In 2015, a very important and less known law had come in place, with the name of Black Money (Undisclosed Income and Assets) and Imposition of Tax Act, 2015 (BMA).
In my regular work with returning NRI clients, I generally find them blissfully ignorant of the provisions of this Act. For that little who do know about this Act, they have the wrong understanding that it has something to do with black money and since they have everything in white, and so there is no implication on them.
And when I start explaining the provisions of the Act, how those apply to them and their obligations under this law, and most importantly the implications of non-compliance, they realise what a big mistake it has been for them not to be aware of this law.
So, if you are an NRI, or someone who has returned from abroad back to India recently, or someone who returned back long ago but still hold assets outside India, shut everything and read this post, word by word. For ease of understanding, I am explaining the Act in a FAQ style.
What is the objective of this Act?
Lot of black money is kept outside India. Existing provisions of the Income Tax Act (ITA) though contain provisions on undisclosed income, were not aligned to the complexities of taxing undisclosed foreign assets and income.
Further, provisions under ITA for violations was very less – for example, if a person does not file a return, the penalty under ITA is a meagre INR 5,000, that too applicable at the discretion of the Assessing Officer.
And that is why considering the seriousness of the problem, government decided to introduce a separate Act that SPECIFICIALLY deals with undisclosed foreign income and assets.
From when is this Act effective? Will it override ITA?
This Act is effective from July 1, 2015. Yes, the Act overrides ITA.
This means any undisclosed income till June 30, 2015 will be taxed under ITA. From July 1, 2015, the taxation of such income will be under the BMA.
Who is covered under the provisions of BMA?
A person who is a resident and ordinarily resident (ROR) within the meaning of Section 6(6) of ITA is covered.
This means, person having NR/RNOR status are not covered under this Act.
What is taxable under the Act?
Only two things – a) undisclosed foreign income and b) undisclosed foreign asset
This means: Taxation of Indian income/assets remains under the purview of ITA – BMA covers only income/assets outside India.
What is undisclosed foreign income?
Undisclosed foreign income refers to that income arising outside India that has NOT been disclosed in a tax return in India.
A question arises: what about annual accretion in a 401K retained outside India and disclosed not as foreign income but as exempt income in tax return – in my view, such income should not be considered as “undisclosed income” under BMA.
What are the implications of having “undisclosed foreign income”?
Following implications will apply:
- Tax @ flat rate of 30% (no surcharge/cess is applicable like in ITA)
- Interest u/s 234A,B,C as computed under Income Tax Act
- Penalty equivalent to 300% of tax
What is the penalty for non-furnishing of tax return in case of foreign assets
Under the ITA, non-filing of tax return invites a meagre penalty of INR 5,000 under Section 271F of the Act. However, the Black Money Act which came into effect in 2015 specifically to deal with foreign asset non-disclosures imposes penalty as well as prosecution
Penalty: Flat penalty of INR 10 lacs for every assessment year where:
- Return was due to be furnished but not furnished
- Return was furnished but did not contain proper details of foreign assets
Prosecution: Rigorous imprisonment for anywhere between 6 months to 7 years
What is undisclosed foreign asset?
Undisclosed foreign asset refers to an asset outside India for which the assessee does not have a satisfactory explanation as to the source.
Note that definition of undisclosed asset has nothing to do with a disclosure in tax return. Even if it is disclosed in Schedule FA in tax return and during the assessment, assessee is not able to explain source of such asset, it will be considered as an undisclosed asset.
Conversely, if a foreign asset for e.g. is not disclosed in Schedule FA however the assessee can explain very clearly the source of such asset viz. salary income from foreign employer, then it will not qualify as an undisclosed asset.
Net point, for an asset to be considered undisclosed, what is relevant is the explanation of source and not the fact whether it is disclosed in ITR or not.
What are the implications of having “undisclosed foreign asset”?
Undisclosed foreign asset taxation would also depend on the date it is noticed by the AO as follows:
- Before 1/7/2015: Under ITA
- 1/7/2015 onwards: Under BMA
Under ITA, implications are as follows:
- Tax @ 30% u/s 115BBE which came into effect vide Finance Act, 2012. No expenditure/deduction will be allowed against that amount.
- Interest u/s 234 ABC
- Penalty for wilful evasion of tax between 100-300% of tax amount u/s Section 271
- Penalty for failure of furnishing tax return u/s 271 INR 10,000
- Prosecution u/s 276C and 276CC for evasion of tax and non-filing of return of income respectively
Under BMA, Undisclosed foreign asset shall be taxed as “undisclosed foreign income” in the year in which it comes to the notice of the Assessing Officer (AO). This will happen even in case the undisclosed asset is created out of income from preceding years. Only difference is that interest u/s 234ABC will not be charged.
Can you explain penal implications with the help of an example?
Yes.
Suppose Mr. A, a ROR, has a house property in USA of INR 1 crore which yielded a rental income of INR 8,00,000 in financial year 2015-16. He failed to disclose this rental income as well the house property in USA in his Indian tax returns filed on July 31, 2016.
Subsequently, he received a notice from the tax authorities in India and he was not able to explain the source of house property purchase to the extent of 25%.
Implication will be as follows:
INR 1 CR * 25% = INR 25 lacs will be treated as undisclosed income.
Undisclosed rental income is INR 8 lacs.
Total undisclosed income: INR 25 lacs +INR 8 lacs = INR 33 lacs.
- Tax: INR 33 lacs * 30% = INR 9.9 lacs
- Interest u/s 234 ABC: Let us assume INR 1 lac (will apply only on proportionate tax on INR 8 lacs and not full INR 33 lacs)
- Penalty for undisclosed income: INR 9.9 lacs * 300% = INR 29.7 lacs
- Penalty for non-disclosure of foreign income & assets in tax return = INR 10 lacs
Total Financial Impact: INR (9.9 + 1 + 29.7 + 10) lacs = INR 50.6 lacs
Plus, the assessee will be charged with prosecution for any period between 6 months to 7 years. If the default is proved wilful, then it can extend upto 10 years.
Is there a time limit for issuing notice for taking action under BMA?
No time limit. Your undisclosed income/asset since your date of birth can be questioned at any point in time.
What are the existing provisions in ITA for foreign income and assets?
Refer this post: Guide to help Returning NRI/PIOs declare their foreign income/assets in Indian tax returns
Also read: Why Returning NRIs should continue filing tax returns even if no taxable income
I am an ROR and failed to disclose foreign income and assets in previous years, now what to do?
When BMA was launched, it gave an opportunity to the assessees to come clean by paying 60% tax and get immunity from tax, penalty, prosecution etc. Now, this window is no more. Also, the BMA does not offer any compounding provision as in FEMA where you pay small penalty and regularise the transaction.
Speaking of undisclosed income, check if you can go back and revise the previously filed tax returns. Generally, as per existing provisions of tax return, you can revise only last 2 years returns, not beyond that. That too can be done ONLY if you had filed the original return within due date.
- If you can revise the return, go ahead and revise, give the correct details in respective schedules of the tax return.
- If you do not have the option to revise the return, then it becomes a tricky situation because the BMA per se does not offer ANY leeway.
One way I can think of is to write to the concerned Assessing Officer regarding the fact that non-disclosure was completely by mistake and without any mala fide intention – ask him to either allow revising retun u/s 139 or re-opening your assessment u/s 147. Preserve the acknowledgement copy of your application to the AO. Note that Explanation 2 to the proviso includes income/asset located out of India as one the reasons where income might have escaped assessment.
Once you do that, the Assessing Officer has to issue a notice u/s 148 requiring you to file a return which is deemed to be a proper return as required to be filed u/s 139 – in such a case, you can file the return stating proper details of your foreign income/assets.
Note that this is a workaround and not a proper way. The Assessing Officer might not accept your request to re-open the assessment. Even in that case, the acknowledgement you have on record can save you at a later date from an allegation of wilful non-disclosure where you can say that you were ready to offer it, but the ITD did not accept it.
Given the sensitivity of such situations, it is advisable to seek advisory of a CA knowledgeable about cross border tax and representation matters as there can be a lot of permutations and combinations.
Checklist for Returning NRI for compliance w.r.t assets outside India
- No asset/income disclosure is needed w.r.t such assets till your status is Non Resident or Resident and NOT ordinarily Resident (RNOR) for a financial year as per ITA – read this post to know your residential status: How NRI/PIOs can decode the Indian tax residency rules & save tax
- From the financial year that you become a Resident and Ordinarily Resident (ROR) AND you hold any foreign assets or you hold any financial interest/ beneficial ownership in any entity, you will be required to do the following compliances as per ITA & BMA:
- File a tax return in India – this is to be done even if your income is below the qualifying exemption limit under the ITA (presently, it is INR 2.5 lacs)
- While filing the tax return, select the correct return which allows you to file details of your foreign assets – For AY 2016-17, if there is no income from business/profession, such persons should select ITR 2 – the ITR numbers change every year –if you’re not clear, ask your CA to select the return format which contains Schedule FA (FA stands for foreign assets) – read this post to get more clarity: Guide to help Returning NRI/PIOs declare their foreign income/assets in Indian tax returns
- There is nothing specifically mentioned in ITA w.r.t. which date’s value should be taken for purpose of disclosure in the return – in my view, the value close to the date of actual filing of the return should be taken.
- There is an exemption given from disclosure of foreign bank accounts having a balance less than INR 10 lacs
- Take a print out of the foreign bank statements, 401K and other assets and file it in your tax records – later, it may need to be used to explain the valuation of these assets.
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