This article serves as a primer for the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Black money has long been a scourge for the Indian economy with residents refusing to report transactions to evade tax and avoid regulatory scrutiny. The National Council of Applied Economic Research estimated that the illicit wealth accumulated outside India between 1980 and 2010 as somewhere between USD 384 billion and USD 490 billion. In 2015, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) was enacted to penalise persons with black money abroad and to curb overseas diversion of Indian funds with the intention of evading taxes in India. The Black Money Act is essentially an extension of the Indian income tax regime that specifically targets residents hiding their income from foreign sources from the authorities.

While the Black Money Act was originally supposed to come into effect on 1 April 2016, it was instead notified on 1 July 2015 leading to a range of issues which will be dealt with in the next article.

What is black money?

Black money is generally money that is earned (either legally or through illicit activities) but has not been reported to authorities and, consequently, has not been taxed. In its White Paper on Black Money, the Ministry of Finance, Government of India defined black money as “…assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession…”. However, the term ‘black money’ has not been defined in the Black Money Act and one must rely on the Statement of Objects and Reasons appended to the Black Money Act which vaguely refers to black money as ‘tax-evaded income’. Given that the Black Money Act deals only with ‘undisclosed foreign income’ and ‘undisclosed assets located outside India’, for the purposes of the Black Money Act, ‘black money’ does not include undisclosed income or assets within India.

Undisclosed foreign income

‘Undisclosed foreign income’ refers to undisclosed income of an assessee from a source located outside India. Income can be categorised as ‘undisclosed’ if the assessee has either failed to furnish a return of income or has failed to disclose that income in Indian income tax returns.

Undisclosed asset located outside India

An ‘undisclosed asset located outside India’ is an asset (including financial interest in any entity) outside India held by the assessee (either directly or as a beneficial owner) and in respect of which the assessee either has no explanation regarding the source of investment in the asset or where the explanation tendered is found unsatisfactory by the assessing officer. When assessing tax on an undisclosed asset located outside India, the relevant date is the date on which the asset comes to the notice of the assessing officer (and not the date of acquisition of the asset). Consequently, an assessee will be taxed on an asset even if he has disposed of the asset prior to the Black Money Act coming into effect.

Under the Black Money Act, an undisclosed asset located outside India is to be charged to tax based on its value in the year preceding the year in which the asset came to the notice of the assessing officer.

Assessees and assessment

Unlike the Income Tax Act, 1961 (Income Tax Act) (which taxes residents, non-residents and persons not ordinarily resident), the Black Money Act applies only to persons (assessees) who have been resident in India in the relevant year. As the taxable components under the Black Money Act are, by their very nature, undisclosed, their taxation differs significantly from the Income Tax Act (which provides for self-assessment).

Under the Black Money Act, assessment of undisclosed foreign income and, or, assets and computation of tax and penalty thereon are undertaken by the assessing officer. The assessing officer may act: (i) upon receipt of information from authorities under the Income Tax Act or any other law in force; or (ii) suo motu upon coming across any information, if, based on such information, he is of the opinion that assessment is required.

Rate of tax, penalty and recovery

Under the Black Money Act, undisclosed foreign income and, or, assets are subject to tax at 30% of the taxable value of such income and, or asset. Further, the assessee is also liable to a penalty of 3 times of the tax computed. As a consequence, the assessee ends up paying 120% of the taxable value of undisclosed foreign income or asset.

The Government may recover the applicable tax and penalty by issuing notices in the nature of garnishee notices to debtors and, or, employers of the assessee. Default in complying with such notices exposes the debtors and, or, employers to proceedings under the Black Money Act. Additionally, the sums may be recovered by attachment and sale of the assessee’s movable or immovable property, or by appointing a receiver for the management of the assessee’s movable and immovable property.

One-time compliance window

Today, residents are required to disclose details of their foreign income and, or, assets as part of their income tax returns. However, when the Black Money Act was initially notified, a one-time compliance window was provided for declaration of previously undisclosed foreign income and, or, assets and payment of tax and penalty. Under the one-time compliance window, assessees could declare their foreign income and, or, assets between 1 July 2015 and 30 September 2015. Thereafter, the tax and penalty were to be paid by 31 December 2015. Where declaration and payment occurred in accordance with the one-time compliance window, the applicable penalty was 100% of the tax payable (as opposed to 3 times the tax payable as is otherwise contemplated by the Black Money Act) and no criminal consequences were to ensue.

Consequences of contravention

The consequences of contravention of the Black Money Act are both civil and criminal. A range of monetary penalties are imposed for various non-compliances such as failure to file returns on time, failure to disclose foreign income and, or, assets, etc. In addition to the civil consequences, the Black Money Act also provides for criminal prosecution for non-compliances, in the event such non-compliances are determined to be wilful. For such wilful non-compliances, evasion of tax, etc., a person may be prosecuted and imprisoned for anywhere between 3 months and 10 years depending on the nature of the offence. Like the Income Tax Act, the Black Money Act, also provides for a presumption of culpable mens rea (i.e. a presumption of the intention to commit the offence) which is to be disproved by the person accused of the offence.

Promises made. Promises kept?

In 2019, the Standing Committee on Finance admitted that “…There are no reliable estimates of black money generation or accumulation neither is there an accurate well-accepted methodology for making such estimation…”. Due to difficulties in correctly estimating the extent of black money abroad, measuring the success of the Black Money Act may be somewhat difficult, especially as it is still a relatively new statue. It remains to be seen whether its implementation will succeed in reducing or eliminating the problem of black money abroad. While we are hopeful that the Black Money Act will be able to curb and bring back black money abroad, it does, in its present form, have certain shortcomings which have been highlighted by responses to the one-time compliance window and disputes which have arisen under the Black Money Act. These issues will be discussed in our next article.

This article is co-authored by Devansh Arya