MAY 03, 2015

By Pradip R Shah, CA

IN this part we shall examine provisions relating to computation of tax liability, Penalty and Prosecution.

Computation of Tax Liability

S. 3 (1) provides for computation of tax under two different scenarios as under:

a) Tax on Undisclosed Foreign Income and Asset (UFIA) of the Previous Year ; and

b) Tax on Undisclosed Foreign Asset (UFA)

Tax on Undisclosed Foreign Income and Asset (UFIA) of the Previous Year

Provision in this respect is quite simple i.e. pay tax @ 30.00% of the amount of undisclosed income. Since, UFIA will be coming into force from AY 2016-17, UFIA of the FY 2015-16 can be taxed under this clause. UFIA in relation to any earlier year cannot be taxed under this clause. UFIA of the earlier year already spent / expended before 1 st April, 2015 cannot be taxed. However, if the said amount has been lying in a bank account or invested in an asset, it will be subject to tax under Proviso to Clause 3(1).

As explained earlier, scope of income will be as defined u/s 2(24) of ITA. S.2(24) of ITA includes income from salary, perquisites, business, capital gain etc. Its complexity can be gauged from the fact that when definition of these sources of income is applied, it will be clear that certain transactions which are not in the nature of income as understood in conventional sense are also covered. Let us take the case of dividend. S.2(22) of ITA defines dividend in such a way that transactions of loan and advances from certain type of companies are also covered. Thus, scope of levying tax under this clause is very wide.

Both, under UFIA and ITA, the period for determining tax computation will be April to March.

As far as methodology of computation of UFIA is concerned, S. 5 provides that no deduction in respect of any expenditure, allowance, or set off of any loss shall be allowed. Since there is no specific provision for availing benefit of exemption under ITA, the same will not be available. Apart from that there is no provision for availing any benefit for credit for tax paid in source country. In a nutshell, tax @ 30.00% will have to be paid on the gross amount received.

It will be interesting to see to what extent the provisions of Chapter-V of ITA comprising of S.60(Transfer of Income where there is no transfer of Asset), S. 61(Revocable Transfer of Assets), S. 62 (Transfer Irrevocable for a specified period) and S. 64(Income of Individual to include income of spouse, minor child etc.) can be applied while computing income under UFIA.

Applicability of Place of Effective Management (POEM)

Budget, 2015 contains provisions relating to amendment in S. 6(3) of ITA where under it is proposed that a foreign company will be said to be resident in India if the POEM is in India. Severity of this provision with UFIA can be understood with the help of a hypothetical case.

Suppose, during the course of search in December, 2016 the AO comes to know that POEM of a foreign company is in India. The said company has not filed RoI as it is incorporated outside India. The AO issues notice and holds that the said company is Resident and, therefore, subject to tax in India. Now, the AO has two options viz. (a) to initiate the process under ITA and/or (b) to initiate the process under UFIA. If the process is initiated under ITA, assessment will be made as per the provisions of ITA. However, in the case of process initiated under UFIA, computation of tax liability will be as per the provisions of S. 4 and 5 of UFIA. In terms of provisions of S. 5, no deduction of expenditure etc is permitted. Therefore, entire sales revenue will become UFIA and it will be taxed @ 30%. Moreover, penalty @ 300% will also be levied. Prosecution proceedings will also follow.

It should also be noted that the process of assessment under ITA will continue side by side. However, since tax and penalty will be higher under UFIA than under the ITA, IT Department will prefer invoking the provisions of UFIA. Once tax demand under UFIA is confirmed, process of levying tax under ITA will have no impact as the same income cannot be taxed twice.[see S. 4(3) of UFIA].

The above gives one an idea about getting trapped under UFIA.

Tax on Undisclosed Foreign Asset (UFA)

What is an Asset?

Neither UFIA nor ITA defines the same. In view of this, one can say that it includes property of every description, movable or immovable. It should be noted that an interest in the property is also an asset. In order to avoid any dispute, sub-clause 4(2) provides that it will include financial interest in any entity.

What is an Undisclosed Foreign Asset?

Definition of Clause 2(11) of the term "Undisclosed Asset Located outside India" covers the asset held by the Assessee in his name, or in respect of which he is a beneficial owner. Thus, an ROR Assessee being a Trustee and holding the property in his name as a trustee will also be covered. Moreover, an ROR Assessee being beneficiary of a trust located outside India will also be covered.

Proviso to S. 3(1) provides for charging tax on UFA which has come to the notice of the AO. Here also tax is required to be paid @ 30.00% of value of the asset in the said Previous Year. Since the tax is levied on value of the asset, the question of valuation of asset will arise. Secondly, there being large number of asset attracting different methods of valuation, this is going to be herculean task for the Assessee and the AO.

Secondly, year of acquisition of such an asset is not relevant. Therefore, if an asset was acquired, say, 50 years ago and not disclosed, tax will be levied on it at the market value in , say, the FY 2017 in which it has come to the notice of the AO and is assessed tot ax.

As far as methodology is concerned, as explained above, no deduction of any expenditure etc. will be permitted.

Penalties

Chapter IV of UFIA containing sections from 41 to 47 deals with various types of penalties which can be levied. They are as under:

a) UFIA and UFA @ 300% of tax computed

b) Failure by ROR who is having FI or FA to file RoI as provided u/s 139. Quantum of penalty is Rs. 10 lacs. However, if the FA is being a bank account having balance of not more than Rs. 5 lacs, no penalty to be levied.

c) Failure to furnish information or providing inaccurate particulars in relation to beneficial interest in a trust. Penalty to be levied is Rs. 10 lacs.

d) Failure to pay tax. Penalty will be equal to the amount of tax arrear.

e) Failure to

i) answer any question

ii) sign any statement made in the course of proceedings

iii) attend, produce books of accounts/ documents etc.

In these cases, minimum penalty to be levied will be Rs. 50,000 extending upto Rs. 2 lacs

Offences and Prosecutions

It is specifically provided that provisions relating to Prosecution are not in derogation to the provisions of any other law for prosecutions for offences. Offences and prosecutions for the same are as under.

a) ROR Assessee having UFI and UFA fails to file RoI - rigorous imprisonment of not less than six months but extending to seven years + fine

b) ROR Assessee wilfully fails to furnish information in RoI- rigorous imprisonment of not less than six months but extending to seven years + fine

c) ROR Assessee wilfully attempts to evade tax, penalty etc. - rigorous imprisonment of three months extending upto three years + fine

d) Any person wilfully making false statement - rigorous imprisonment of not less than six months but extending to seven years + fine

e) Any person abets or induces any other person to make false statement - rigorous imprisonment of not less than six months but extending to seven years + fine

It should be noted that there is no provision for compounding of an offence nor there are any provisions for settlement.

Provisions relating to Penalties and Prosecution are as in the case of ITA. It is well known that there are hardly any cases of prosecution under the ITA. Question that remains whether the provisions of UFIA will also prove toothless? It all depends on how these provisions are being implemented.

Everyone knows that it takes years in criminal courts to prosecute a criminal. There is huge pendency of criminal cases in all the courts throughout the country. The objective of UFIA being deterrent can happen only if Special Courts are established to execute such cases in fast and expeditious manner.

This article concludes with an examination of the provisions relating to Tax Compliance for UFIA and steps to be taken by ROR to avoid UFIA.

Making a clean breast of affairs - Declaration of UFA and UFI

S. 59 of UFIA provides for one time immunity by filing a declaration of UFA. It provides that any person can make a declaration in respect of any UFA acquired from income chargeable to tax under the ITA. Such an omission of FI may be by reason of the omission or failure on the part the Assessee by not filing RoI or failing to make fully and truly all material facts necessary. UFI should pertain to AY 2015-16 and prior period. Following important points be noted in this respect.

Firstly, UFI and UFA are required to be made in the form of a declaration to be filed during the period as announced by the Government.

Secondly, tax @ 30.00% on UFI and UFA will have to be paid. There is no provision for claiming any expenditure, exemption, deduction etc. from such income. No tax credit can be claimed which may be available under Double Tax Avoidance Agreement. Thus, tax will have to be paid on gross income accrued or received.

Thirdly, penalty @100% of the tax amount will also have to be paid. Levy of penalty is automatic. Thus, total amount to be paid will be 60% of UFI and UFA. Tax paid will be non-refundable. Declaration filed without payment of tax will not be a valid declaration and no immunity will be available in such cases.

Fourthly, there is no provision for prosecution under this section.

Fifthly, once declaration is filed under this section, income in this respect will have to be disclosed in the RoI for AY 2016-17 and thereafter. This for the reason that IT Department will be having the data about FI and FA.

Sixthly, such a declaration should be for any year prior to AY 2016-17. It means that once a declaration is filed, ROR Assessees will have to declare FI for FY 2015-16 in the RoI to be filed for AY 2016-17 otherwise provisions of S. 4 of UFIA will apply automatically.

Conclusion

Provisions relating to penalty and rigorous imprisonment may be found to be harsh. If UFIA is implemented in real earnest, it can cause serious problems for large number of ROR assessees having UFI and UFA. It should be noted that UFI and UFA are being viewed by all the Governments of major countries seriously. Number of steps have been initiated to curb such practices. Government of USA has already started entering into an agreement for exchange of information. Many other countries have already started the process in this direction. Considering these facts, it will be advisable for ROR assessees to opt for the scheme for declaration in respect of the past UFI and UFA and pay tax thereon.

After discussions on the bill in Parliament, there may be some amendments made. However, looking at the fact that not much time may be available once the Bill becomes statute, one should initiate actions without any delay.

As on today, it is possible to file RoI for AY 2014-15 and 2015-16. If it is possible to claim any benefit, deductions, relief, tax credit etc. under DTA or ITA, it will be advisable to file RoI for AY 2014-15 and 2015-16 and declare UFI and UFA. This is for the reason that under S. 59 of UFIA, it will not be possible to claim these benefits nor it will be possible to claim it if the income is assessed u/s 4 of UFIA. However, one should wait and watch the terms and conditions for the purpose of making declaration under this scheme. As far as UFI for the prior years are concerned, benefit available under section 59 should be availed.

Looking to the tone and approach of the Government, the process of collection of information from global sources may gather momentum making it possible to identify violation of provision of ITA. Moreover, prosecution in such cases may also be expedited too. This may be the last opportunity for making a clean breast of ones' ill-gotten wealth and so should not be missed.

Editor: The three-part article stands concluded.

Also See : Black Money Bill - Black is Beautiful but becoming Painful - Part I + Black Money Bill- Disclosing 'Undisclosed' - Part-2