An insight into Income Declaration Scheme

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In the recent past, government has made many attempts to bring in the unaccounted and undisclosed black money into India. One of the attempts to achieve this was the introduction of the Income Declaration Scheme, 2016 in this Finance Bill, 2016.

Before introduction of this scheme, the penal provisions of non-disclosure of income were quite punitive and any individual would think about a hundred times to declare his unaccounted income. With this scheme, government has made an attempt to make the provisions somewhat lenient and it is actually acting as a golden opportunity for all the tax evaders to come out clean.

Purpose:

The main purpose of this scheme is to provide an opportunity to those persons who have not paid full taxes in the past to come forward and declare the undisclosed income and pay tax. This scheme is extended to all persons, be it an individual, a company, HUF, Firm or any other person. However, persons in respect of whom any kind of income tax or black money or other specified proceedings are pending are excluded from this scheme.

Salient Features of the Scheme:

  • The person can declare any income chargeable to tax, which has not been declared in the past years prior to assessment year 2017-18 (Financial Year 2016-17)
  • Fair Market Value of the assets as on 1st June, 2016 would be deemed to be the undisclosed income in relation to the asset
  • Tax, surcharge and penalty are payable at the rate of 45% of the income declared under the scheme ​

​​Immunity under the Scheme:

  • The value of asset declared in the declaration shall not be chargeable to wealth tax for any year
  • No scrutiny or any other type of enquiry would be held either under the Income Tax Act or under the Wealth Tax Act for the income disclosed under the scheme
  • Immunity from prosecution under the Income Tax Act or Wealth Tax Act
  • Immunity from Benami Transactions (prohibitions) Act, 1988 subject to certain conditions
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Compliance Window:

  • Declaration to be made from 1st June, 2016 to 30th September, 2016
  • Tax, surcharge and penalty to be payable by 30th November, 2016

Mode of making Declaration:

  • To be filed online; or
    To Jurisdictional Pr. Commissioner/ Commissioner of Income Tax

Frequently Asked Questions:
The Central Board of Direct Taxes (CBDT) has also come out with three sets of Frequently Asked Questions (FAQs) for providing adequate clarifications on the Scheme. Some of these have been discussed below:

1.    Declarant would be liable for capital gains on sale of such undisclosed assets in future. The cost of acquisition for the purpose of capital gains would be the fair market value of such assets as on 1st June, 2016
2.    The information in respect of declaration made would be confidential and no information contained in the declaration would be shared with any other law enforcement agency. The information would also not be shared within the Income Tax Department for any investigation in respect of a valid declaration.
3.    It is not mandatory to file a valuation report of the undisclosed income represented in the form of investment in asset along with the declaration. However, the declarant should have the valuation report.
4.    In case of part payment of income tax, surcharge and penalty before 30th November, 2016, the entire declaration made under the scheme shall be invalid
5.    The scheme is available to both residents and non-residents
6.    It is mandatory to quote your PAN in the declaration in order to claim the benefits and immunities available under the scheme
7.    In case a declaration relating to investment in undisclosed asset is made under the scheme, no investigation would be initiated against the seller in respect of such declaration
8.    It is expected that the declarations made under the Scheme are filed correctly. However, a revised declaration can be filed on or before the 30th September, 2016 provided the undisclosed income in the revised declaration is not less than the undisclosed income declared in the declaration already filed

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Advantages of the Scheme as against declaring the past undisclosed income as current income in the return of income to be filed for AY 2017-18
1.    Declaration of past undisclosed income in the current year amounts to false verification of return of income which shall attract prosecution under the Income Tax Act
2.    If anyone attempts to disclose past undisclosed income in the current year, he would have to explain the source of income and substantiate the manner of earning the said income. However, in case of disclosure under this scheme, there would be no need to explain the source of income
3.    Declaration of past undisclosed income in the current year cannot explain assets acquired in the past or provide any immunity in respect of the same
4.    The Income Tax Department is in receipt of large volumes of information from various sources such as Registrars of property, financial institutions, stock exchanges, tax deductor, etc. The Department has launched a comprehensive data mining and compliance management programme in the form of “project insight” which will generate a large volume of reliable information about financial transactions undertaken by taxpayers and the relevant year in which the transaction was undertaken

Example:
Manoj filed his return of income for Assessment Year 2015-16 and Assessment Year 2014-15 on the due date declaring NIL income. Manoj however, earned an income of INR 60 lakhs each year from a transaction, which he didn’t disclose in the return filed by him. The income so earned by him was in turn invested in an asset, whose fair market value as on 1st June, 2016 is INR 150 lakhs.

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In this case, if Manoj wishes to come clean under this scheme, he can by declaring the undisclosed income and paying the following amount as tax, surcharge and penalty:

Actual undisclosed income: INR 120 lakhs (60 Lakhs + 60 Lakhs) (A)

Undisclosed income as per the Income Declaration Rules (Fair Market Value as on 1st June, 2016): INR 150 lakhs (B)

Tax (30% of B): INR 45 lakh ( C)

Surcharge (25% of C): INR 11.25 lakhs (D)

Penalty (25% of C): INR 11.25 lakhs ( E)

Total burden on Manoj (C+D+E): INR 67.50 lakhs (F)

Effective Rate (F/B): 45%

Effective rate vis a vis actual undisclosed income (F/A): 56.25%

This scheme is considered to be a golden chance to come out clean. Let’s see how many would capitalize on this opportunity.