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Disclose overseas income in tax returns or face penal action

Wilful failure to declare information relating to foreign income and assets in the return of income may lead to prosecution with punishment of rigorous imprisonment of up to seven years

June 26, 2019 / 12:14 PM IST

Divya Baweja & Preeti Gupta

 Black Money has always been a point of concern for India and the government has been trying to deal with it for ages. Recognising the limitations under the existing legislations, the government enacted a comprehensive new law on black money to specifically deal with money stashed away abroad. The Bill was enacted in May 2015 as the ‘Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’ (Black Money Act).

Under the Black Money Act, reporting of global assets in the tax return has been given utmost importance for individuals qualifying as “Resident and Ordinarily Resident” (ROR) in India. Exemption from reporting of foreign asset is available for foreign nationals subject to fulfilment of specified conditions.

Declaring overseas assets

Disclosure of global assets and income held/earned outside at any point during the year is mandatory. It is also important to disclose assets which may have been sold/ disposed of during the relevant year. Even where an ROR individual does not have any taxable income in India, a tax filing requirement arises if the individual owns any assets outside India. This is specifically applicable to foreign nationals who accompany their spouses coming to work in India, and after a period of time qualify as ‘ROR’ without having any source of income in India.

Under the Income-tax Act, 1961 (IT Act), reporting requirements for foreign assets were initially introduced in the Indian tax return from FY 2011-12. Initial non-disclosure may have attracted a general penalty under the IT Act; however, after the introduction of the Black Money Act, penal consequences on non-disclosure have been made more stringent.

The key implications under the Black Money Act have been listed below:

  1. Undisclosed foreign income and asset will be taxed at a flat rate of 30 percent. Exemptions or deductions which may otherwise be applicable in such cases, shall not be allowed.

  2. Concealment of income and assets and evasion of tax in relation to foreign assets will be liable for prosecution with punishment of rigorous imprisonment up to 10 years.

  3. Penalty for concealment of income and assets to be levied at 300 percent of the tax sought to be evaded.

  4. Beneficial owner or beneficiary of foreign assets will be mandatorily required to file return, even if there is no taxable income.

  5. Penalty of Rs 10 lakhs may be levied on non-filing of tax return or filing of tax return with inadequate disclosure of foreign assets.

  6. Wilful failure to furnish a tax return or to disclose information relating to foreign income and assets in return of income may lead to prosecution with punishment of rigorous imprisonment up to seven years

The legal angle

With the implications applicable under the Black Money Act, it may be noted that the IT Act also provides that the tax officer has the power to open assessment/ re-assessment up to 16 previous financial years in case of unaccounted foreign assets/income for ROR taxpayers.

Since the Black Money Act has been enacted only a few years back, there are limited judicial pronouncements in respect of the provisions of the same, that too, with divergent views.

The Calcutta High Court has recently upheld initiation of prosecution proceedings under the Black Money Act for failure to report inherited foreign bank accounts in the Indian Income tax return for a period prior to enactment of the Black Money Act. It was further of the view that action can be undertaken both under the IT Act and the Black Money Act, since the penalty levied under the IT Act was for concealing income/ providing in accurate particulars of income. However, the proceedings under the Black Money Act relate to failure in reporting foreign assets in the ITR. Hence, it cannot be said that the taxpayer is being penalised for the same offence twice.

Separately, the Delhi High court in a different case restrained the income-tax department from taking action against a taxpayer, till the date of the next hearing. The High Court, while providing the relief, was of the view that the Central Government was not within its power to issue notifications under an Act which was not enacted at the time of issue of the notification itself. However, on appeal from the Central Government, the Hon’ble Supreme Court has stayed the order of the High Court and allowed the tax department to continue its proceedings against the taxpayer.

Hence, given the stringent penal consequences for not reporting or incorrect reporting, it is advisable to correctly report all foreign income and assets in the India tax return, to obviate the rigors of penal implications under the Black Money Act.

(Divya Baweja is Partner, Deloitte India; Preeti Gupta is Senior Manager with Deloitte Haskins and Sells LLP)

first published: Jun 26, 2019 09:07 am