Tuesday, July 12, 2016

The Income Declaration Scheme, 2016: Certain Aspects

1. Last year, it was a one-time compliance window under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 ('the BM Act') to report the undisclosed offshore assets. Now it is an IncomeDeclaration Scheme, 2016 ('IDS, 2016') to declare undisclosed income from a domestic source. The former scheme received lukewarm response in terms of tax yield, given the high tax rate (60% incl. tax and penalty) and the concept of fair market value for valuing the asset for computing the tax liability. Similar doubts are being raised regarding the latter scheme as it has both these features, i.e., high tax rate (45% incl. tax, surcharge, and penalty) and the fair market value concept to value the asset if the undisclosed income is in the form of investment in any asset. A key argument is often presented that a voluntary disclosure scheme with more generous terms (such as lower tax rate, immunities from various laws) is needed to encourage delinquent taxpayers to pay their due taxes which can be utilised to improve the much-needed infrastructure in the country. In that case, presumably, the counter argument is that such a scheme would be discriminatory against the law-abiding taxpayer (in fact, the VDIS, 1997 could have been struck down by the Supreme Court but for the Government assuring the Court that henceforth they would not come out with such schemes). Thus, the introduction of any such scheme often involves economic efficiency, morality, and constitutionality issues. This article, however, is restricted to certain issues arising from the IDS, 2016.

2. Certain Aspects of IDS, 2016
Broad framework
2.1 The IDS, 2016 is broadly framed on the lines of one-time compliance window provided under the BM Act (sections 59 to 72). Further, the current scheme has some similarities (discussed at appropriate places) with the earlier schemes (scheme of 1965, 1975 and 1997) and, therefore, the CBDT instructions / clarifications and the judicial pronouncements interpreting these schemes shall be useful.
Declarant, Meaning of
2.2 The word "declarant" has been defined to mean a person making the declaration under section 183(1) of the scheme. Since the word "person" is not defined in the scheme, as per section 182(c) of the scheme, reference should be made to the definition of the word "person" as contained in section 2(31) of the Income Tax Act, 1961 ('the IT Act'). Accordingly, it will cover Individual, HUF, Company, Firm, etc., irrespective of its residential status. Therefore, even a non-resident person is eligible under this scheme. Interestingly, while moving the Finance Bill, 2016 in the Lok Sabha, the Finance Minister said that IDS is open for domestic taxpayers. However, it is well-settled that when the language is plain, clear and unambiguous, the speech of the Finance Minister should not be looked into.
Phrase — "Income chargeable to tax"

2.3 Under Section 183 of the scheme, a person may make a declaration in respect of any "income chargeable to tax" under the IT Act within the notified period. In the context of Voluntary Disclosure of Income and Wealth Ordinance, 1975, the Calcutta High Court in the case of CIT v.Sumati Kumar Sunil Kumar held that the concept of income chargeable to tax in the Voluntary Disclosure Scheme is the same as in the IT Act. Further, the phrase "Income chargeable to tax" was used in the VDIS, 1997. In this respect, it was reiterated by the CBDT that the computation of income chargeable to tax would be in accordance with the provisions of the IT Act. Under the IT Act, while computing the income, one is required to take into account all the eligible expenditures, deductions and set-off of allowable losses. However, section 183(4) of the Finance Act, 2016 impliedly overrides the income computation provisions given in the IT Act to provide that "No deduction in respect of any expenditure or allowance shall be allowed against the income in respect of which declaration under this section is made". Thus, it is evident that declarant shall not be allowed to claim any deduction of any expenditure in relation to income offered under this scheme. Interestingly, looking at the current language of section 183(4), it appears that set-off of losses against undisclosed income shall be available. In this context, one may refer to section 5(1) of the BM Act which additionally puts a restriction on "set-off of any loss". The said section reads as follows: [i]n computing the total undisclosed foreign income and asset of any previous year of an assessee, (i) "no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee, whether or not it is allowable in accordance with the provisions of the Income-tax Act"
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