Black money law: Non-disclosure of foreign assets and implications

The government and the income tax authorities have long considered black money, unaccounted money, or concealed income to be major problems. Revenue officials discovered black money or unreported income more than ten years ago through a variety of sources, pointing to the large unauthorised outflow of funds and widespread tax cheating by the populace. Any nation's economy is seriously threatened by tax evasion since it causes revenue losses, inflation, and a rise in corruption.

Even the late Arun Jaitley, the former finance minister, had said in his 2015 budget speech that “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully".

According to an article by Mint, the government recognised the necessity to put in place a legal framework that could control the movement of black money, as well as uncover undeclared accounts outside of India, in order to address this issue effectively. The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 was approved in Parliament as a result of this necessity. Black Money (Undisclosed Foreign Income and Assets) and the Imposition of Tax Act, 2015 (the "Black Money Law") were a result of this introduced.

The legislature simultaneously imposed disclosure obligations on all residents and normally resident taxpayers who owned any assets (including financial interests) or received income from any source outside of India.

According to IT regulations, taxpayers must provide sufficient disclosure in schedule FA of any foreign accounts, shares of foreign corporations, mutual fund units of a foreign fund, immovable property, income held, etc., including any beneficial interests. It is crucial to emphasise that even if tax is withheld by the Indian entity on the perquisite value of such ESOPs, the scope of disclosures with regard to foreign assets/income is broad enough to cover transactions like shares of foreign entities allocated to employees of an Indian company under an Employee Stock Option Plan (ESOP) or similar schemes.

The fact that these reports cover assets kept during a year, even if no income was generated from them, should be noted by taxpayers. Therefore, calculating the tax due on income generated during a year does not relieve a taxpayer of their obligation to file an income tax return (ITR). It is crucial to make sure that all necessary disclosures have been completed for all of the assets and income, including those located abroad.

Penalty and criminal liability

Through the Exchange of Information clauses of Tax Treaties, which allow for the automatic exchange of information between countries, tax regulators have recently been actively obtaining information about undeclared offshore investments and assets. This has made it easier for the government to find taxpayers' unreported or unaccounted-for money, examine the cases carefully, and start legal actions under both the Income Tax Law and the Black Money Law.

Unreported foreign income and assets are subject to a different, stricter taxation structure that is laid forth in the Black Money Law. It not only assesses tax and applies penalties for any unreported foreign income or assets, but also for the lack or inaccurate declaration of a foreign asset or income information in the return for income reported by the taxpayers.

According to the Black Money Law, there is a 10 lakh rupee fine for any failure to submit accurate and complete disclosures of foreign assets and income. Additionally, there is a chance that the same will be deemed to be "undisclosed foreign income and asset," which could result in tax liabilities of 30% and penalties equal to three times the tax liabilities on such undeclared foreign income and asset. Additionally, it could also lead to criminal liability for attempting to evade taxes on such income.

When an unreported foreign asset is discovered by tax authorities and the taxpayer is unable to adequately explain the origin of the investment, it is the period during which the asset is subject to taxes. In addition, according to recent decisions in this area, the aforementioned implications would hold true whether or not the aforementioned assets existed at the time of taxation or even before the Black Money Act was passed.

Taxpayers must make sure that they have completely and truthfully revealed all foreign assets and income in their ITRs in order to protect themselves from tax, penalties, and other legal repercussions.

Resident taxpayers should review their ITR even if the deadline for filing it for the current assessment year has passed and carefully verify that all foreign assets and income declarations have been made in the filed return of income. By completing a revised and belated return on or before December 31, 2022, taxpayers can provide the missed-out disclosure details if they accidentally left them out or if the ITR hasn't been submitted yet.