Grey shades of Black Money_240815

Grey shades of Black MoneyIssues | Challenges | Measures

CA Samir SanghviSynthesis

Typical Step up approach to Black Money

24 August 2015 CA Samir Sanghvi 2

Cash Earning through illegal activities / unauthorized means

Earnings hidden from Tax authorities

Hidden earnings converted to asset

Attempt to give legitimacy through money laundering

Continue to hold Asset

Cash generation from use of asset

------------------------------------------------------------Cash generation 2 Cash application------------------------------------------------

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What is Black Money?IncomeNot reported to the public authorities at the time of their generation,

….when reporting was mandatory in India under tax laws

AND

AssetNot disclosed at any point of time during their possession,

….when disclosure was mandatory under prevailing laws in India

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Attack is on Assets acquired out of undisclosed income (source) for income generated in past years.

Income / Asset not required to report in India can’t be termed as “Undisclosed”.

Income / Asset not disclosed due to ignorance or negligence can be termed as “Undisclosed” - Intention immaterial.

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Black Money understanding…

Legal route chaos

Taxability of Income in India

Whether Income reported in India?

Asset creation Whether Asset disclosed in India?

Is it Black money?

Yes No Yes No Yes, it’s concealed income

Yes Partly yes Yes Yes No

Partly No Yes Yes Yes

Yes No Yes Yes Yes, due to source being questionable

Yes No No* NA Yes, it’s concealed income^

No No Yes No No

24 August 2015

* Expensed out.^ Difficult to establish for Authority.

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Black Money summary…

Legal route chaos

Income generation reported Asset disclosure made Is it Black Money? Remark

Yes Yes No Fully complied

No Yes Yes Compensation for Income concealment

No No Yes Case of concealment

Not required No No No need to comply till mandatory to disclose

Yes No No Need to establish reason for non-disclosure of asset

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Applies to period

of accrual

Applies to period

of holding

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Sources of Black Money…

Legal route chaos

Illegal Activities (Criminal Breach of Laws) Legal chaos (Sophisticated routes of Breach)

Smuggling/ Hoarding Thin line : Tax evasion v/s. Tax planning – Tax Fraud

Forgery / Embezzlement Manipulation of Financial records for different stakeholders –Constructive Frauds

Terrorism Increasing Valuation and Turnover by inappropriate measures and generating short term benefits – Window dressing

Illegal mining / Illegal Trafficking / Hawala Non-adherence to Foreign Exchange Laws

Dealings in Pirated version of copy righted products Inadequate reporting to Regulators - Misstatement

Weapons trading

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Major Application of Black Money...

• Land and Real Estate transactions.

• Bullion and Jewellery transactions.

• Valuables such as paintings, archaeological collections, sculptures etc.

• Spending on Lifestyle

• Black money routed ‘abroad’ in foreign banks, real estates, shares/business etc...

24 August 2015

CA Samir Sanghvi 8

Reforms by Government in 2015• Gold Monetisation Schemes launched

• a financial alternatives to invest in redeemable Gold Deposit schemes carrying Interest.• Objective to unlock the value of this non-productive asset.

• Movement towards Cash Less Society• Encourage online and card-based transactions and boosting use of plastic money.

• The JAM Trinity - Jan Dhan Yojana, Aadhar and Mobile• Implementation of direct transfer of benefits to Bank accounts linked with Aadhar Card.

• Incentivising use of ‘wired money’ in dealings of Immovable property• Discourage Cash transactions with 100% penalty clause.• prosecuting Benami transactions by drafting new code.

• PAN mandatory for transaction > INR 1 Lac

• Tax information exchange from various countries under Double Tax Avoidance Agreement(DTAA)• Introduction of Foreign Black Money Act and disclosure/ compliance made strict.

24 August 2015

(Foreign) Black Money LawScope | Options | Compliance | Financial Impact

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Scope and Applicability

Country Act W.E.F Applicable to

USA Foreign Account Tax Compliance Act (FATCA) 2014 US Residents

INDIA Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015

2015-2016 Indian Residents (Ordinary)

Indian Version - Applicability:• Applies to undisclosed Foreign Income and Assets held abroad by Ordinary Residents in India.

• Income/Asset held abroad which is wholly or partly undisclosed comes under net of ‘undisclosed’ regime.

• Illegal Domestic assets and Cash held on Indian soil not subject to provisions of Foreign Black money Act.

• Indian Income Tax Authorities have been charged with the administration and compliance.

24 August 2015

Key Highlights

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• Flat tax rate @ 30% plus penalty rate @ 300% of tax rate (Effective Tax - @120% of Asset value) –• Quantum of undisclosed foreign income (if held in cash form) and• Current Fair market value (FMV) of undisclosed foreign assets (if held otherwise) OR• Sale proceeds of sold foreign asset, which remained undisclosed.

• Reopening of assessment due to new source of income is not subjected to 16 years time-limit.• No deadlines prescribed for issue of notice / summons – Ambiguity prevails.• Time to reopen cases commences from date of generating unreported income till date of knowledge by Officer.

• No deduction/ exemption or set off of brought forward losses would be permitted.

• No Foreign tax credit would be permitted against disclosure in India.

24 August 2015

Foreign Property to be taxed at current Market price

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Key Dates

Date Event

20th March,2015 Undisclosed Foreign Income and Assets (Imposition of Tax) Bill introduced

25th May,2015 Undisclosed Foreign Income and Assets (Imposition of Tax) Bill received President’s Assent andbecame a Law.

01st July,2015 Effective date of implementation

02nd July,2015 Black Money Rules on asset valuation & procedures notified.

06th July,2015 FAQ Circular issued by CBDT (13/2015).

30th

September,2015Deadline for ‘declaration’ of offshore assets under the Compliance Scheme (One time window).

31st October,2015 Revenue to intimate declarant about information it has from other sources.

31st December,2015 Deadline for making payment of tax and penalty under Compliance Scheme.

24 August 2015

Penal Costs

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Nature of Offence Penalty

Willful attempt• To evade tax in relation to foreign income or an asset located outside India 300% of tax

(equivalent to 90% of value of Un-disclosed assets)

• Failure to furnish a return in relation to holding of such assets

Inadequate Disclosure• Non-disclosure of foreign assets in ITR acquired from explained source INR 10 Lacs

(w.e.f AY 2016-17)

• Improper disclosure of foreign assets in ITR acquired from explained source

Failure to comply with summon in relation to enquiry for undisclosed income/Foreign Assets

INR 2 Lacs

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Punishment

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Nature of Offence Imprisonment

Willful attempt • To evade tax in relation to foreign income /asset located outside India 3 years to 10 years

• Failure to furnish a return in relation to such assets 6 months to 7 years

Non-disclosure of such assets in ITR 6 months to 7 years

Abetment or inducement of ‘another’ person(i) to make a false return or(ii) a false account or statement or declaration(Including banks and financial institutions aiding in concealment of foreign income / assets of

resident Indians or falsification of documents).

6 months to 7 years

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One Time Compliance windowScope | Concerns | Compliance | Deadlines

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Who can opt?

• A declaration by ‘Ordinary Resident’ for undisclosed foreign assets acquired from taxable Income only if-• He has not filed IT return for respective year/sOR• He failed to disclose such income in a return furnished before date of Black Money LawOR• Income escaped assessment by reason of omission / failure on his part to make a returnOR• Income escaped assessment by reason of non-disclosure of true and material facts by him.

• A declaration is possible for Income generation and/or Foreign assets acquired before 1st July,2015.

• No need to continue foreign asset on date of declaration.

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Declarant’s Role

• A declarant shall pay 30% tax plus 100% penalty on tax on ‘declared’ income/assets(effective tax- @60% of undisclosed Income or Undisclosed foreign Asset value*).• Declaration to be made in Form 6 with CIT, Delhi in physical form or electronically with digital sign < 30th

September,2015.• Declaration need to be accepted by Department in a month’s time.• Payment < 31st December,2015.

* In respect of assets, rules notified for valuation –• Higher of Cost or FMV on 1st July,2015 (as per prescribed guidelines).• In case of sold foreign asset, higher of Cost or Sales value.• In case of Foreign Bank Account, sum of all deposits made in such account (without consideration of any sort of

withdrawals) would be FMV.

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Non-applicability of option

• ‘Pending’ Proceedings under IT Act in respect of undisclosed income/ assets such as:• A notice issued before 30th June,2015, but assessment not initiated;• Assessment pending before 30th June,2015 for concerned year;• A Search/ survey is conducted and time limit for issuance of notice for initiation of assessment is unexpired as on

30th June,2015

• Any information received by IT department under Tax treaty in respect of subject asset/ income, for which enquiry isinitiated.

• Prosecution initiated against the Resident under any criminal laws in respect of said income/ assets such as under• Economic Offence Wings (EOW) or• Prevention of Money Laundering Act (PMLA) etc.

24 August 2015

Undisclosed Foreign Income or Foreign Asset

Status of IT Assessment on 30th June,2015 Assessmentpending?

Declaration Validity?

AY 2015-16 – INR 150 Lacs Return filed on 29th June,2015 No Yes

AY 2014-15 – INR 100 Lacs Return filed on 29th March,2015, notice not issued No Yes

AY 2013-14 – INR 120 Lacs Scrutiny notice issued, assessment hearing not yet commenced Yes No

AY 2012-13 – INR 50 Lacs Notice not issued, time limit for scrutiny notice expired No Yes

AY 2011-12 – INR 250 Lacs Survey conducted on 25th January,2011, consequential assessment completed on 31st December,2013 without considering such asset

No Yes

AY 2010-11 – INR 150 Lacs Notice for reassessment issued on 25th March,2015 and assessment done and matter under appeal

No No – if matter relates to same asset, else Yes

AY 2009-10 – INR 75 Lacs Survey conducted on 25th March,2009, consequential assessment completed on 31st December,2011 taxing part of income INR 30 Lacs

No (45L)Yes (30L)

YesNo


Practical Evaluation

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Validity of Declaration

• A Declaration is valid only if-• Tax plus penalty is paid on or before 31st December,2015 AND• Declaration made is free from any misrepresentation or suppression of facts/ information.

• Income earned out of Corruption not eligible for declaration.• Ambiguity prevails about ‘proving’ degree of “corruption”.

• No refund of tax or penalty in case declaration considered as ‘void’.

• Benefits in case of Valid declaration-• No Income tax / Wealth Tax in year of generation of income/ asset;• No adverse impact on finality of completed assessments for years in respect of such declaration;• No action against directors/managers of the Company;• Relief from Prevention of Money Laundering Act;• Immunity from prosecution proceedings in respect of declared assets under following Acts-

Income Tax Act | Wealth Tax Act | FEMA | Companies Act | Customs Act.

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Consequences of Non-declaration

• Deeming provision applies-• Consideration of undisclosed foreign asset as acquisition of the year when came to notice of Assessing Officer.• Impact – Holding foreign assets in past may be subject to assessment under Black money Law even after disposal of asset.

• Effective Tax – 120% of Assets value vis a vis 60%

• Prosecution against defaulter – Imprisonment provisions get attracted

• Proposals made under Prevention of Money Laundering Act (PMLA)-• to attach and confiscate unaccounted assets held abroad or• to confiscate equivalent asset in India.

• Proposal is made in Foreign Exchange Management Act,1999 (FEMA)-• to initiate criminal prosecution against defaulter in contravention as well as• power of seizure/ confiscation of equivalent asset in India.

24 August 2015

Practical situations and solutions

Situation - 1

• Mr. X inherited a House in Dubai from his father Mr. A (Ordinarily Resident) on his death. House was acquired by Mr. Afrom unexplained sources. Is Mr. X liable to declare such asset in personal capacity?

Hint:

• Mr. X need to file declaration in capacity of Legal representative of Mr. A.

• Mr. X need to declare Property at higher of Cost or FMV on 01.07.2015.

• In future, whenever House is sold and money deposited in foreign bank account, the cost of house shall be disclosed atFMV declared under Black Money Law.


Situation - 2

• Mr. X was ordinary resident during AY 2004-05, when he generated income chargeable to tax in India and invested inforeign assets. But, did not disclose it in IT returns of that year. Now, he became Non-resident during AY 2015-16. Pleasesuggest whether he shall file declaration?

Hint:

• Mr. X shall disclose foreign assets by filing declaration, as he was ordinary resident during the year of concealment ofincome.

• The Law of Black money applies to any previous year in which new source of income came into place irrespective ofperiod of limitation.


Situation - 3

• Mr. X was ordinary resident during AY 2012-13, when he generated foreign professional income reportable to tax inIndia (Residence rule) as well as Singapore (Source Rule) and invested in foreign bank deposits, but failed disclose it in ITreturns of AY 2012-13. Please suggest whether he shall file declaration?

Hint:

• Mr. X shall disclose foreign assets by filing declaration, as he was ordinary resident during the year of concealment ofincome.

• He will not be entitled to foreign tax credit in India in respect of taxes paid on said income in Singapore.


Situation - 4

• Mr. X was non-resident during AY 2004-05, when he generated income outside India and invested in foreign assets andcontinued to hold till date. Now, he became Ordinary-resident during AY 2015-16. Please suggest whether he shall filedeclaration?

Hint:

• Mr. X not liable to file declaration, as he has not violated any law of India in AY 2004-05.

• The concerned asset is not undisclosed asset.

• However, in ITR of AY 2015-16, he shall disclose foreign assets due to specific disclosure.

• W.E.F. AY 2016-17, non-disclosure would attract penalty of INR 10 Lacs.


Situation - 5

• Mr. X was non-resident during AY 2004-05, when he generated income in India but did not pay tax in India. Hegenerated cash in Dubai and further invested it in Dubai house and continued to hold till date. Please suggest whetherhe shall file declaration?

Hint:

• As the Indian income was not offered to tax and it being source of foreign asset, the asset becomes undisclosed foreignasset.

• Mr. X being non-resident at time of generation of income as well as subsequent years is not permitted to file any suchdeclaration.

• Separate Legal action can be initiated under IT Act or PMLA or FEMA for non-compliance. Declaration window is not forMr. X.


Situation - 6

• On 15th March, 2015, Mr. X (resident) filed revised return for AY 2013-14 as well as belated return for AY 2014-15declaring foreign asset, which was acquired long back out of unreported income. Please suggest whether he shall filedeclaration?

Hint:

• Mere disclosure in IT return without reporting source of investment in asset to IT authority will not exempt defaulterfrom any declaration.

• Advisable to disclose the asset through declaration.


Situation - 7

• During AY 2000-2001, Mr. X, a resident, generated income in India but did not pay tax in India. He further settled an off-shore Trust in Mauritius under Trusteeship of two foreign nationals with said income as corpus and introduced all hisfamily members (excluding him) as beneficiaries. Trust invested corpus in Tax free bonds in UK. Please suggest whetherTrust shall file declaration?

Hint:

• Firstly, the income of Mr. X is unreported, therefore the Investment in offshore trust corpus is undisclosed foreign asset.

• Mr. X being beneficial owner of the asset must make declaration in due time to avoid litigation.


Situation - 8

• During AY 2010-2011, Mr. X, a resident became signatory in foreign bank account opened in name of M/s. XYZ BV(Netherland), created with capital transferred from Indian company to European company in line with FEMA guidelines.Is declaration necessary by Mr. x?

Hint:

• Firstly, the Investment from India in Capital in M/s. XYZ BV (Europe) is FEMA compliant, therefore there seems nothing‘undisclosed’.

• Mr. X need not file declaration as Foreign Black money is not applicable in such situation.

• However, Mr. X need to report in his IT return of AY2015-16 onwards, details of signatory in foreign bank account withaccount details as well as peak and closing balance during the year.


Challenges ahead…

Some major roadblocks• Compliance window time is too short – Right Awareness is another challenge.

• Calculating FMV of foreign unlisted shares and securities in line with global accounting norms is difficult task.

• Furthermore, satisfying the IT Authority about valuation criteria may expose declarant to new set of challenges in specificsituations such as-

– Valuation of intangibles, if held overseas;

– Controlling interest of foreign company in other subsidiaries/ associate concerns.

• Obtaining bank account information for period beyond threshold is difficult.

• Every country don’t have registered valuer criteria. Degree of reliance is question.

• Analyzing residential status of Overseas company under substance of Place of Effective management (PoEM) principle wouldcreate more difficulty in compliance.


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Some Recent Developments…

• INR 6,500 crore worth undisclosed foreign assets declared so far through One time compliance window.

• SEBI busts gains through losses by banning tax evasion by incurring bogus losses to offset tax liabilities through tradingin illiquid Stock options.

• SEBI attempts to discourage speculative trading activities through derivative products.

• Revenue department amended Income Tax rules to provide for reporting of information with regard to financial assets/accounts.

• Switzerland Government revealed names of few Indians with Bank account in their country.

• Government approves pact with Seychelles to curb black money

24 August 2015

Key take-aways

Key Take-aways

• Reporting of Income v/s. Taxability of Income is key. Even exempt income need to be reported.

• Disclosure of Asset without reporting source is considered black money.

• Foreign black money – ‘compliance window’ open till 30th Septmeber,2015 for declaration in respect of –

– Income unreported in India

– Assets undisclosed and continued to be held outside India

• Foreign black money – ‘payment deadline’ by 31st December,2015 @60% of asset value. Post that, no criteria to file latepayment with interest.

• Declaration a safe bet for those Resident who are eligible else same information may be used for prosecution ifdeclaration is not accepted – it is a Double edged sword!...


CA Samir Sanghvi

Q&A

CA Samir Sanghvi

Email : [email protected]

Headphone : +91 9821009143 |Landline : +91 22 24026648

2nd Floor, Gita, Plot-92, Sion Circle, Next to HP Petrol Pump, Sion (E), Mumbai – 400 022

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Grey shades of Black Money_240815