By: Rajesh M Kayal
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, has been notified with stringent provisions on tax, interest, penalty and prosecution for having illegal funds stashed abroad.
While the Act has come on the back of political compulsion, assessees’ attitude of non-disclosure and difficulty in getting information from overseas banks due to secrecy laws of various countries, the black money legislation looks to impose a penalty of 300 per cent along with the tax and interest due on the undisclosed foreign assets and income.
It also calls for 100 per cent penalty if the demand raised is not paid within the stipulated time and an imprisonment of anywhere between 6 months to 10 years.
The government has, however, offered a one-time opportunity to individuals to declare their undisclosed foreign assets and incomes and avoid penal action. All that they would be required to do is pay tax at the rate of 30 per cent along with a penalty of 30 per cent on the declared foreign income or assets declared.
While foreign assets have been divided into eight categories, three methods have been provided for valuation of different assets for declaration purpose. But a closer look into the procedure shows that getting a fair valuation is a tricky affair in case of certain assets and individuals need to know what process is to be adopted. Listed below is the process of valuation for various assets.
As per Clause (a) of Rule 3, the value of jewellery and precious stones shall be taken at cost or fair market value whichever higher. For calculating the fair-market value, the assessee should obtain a report from a government-recognised valuer in the country where the assets are located. However, in case of gold and jewellery, the assessee may end up paying less tax than on other foreign assets like bank deposits because the fair-market value of gold is lower in several countries in comparison to India. Along with this there may also be substantial difference in the valuation of precious stones.
Clause (b) of Rule 3 provides the procedure for valuation of artifacts like archeological collections, drawings, paintings, sculptures etc. The valuation of such assets is subjective and may vary depending upon the valuer and the country. The fair-market value can be decided only on the basis of auction of the artifacts.
Shares and Securities
The process of valuation of listed shares and securities is rather simple and the assessee has to disclose the value that is higher of the acquisition cost or market value at the time of declaration. The process, however, is much cumbersome for an unlisted company. If the assessee is holding shares of an unlisted company then he has to first get valuation report of all the assets of that firm from a government-recognised valuer and then disclose the value of his holding. Even if one is holding 5 per cent stake in the company, he would be required to get the valuation of whole company done to arrive at the value of his holding.
Clause (d) of Rule 3 provides the procedure to get fair-market value of immovable properties and the disclosure should be of the value that is higher of the acquisition cost or fair-market value. The fair-market value assessment has to be done by a government- recognised valuer in that country.
Clause (e) of Rule 3 provides the procedure for valuation of an account with the bank. In order arrive at the value of declaration in this case, all credits to the account from the date of opening will have to be added and any withdrawals made and redeposit of withdrawal at a later date will have to be excluded. Also, the amount on which taxes and penalties have already been recovered before the declaration has to be excluded. The problem in this case is that it is tough to get details of all transactions in the account especially if the account is an old one. So, if one had opened the account 25 years ago, he will have to provide the details for the entire period.
Suppose, an assessee withdrew $2 lakh from his overseas account in 1998 to buy a property that was later sold in 2010 for $5 lakh and deposited the proceeds in the bank account, the question arises is whether to pay tax on $5 lakh or $3 lakh. It ideally has to be on surplus deposit of $3 lakh, but in case the assessee does not have details of transactions and can’t provide supporting documents of the property transaction, he will be liable to pay tax on full amount of $5 lakh.
Interest in partnership firm
The Clause (f) & (g) of Rule 3 provides the procedure for valuation of interest in partnership firm. The valuation of share in a partnership firm has to be determined by dividing the net assets of the firm in the ratio as mentioned in the partnership deed that will become applicable at the time of dissolution. The valuation process is similar to that of holding in unlisted companies.
As per the notification by Ministry of Finance, the window for declaration is open for three months between July 1 to September 30, 2015 and both the valuation and declaration of undisclosed foreign assets has to be completed within this period. While declarations, once made, can’t be rectified, wrong declaration will be treated as invalid. Also if there is any dispute relating to valuation, no opportunity will be provided for rectification. This may not be very easy as it would be difficult to complete the valuation process for assets like unquoted shares or share in partnership firm within the stipulated three months. Even in the case of bank account it may be difficult to comply within the deadline. If an individual has a trading business abroad and all transactions are routed through his personal foreign bank account but no books of account has been maintained then in such case it will become difficult for the individual to provide details the transactions in his account.
In some countries like the UAE, there is no income tax and also no legal requirement to maintain books of accounts for tax purpose. In such cases, it will be difficult for individuals to get details of all transactions in the bank account.
The new Act and rules are not applicable to non-resident and not-ordinary resident. Suppose an assessee has opened the bank account 15 years back and for the last five years he is an Indian resident, in such cases only assets that have been acquired from the income taxable in India will be liable to tax. Income earned outside India as a non-resident would not be subject to tax. It is duty of assessee to explain the source of income and provide the evidence in support of source of income for the acquisition of foreign asset. However, if the assessee has no explanation of the source of income for acquisition of such assets then he will be liable to pay tax on fair-market value of the asset.
In past, whenever any amnesty scheme was announced by the government, the declarations made were accepted as it is and individuals were not questioned. Even under foreign exchange remittance scheme of 1991, declarations were accepted as it is. This is an opportunity to come clean by declaring undisclosed foreign income and assets, even though there may be problem in valuation of assets in few cases.
The author is a member of Institute of Chartered Accountants of India.