Paying tax fine under CBDT 'Nudge' scheme won't erase PMLA, FEMA violations, say legal experts

On November 27, CBDT announced the launch of second phase of its ‘Nudge’ initiative targeting taxpayers with undisclosed foreign assets and income.

Wealthy individuals who are receiving ‘Nudge’ messages from the Central Board of Direct Taxes(CBDT) for undisclosed foreign assets may be in further trouble. Even if these monied individuals accept the existence of undisclosed foreign assets and pay taxes on them, there could be further trouble in terms of violation of provision of laws such as the   Prevention of Money Laundering Act (PMLA), Customs Act and Foreign Exchange Management Act(FEMA) amongst others, say experts.

On November 27, CBDT announced the launch of second phase of its ‘Nudge’ initiative targeting taxpayers with undisclosed foreign assets and income. This is based on information Indian government received from other foreign governments as a part of the international OECD framework.

The information the Indian government has received includes a list of properties owned by Indian residents in a country along with details of their bank accounts and balances being held in the reporting jurisdiction. The tax department said it was sending SMS and email alerts, primarily to high-risk cases, advising them to review and revise their Income Tax Returns (ITRs) by December 31.

Foreign Assets Include Real Estate, Stocks, Bonds

Undisclosed foreign assets include assets like real estate holdings, stocks, bonds along with any other forms of foreign income being received by the residents that have not been disclosed by these individuals in their tax returns.

“Declaring foreign assets for purpose of compliance under BMA(Black Money Act / Income-tax Act does not automatically immunize one from regulatory consequences under other laws, including FEMA or foreign-exchange / anti-money laundering regulations,” said Sandeep Bhalla, Partner, Dhruva Advisors.

“Therefore, even if a taxpayer pays tax under BMA and discloses foreign assets/income, regulators under FEMA or other agencies could potentially examine the same assets/transactions for compliance with exchange control or disclosure requirements,” Bhalla added.

The Central Government had launched a one-time amnesty scheme back in 2015 wherein it provided immunity to those taxpayers who disclosed their black money assets by September 30, 2015. Such persons were given immunity from all legal consequences. In the scheme, taxpayer was required to pay a 30% tax on the undisclosed amount along with 30% ‘concessional penalty’. It provided amnesty from laws including the Income-tax Act, Wealth-tax Act, FEMA, Companies Act and Customs Act.

However, the new scheme has no such incentives.

“Non-disclosure of foreign assets may lead to scrutiny by the Reserve Bank of India (RBI) or the Enforcement Directorate(ED) as well since such transactions may involve violation of FEMA and PMLA as well,” said Amit Singhania, founder, Areete Law Offices. “It is highly recommended to disclose foreign assets in tax return even if the assets are being purchased from taxable income,” Singhania added.

Source of Income

Disclosing the source of Income for purchases made could be a key concern for many wealthy individuals because if these individuals used unaccounted money for purchases, money laundering law may get triggered, say legal experts. If residents have used the Liberalized Remittance Scheme(LRS), consequences may be less serious since they have used money accounted for.

“Under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA”), any undisclosed foreign income (UFI) or undisclosed foreign asset (UFA) attracts tax at 30% plus a penalty of 90% — an aggregate effective levy of 120%, applied on a gross basis. Additionally, no deductions, set-offs, exemptions, or foreign tax credits are permitted,” Bhalla added.

The CBDT had launched its first Nudge Campaign in November 2024 for undisclosed foreign assets identified for FY25. According to the government data, 24,678 taxpayers revised their returns voluntarily disclosing Rs 29,208 crore of foreign assets along with Rs 1,089 crore in undisclosed foreign sources of incomes.

“Accepting that one has foreign assets and income can lead to consequences, under FEMA and PMLA and anyone making a declaration must ensure that there is compliance with other laws as well. Over the last few years, the IT department has been tracking details of foreign assets and foreign income of Indians. Some information has come from other countries which have shared this under the CRS (Common Reporting Standard)," said Anil Harish, Managing Partner, D.M. Harish & Co.