Monday, July 11, 2016

Halfhearted approach in proposing the Income Declaration Scheme, 2016

The Finance Minister in his Budget Speech on 29th February, 2016 surprised all by introducing the Income Declaration Scheme, 2016 which is proposed to come into effect from 1st June, 2016. For persons who have not paid full taxes in the past, the Scheme provides a one-time window to come forward and declare the undisclosed income of any financial year upto 2015-16 and pay tax, surcharge and penalty aggregating to 45% of such undisclosed income declared. The FM has indicated in his Budget Speech that the window will be open from 1st June till 30th September, 2016 with an option to pay amount due within two months of declaration. Post Budget the FM has mentioned that the four-month compliance window for domestic black money holders is not a VDIS (Voluntary Disclosure of Income Scheme) and it is not an amnesty scheme. Interestingly the FM has used the phrase 'past trangressions' recognising the past wrongdoings of tax evaders and offer them an exit door on payment of 45% of undisclosed income. Such persons would further enjoy immunity from prosecution under Income Tax Act, Wealth Tax Act, and Benami Transaction (Prohibition) Act, 1988. As per our FM, the Government is fully committed to remove black money from the economy. The Scheme as mentioned in clauses 178 to 196 of the Finance Bill, 2016 (in short referred as the 'Bill') is analysed hereunder:
1. Backdrop and comparison of present Scheme with some aspects of VDIS, 1997:
It would be relevant to mention that the prime reason for accumulation of black money has been the fact that our country had the maximum tax rate of 97.75% (tax @ 85% plus surcharge @ 15%) in seventies. That means a person declaring income of Rs. 10 Lakhs in those years was required to pay tax of almost Rs. 9,77,500/- only (if we ignore the initial exemption limit). In addition to that one was required to pay wealth tax. Now the maximum rate of tax is 30% plus education cess of 3% plus surcharge in some cases which is much reasonable to the tax rates in 1970's. The present Income Disclosure Scheme, 2016 announced in Budget, 2016 has some positive aspects as well as some not so positive aspects if we compare with the Voluntary Disclosure of Income Scheme, 1997 (VDIS) declared for Indian tax payers. The rate of tax payable under the present scheme is 45 per cent (tax @ 30% plus surcharge 7.5% plus penalty 7.5%) which is 1.5 times of the tax payable under VDIS, 1997. It may be noted there was no penalty in case of VDIS.

2. Declaration of Undisclosed income and Fair Market Value of asset to be taxed [clause 180 of the Bill]: On or after the date of commencement of the Scheme but before a date to be notified by the Central Government, any person may make a declaration in respect of any income chargeable to tax under the Income-tax Act for any financial year up to 2015-16:
(a)

which he has failed to furnish a return u/s 139 of the Income-tax Act;
(b)

which he has failed to disclose in a return of income furnished by him under the Income-tax Act before the date of commencement of this Scheme;
(c)

which has escaped assessment by reason of the omission or failure on the part of such person to furnish a return under the Income-tax Act or to disclose fully and truly all material facts necessary for the assessment or otherwise.
Where the income chargeable to tax is declared in the form of investment in any asset, the fair market value of such asset as on the date of commencement of this Scheme shall be deemed to be the undisclosed income. The fair market value of any asset shall be determined in such manner, as may be prescribed. No deduction in respect of any expenditure or allowance shall be allowed against the income in respect of which declaration under section 180 of the Finance Bill, 2016 is made.

In all likelihood, the Fair market valuation (FMV) rules will be determined in sync with the Determination of FMV Rules as prescribed for the purposes of sec. 56(2) of the Income Tax Act, 2961 and/or the Black Money Act, 2015. The FMV as on 1st June, 2016 is likely to be much more than the actual cost of any asset acquired by prospective declarant and may result into ultimate heavy tax burden. The people may not be so attracted to disclose the income under this scheme and the requirement of charging tax on present value of the asset may caste shadow on the very success of the Scheme and due. In other words, the Scheme needs to be modified to make it practical. Where the declarant has sufficient proof of acquiring an asset in past years at a certain amount, such amount only should be considered for levy of tax and penalty aggregating to 45 per cent and not the current fair market value. The tax on current FMV is not practical as the liquidity problem will also arise and making payment of the tax under the Scheme, will be almost impossible in some cases.
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