cost of acquisition and drawings, paintings, sculptures or any work of art Price that asset would ordinarily fetch if sold in open market as on valuation date 3. Immovable property Valuation to be supported by report from recognized valuer [4] 4. (a) Quoted shares and Higher of securities [5] on established Cost of acquisition and securities market Average of lowest and highest price on valuation date [6] (b) Unquoted shares and Higher of securities Cost of acquisition and Value determined by formula given as: (A+B-L) X (PV)/(PE) (c) Other than equity shares and securities- unquoted 5. Interest of a person in a partnership firm or in an association of persons (AOP) or a limited liability partnership (LLP) of which the person is a member A: Book value of assets in balance sheet [7] other than specified assets [8] and deferred expenses/advance tax B: FMV of specified assets as provided for in the Rules L: Book value of liabilities shown in balance sheet excluding specified liabilities [9] PE: Total paid up equity share capital as per balance sheet PV: Paid up value of equity shares under valuation Higher of Cost of acquisition and Price that asset would fetch if sold in open market on the date of valuation Valuation to be supported by report from recognized valuer Sum total of (a) Portion of net asset of the firm /AOP/LLP to the extent represented by amount of capital to be apportioned amongst partner/member in capital ratio and (b) Residue net assets to be apportioned in accordance with agreement for distribution in the event of dissolution and in absence of such agreement, in the profit sharing ratio Net asset of the firm = A+B-L in a manner provided in (4(b)) above in the context of unquoted equity shares 6. Any other asset Higher of Cost of acquisition or amount invested Price that asset would fetch if sold in open market on valuation date. 7. Where investment in any asset is (FMV of the partly from assessed income taxed assets on (Minus) (FMV of value of asset * Assessed income) in past and partly from undisclosed valuation date as Total Cost income per these rules) [4] Valuer means a person registered as a valuer under the WTA [5] Rules prescribe specific definition for these terms [6] If there is no trading on valuation date, then average of lowest and highest price on a date immediately preceding valuation date when such shares and securities were traded [7] Rules define the term balance sheet [8] Assets in Column 2 of this table [9] Items of liabilities are specified in the Rules
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