Friday, July 8, 2016

Income Declaration Scheme, 2016 – Effective Rate of Tax?

1. The Government has introduced Income Declaration Scheme, 2016 which has come into force from 1st June, 2016. The scheme provides an opportunity to persons who have not paid full taxes in the past to come forward and declare the undisclosed income and pay tax, surcharge and penalty totaling in all to 45% of such undisclosed income declared. Further, as per scheme, declaration of undisclosed income in the form of assets is to be made at Fair Market Value of such assets as on 1st June, 2016.
It is felt everywhere that the total impact of tax in case of declaration of undisclosed income under the scheme is quite high and, therefore, the initial response of the taxpayers regarding the scheme is not encouraging one.
Clarifications issued by CBDT
2. The CBDT has issued three sets of Frequently Asked Questions (FAQs) containing 36 clarifications relating to various controversial aspects clarifying doubts regarding the operation of the scheme. One clarification has been issued by the CBDT by way of Circular No. 25/2016, dated 30th June, 2016 addressing question no. 5 which is reproduced as under:—

Question No. 5: Where a valid declaration is made after making valuation as per the provisions of the Scheme, read with IDS Rules and tax, surcharge & penalty as specified in the Scheme have been paid, whether the department will make any enquiry in respect of sources of income, payment of tax, surcharge and penalty?
Answer: No.
2.2 Analysis of above said Circular: The above clarification is being interpreted in a manner that it would reduce the effective rate of tax on undisclosed income declared under the scheme from 45% to 31%. It is being interpreted in some circles that since the above clarification states that department will not make any enquiry in respect of the sources of payment of tax, surcharge and penalty, it, therefore, would give leverage to the taxpayer to make payment of taxes on the undisclosed income declared under the scheme out of the other undeclared sources and such other undisclosed source of income need not be made part of total declaration. This can be explained by way of the following example:
Amount (in Rs.)
Declaration of income under the scheme ……
 100 Lacs
Tax required to be paid @ 45% ……
 45 Lacs
In case the above said sum of Rs. 45 Lacs is also paid out of undisclosed income, since the source of such amount shall not be enquired into by the department, it would result as under:
Amount (in Rs.)
Total declaration of undisclosed income (100 + 45) ……
 145 Lacs
Tax paid under the scheme…….
 45 Lacs
Effective rate of tax (45/145*100)……

It is interesting to note that there was front page news in "The Economic Times" on 2nd July, 2016 reporting the above interpretation. Moreover, there was a meeting in the evening on 2nd July, 2016 conducted by the Institute of Chartered Accountants of India (ICAI) inviting CBDT Chairman and other officials which was webcast throughout the country. In the above programme, similar views were expressed by an eminent tax expert who was speaking regarding various aspects of the scheme in the presence of CBDT Chairman and other senior officials. There was no rebuttal from the CBDT officials on the above interpretation, which has also given an impression in the minds of the tax experts and taxpayers that the scheme shall be operated in the above manner and thus, taxpayers may be able to reduce the effective rate of tax on undisclosed income declared under the scheme from 45% to 31%.

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