On 13 May 2015, the India Parliament ratified the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015. President Pranab Mukherjee signified his assent on 26 May 2015. In prime, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (the "Foreign Assets Act") promulgates a comprehensive framework for dealing with undisclosed foreign income and assets, together with imposition of tax on such undisclosed foreign assets and penalty for tax evasion and non-disclosure.
Accordingly, it is worthwhile to consider the following key aspects of the new legislation.
Scope: The Foreign Assets Act applies to all persons who are resident and ordinarily resident of India under the Income Tax Act. An undisclosed asset located outside India is defined to mean an asset (including any financial interest in any entity) located outside India, held by the assessee in his name or in respect of which he is a beneficial owner, and the assessee has no explanation about the source of investment in such assets or the explanation given by the assessee is unsatisfactory in the opinion of the assessing officer. Further, "undisclosed foreign income and asset" is defined as the total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India.
Administration: The Central Board of Direct Taxes and the existing hierarchy of tax authorities under the provisions of the Income Tax Act, including the appeals machinery prescribed thereunder, have been tasked with implementation of the new legislation.
Taxation Rate: Any undisclosed foreign income or asset shall be taxed at the rate of 30 percent, and the provisions relating to exemption, deduction or minimization of tax liability by way of set off of losses under the Income Tax Act will not be available.
Penalties: Non-disclosure of any income or asset located outside India will attract, in addition to the tax, a penalty equal to three-times the tax payable on the undisclosed foreign income and assets. Not furnishing income tax returns for foreign income and assets or providing misleading information for such foreign income and assets attracts a penalty of INR 10,00,000 under the new legislation. Criminal punishment for such tax evasion practices could attract rigorous imprisonment from three to 10 years and a discretionary fine. However, it is important to note that the Foreign Assets Act provides that persons who have foreign accounts with minor balances, which may not have been reported out of oversight or ignorance, are protected from penalty and prosecution.
One-Time Amnesty Scheme: The Foreign Assets Act provides a one-time amnesty scheme for all persons who have not previously disclosed their foreign assets for the purpose of taxation. The Central Government will provide notification on the scope and administration of the amnesty scheme after the legislation comes into force. The amnesty scheme requires payment of tax at the rate of 30 percent, together with a penalty amount equalling the total tax amount levied on the undisclosed foreign assets. Further, such declaration made by the taxpayer in this regard will not be admissible as evidence for prosecution under the Foreign Exchange Management Act, 1999; Income Tax Act; Wealth-Tax Act, 1957; Companies Act, 2013; or Customs Act, 1962. However, it is likely that the amnesty scheme will not be applicable to any person who has been subjected to a search or when a notice of reopening is pending or information has been received by the tax authorities under a tax treaty or tax information exchange agreement in respect of the undisclosed asset, etc. Therefore, the information in relation to HSBC Bank Geneva account holders is likely to fall under this category.
Money Laundering Offences: The Foreign Assets Act contains an amendment to the Prevention of Money Laundering Act, 2002 ("Money Laundering Act"), thereby making a violation under the Foreign Assets Act an offence under the Money Laundering Act, as well. This may be particularly concerning for banks and other financial intermediaries since each such institution can be prosecuted under these provisions in India for wilfully abetting these practices.