EY Tax Alert CBDT releases second round of FAQs on Income Declaration

Scheme, 2016

28 June 2016

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Executive summary

This Tax Alert summarizes a recent Circular[1] issued by the Central Board of

Direct Taxes (CBDT), which contains the CBDT’s clarifications in the form of

frequently asked questions (FAQs) relating to the Income Declaration Scheme,

2016 (Scheme).

Various issues and concerns were raised regarding the scope of the Scheme as

introduced by the Finance Act, 2016 (FA 2016). A number of representations

were made requesting the CBDT to clarify the scope and procedure of the

Scheme.

In deference thereto, the CBDT clarified, in the form of 14 FAQs vide Circular No.

17 of 2016, certain aspects of the Scheme[2]. To provide more clarity and

encourage taxpayers to voluntarily make declarations under the Scheme, the

CBDT has additionally addressed certain issues in the form of 11 questions and

answers (Q&As) vide this Circular. The clarifications largely deal with issues, such

as eligibility of declarant, requirement of valuation report, consequence of non-

declaration in case of subsequent detection of undisclosed income or asset etc.

[1] Circular No. 24 of 2016 dated 27 June 2016

[2] Refer EY Alert “CBDT releases FAQs on Income Declaration Scheme 2016” dated 21 May 2016

Background

Last year, a new law, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) was enacted with a view to tackle the menace of undisclosed overseas income/assets. It incorporated a one-time compliance scheme wherein it gave an opportunity to taxpayers to voluntarily come forth and declare undisclosed overseas assets and income within a limited period window of compliance and avail immunity from penalty and prosecution under the BMA, as also under other specified acts. This year, the Scheme is introduced under Chapter IX of FA 2016. Under the Scheme, taxpayers which have not paid full taxes in the past can come forward and declare undisclosed income or asset, pay tax, surcharge and penalty, totalling to 45% of such undisclosed income, and avail immunity from penalty and prosecution under the Income Tax Act (ITA) and Wealth Tax Act.

The Scheme will be operative for four months from 1 June 2016 to 30 September 2016, within which the taxpayer is to furnish the declaration in relation to its undisclosed income. The taxes on declared undisclosed income are to be paid by 30 November 2016.

The Rules are notified to provide for a valuation mechanism to determine the fair market value (FMV) of undisclosed assets, as also to prescribe forms for procedural matters[3].

Various issues and concerns have been raised about the scope of the Scheme under the ITA. Various representations were made requesting the CBDT to clarify the scope thereon. CBDT Circular No. 17 of 2016 dated 20 May 2016 provided clarifications to 14 queries in Q&A form. Furthermore, CBDT Office Memorandum dated 22 June 2016 reemphasized that the taxpayer’s declarations shall be kept confidential in the same manner as tax returns. Addressing few [3] Refer EY Alert “The Income Declaration Scheme 2016 - Rules

prescribing procedure and valuation mechanism” dated 21 May 2016

other concerns, the CBDT has released another Circular in connection with the Scheme, containing 11 Q&As clarifying certain further issues surrounding the Scheme. This Tax Alert summarizes the significant clarifications contained in the Circular.

Clarifications on eligibility of a taxpayer for filing declaration

► Reference to “domestic taxpayers’” in the Finance Minister’s Budget Speech created ambiguity on the scope coverage of non-resident taxpayers to avail the Scheme. It is now clarified that both resident as well as non-resident taxpayers can declare their past undisclosed income and asset under the Scheme, subject to fulfilment of other specified conditions.

► Where summons or notice is issued calling for information or a letter is issued under the non-filer monitoring system, but no notice is issued under the ITA for the relevant year for scrutiny assessment, the taxpayer will be eligible to file declaration under the Scheme

► Where notice under the ITA for scrutiny assessment is issued after 31 May 2016, the declarant will be eligible to declare the undisclosed income under the Scheme for the year of such notice, subject to compliance with conditions specified in the Scheme. Once the Tax Authority issues acknowledgement for acceptance of declaration for the relevant year, scrutiny proceedings initiated under notice issued for such year is considered to be closed.

Validity of declaration

The declaration will be valid only when full payment of taxes as per the Scheme is made by 30 November 2016. The Scheme does not contemplate validity of declaration on a pro rata basis to the extent of part payment of amount under the Scheme.

Circumstances under which taxpayers are not eligible to make declaration

Under the following circumstances, a taxpayer will not be eligible for the Scheme: ► Where search action has been initiated

and time for issuance of notice for search assessment has not expired on 31 May 2016.

► In respect of tax years for which proceeding is pending before the Settlement Commissioner.

Clarifications on procedural aspects

► Valuation report: While the CBDT, in the

earlier set of FAQs issued under the Scheme, clarified that although a taxpayer is required to obtain the valuation report in support of the value of the undisclosed assets declared under the Scheme, it is not mandatory to attach the same when the declaration is filed under the Scheme. The Form 1 prescribed by the CBDT for filing declaration under the Scheme, however, requires the taxpayer to attach the valuation report along with the declaration. The CBDT reiterates that, while obtaining the valuation report from the declarant is necessary, it is not mandatory to attach the same with the declaration filed. However, the report is to be furnished on demand to the Tax Authority where it wants to examine the correctness of the value declared before issuing the acknowledgment for the declaration filed.

► Furnishing of Permanent Account Number (PAN) is mandatory while filing declaration under the Scheme. This is also necessary in order to claim benefits and immunities available under the Scheme.

Other clarifications

► In case of amalgamation of companies or conversion of company into limited liability partnership (LLP), where the successor entity wants to file declaration for the years prior to amalgamation/ conversion, the declaration is to be made in the name of the amalgamated company/LLP for the year in which such reorganization takes place.

► In case where the undisclosed income or assets acquired out of undisclosed income are detected after the closure of the Scheme, such income or asset shall be assessed in the year in which the scrutiny notice is issued by the Tax Authority.

► Where asset is acquired partly out of

declared income and partly out of undisclosed income, the value of the asset for declaration under the Scheme is to be computed on the valuation date (1 June 2016), in accordance with the prescribed rules, by allowing proportionate deduction in respect of asset acquired out of assessed income.

Comments

The Circular addresses some of

the concerns of taxpayers in

connection with the Scheme.

Many of the clarifications issued

so far are largely along the lines

of clarifications issued last year

for the purposes of the one-time

compliance window under the

BMA.

Taxpayers who have filed

declaration would need to

exercise caution while

discharging payment of taxes

under the Scheme. Any short

payment may lead to the risk of

its declaration being regarded as

invalid.

PAN is mandatory for furnishing

the declaration. Declarants who

currently do not have PAN,

especially non-residents, may

need to first obtain PAN. The

time period for obtaining PAN

may appropriately be factored in,

keeping in mind that the last date

of filing declaration is 30

September 2016.

Under Indian jurisprudence, a

circular issued by the CBDT, for

proper administration, is binding

on the Tax Authority, even if it is

contrary to legal provisions. This

Circular, however, will not bind

the taxpayers or the Courts, if it

is not in conformity with the law

on any matter.

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