Foreign Incomes and Assets under Black Money Act, 2015 in India

The Government of India has enacted the Black Money Act, 2015 (BMA 2015) in addition to the existing Income Tax Act, 1961 to punish ordinary residents of India (taxpayers) who have Undisclosed Foreign Incomes and Assets (UFIA) earned through illegitimate activities, resulting in a loss of income tax (revenue) to the Government of India.

Before we shall be moving on to discuss the Black Money Act, of 2015, we should discuss Undisclosed Foreign Incomes and Assets (UFIA) beforehand.

Short Glimpse

To control black money and bring unaccounted income circulating in India to account, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 was passed by both houses of parliament and received permission to be enacted as legislation from the President of India on May 26, 2015. The Act went into force on April 1, 2016. The Black Money (Hidden Overseas Income and Assets) and Tax Imposition Act, 2015 address the issue of black money in the form of undisclosed foreign income and assets. 

The Act also specifies the method for dealing with such concealed foreign income and foreign assets, as well as the levy of tax on such undisclosed foreign income and foreign assets.

Concept of Foreign Incomes and Assets (UFIA)

Anything that the taxpayers possess in their names or the names of others where they have a beneficial ownership stake, including financial interests in entities that are situated outside of India. The source of investment in the assets is not explained by the taxpayer, or the explanation provided to the assessing officer (AO) by the taxpayer is inadequate.

The UFIA is an undisclosed source of income for the taxpayer that is outside of India, and the real worth of the unreported assets is likewise outside of India.

Objectives of Black Money Act, 2015

The Black Money Act, of 2015 has the following objectives:

• The Government of India enacted the BMA in 2015 to prevent illicit UFIA from being stored outside India and to be used for the benefit of the people of India’s social, economic, strategic, and national security.
• The Government of India introduced the BMA, in 2015 to broaden the scope and coverage of the Act to encompass taxpayers who took shelter under the Income Tax Act, 1961 up to June 30, 2015, as the terms of the Income Tax Act, 1961 were not precise.

The Black Money Act, 2015

The BMA 2015 contains 88 Sections and 7 Chapters:

• Preliminary 
• Fundamental 
• Tax Management 
• Penalties 
• Offenses and Prosecution 
• One-Time Disclosure Window
• General Requirements

BMA, 2015 is effective on July 1, 2015. Income earned up to June 30, 2015, will be taxed under the Income Tax Act, therefore the BMA, 2015 will be effective beginning with the fiscal year ending March 31, 2016. (The assessment year 2016-17). The BMA, 2015 applies to taxpayers as defined in section 6 (6) of the Income Tax Act, 1961. BMA, 2015 also applies to anybody who is judged to be an assessee in default under this Act.

Even though a person was not an ordinary resident of India in the year before the relevant (previous) year, the BMA of 2015 is nevertheless applicable to them since they were considered residents of India because they spent at least 182 days there during the financial year.

As a result, surpassing INR 5 Lac may be a calculated total of all credit entries in 10 years. BMA, 2015 is applicable when computed totals of all credit entries in all bank accounts outside of India exceed INR 5 Lac in 1 year or more.

By aggregating all credit entries made in foreign bank accounts from the time the accounts were opened until the present, a total of INR 5 Lac must be calculated. The sum of all debit entries is not to be taken into account when determining if the amount is less than INR 5 lac.

Where UFIA are acquired by legal or unlawful structure or action, BMA, 2015 is applicable. BMA, 2015 is applicable where a structure is lawful outside of India but not reported to Indian tax authorities.

Characteristics of the BMA, 2015

The following are the main characteristic of BMA, 2015:

• The BMA, 2015 solely deals with tax evasion actions done outside of India. Tax evasion, on the other hand, is not considered a crime.
• The Benami Transactions (Prohibition) Amendment Act (PMLA) 2016 makes the BMA, 2015 inapplicable to Benami Transactions. As a result, the BMA of 2015 solely applies to the UFIA.
• BMA, 2015 is only relevant to UFIA. As a result, the PMLA 2016 applies to Benami Properties owned in India through Benamidar.
• The BMA, 2015 allows a threshold limit of INR 5 lac for lesser value UFIA. However, when BMA, 2015 is inapplicable, Income Tax Act, 1961 applies.
• The BMA, 2015 requires the retention of proper documentation and records about the UFIA.
• BMA, 2015 is sometimes exploiting information obtained from overseas sources by pestering taxpayers to show themselves to be clean citizens of India.

Income Tax Chargeability under the BMA, 2015

• Income tax of 30% is to be assessed against the UFIA for the fiscal year ending March 31, 2016, and subsequent years.
• Income tax at the rate of 30% is to be levied against the UFIA at the Fair Market Value of the assets in the year in which the AO is first discovered.
• Under the BMA, 2015, education cesses and surcharges are not to be charged on the above-mentioned amount of income tax.

Allowable Expenditures and Set-off of Losses under Section 5

Under the BMA, 2015, expenditures for earning UFIA and setting off losses before the previous year and also for the relevant year are not authorized against the UFIA.

Punishment under BMA 2015

The following are the punishment for the BMA 2015:

Imprisonment under the BMA 2015

• The penalty for failing to provide ITR for UFIA is a minimum of 6 months and a maximum of 7 years in jail.
• The penalty for failing to provide any information for UFIA is a least 6 months and a maximum of 7 years in jail.
• Imprisonment for willful effort to dodge income tax under UFIA is 3 years minimum and 10 years maximum.
• Under the BMA, 2015, the taxpayer is imprisoned for a minimum of three years and a maximum of ten years for a subsequent crime.
• The penalty for making a false statement or delivering false evidence is a minimum of 6 months and a maximum of 7 years in jail.
• The penalty for preparing and presenting a false return, account, statement, or declaration against the tax payable is a minimum of 6 months and a maximum of 7 years in jail.

Fine under the BMA 2015

• (i)The UFIA fine is set at a minimum of 100% and a maximum of 300% of the income tax due under the BMA, 2015. As a result, the maximum effective tax liability (including fine) on the current fair market value of the UFIA is @ 120% (Tax @ 30% + maximum Fine @ 90%).
• The fine for failing to provide the ITR for UFIA is INR 10 Lac.
• The fine for failing to provide information or providing false information to UFIA is INR 10 Lac.
• The fine for a further offense under the BMA, 2015 is a minimum of 5 lac and a maximum of 1 crore if the taxpayer commits the subsequent offense.

Calculation of Total Undisclosed Foreign Income and Asset

Section 5 of the Act specifies the mechanism for calculating total undeclared foreign income and assets, and the process for doing so is outlined further below –

Deduct the following amounts from the value of unreported assets situated outside of India:

• Any income that has been assessed to tax for any assessment year before the assessment year to which the Act applies; or
• Any income that is assessable or has been assessed to tax under this Act for any assessment year.

The deduction shall be permitted only if the assessee provides appropriate documentation to the Assessing Officer demonstrating that the asset was acquired from assessed income or is purchased from assessable income.

The following deductions from the value are not permitted:

• Deduction for any type of cost;
• Deduction for any allowance;
• Set-off of any loss; above deduction is not permitted, whether or whether it is authorized under the terms of the Income Tax Act, 1961.

Penalty Provisions Included in the Black Money Act, 2015

The following are the provisions and penalties included in the Black Money Act, of 2015:

• Section 41- Penalty for Undisclosed Foreign Income and Assets- In the case of undeclared foreign income and assets, a penalty of three times the tax assessed is due.
• Section 42 – Penalty for Failure to File Foreign Income and Asset Return – Failure to provide a return for foreign income and foreign assets result in a penalty of INR 10 Lakhs.
• Section 43 – Penalty for Failure to Furnish Information or Erroneous Information Given – A penalty of INR 10 Lakhs is payable if a report of income is provided but information related to a foreign asset is not furnished or the information furnished is inaccurate.
• Section 44 – Penalty for Failure to Pay Tax Arrears – If the assessee fails to make tax payments, a penalty equivalent to the amount of arrears is due.
• Section 45– Penalty for Other Defaults – In the following instances, a penalty of not less than INR 50,000/- is due; however, the penalty payable under this section should not exceed INR 2,00,000/-
  • • The individual fails to respond to any question posed by the evaluating officer; or
    • The individual fails to sign any declaration he makes before the tax authorities; or
    • In response to the summons issued under Section 8, the individual fails to appear or present books of accounts or documents at the specified location or time.

  Takeaway

  In reality, a hidden asset located outside of India is an undisclosed asset if the assessee is unable to demonstrate the source of investment in such asset. Such a situation may exist when funds for investment have been sent from India via illegal means (hawala, for example), or investment has been made from funds parked in Swiss or other tax havens and sent via illegal means, or income has been earned outside India via illegal means and not disclosed in the tax return. Assessment will refrain from describing such sources for fear of harsher punishment and criminal charges if such a source of investment is identified by the assessee. This Act appears to have the goal of taxing all such illicit income and money.

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