Income Disclosure Scheme 2016: An overview
The government is providing a 4-month window of opportunity starting June 1, 2016, to tax evaders to gain amnesty by coming clean under the scheme by paying 45 per cent tax.
The same has now been incorporated in Chapter IX of the Finance Bill, 2016. Also, The Central Board of Direct Taxes (CBDT) has recently notified the Income Declaration Scheme Rules, 2016 (the Rules) and issued explanatory notes along with clarifications in the form of Frequently Asked Questions (FAQs) for better compliance of the Scheme.
Let us discuss the salient features of the Scheme.
Who can make the declaration?
All persons, who have not paid full taxes in the past can come forward and declare their undisclosed income, whether in the form of investment in assets in India or otherwise.
Rate of tax, surcharge and penalty
The declarant will have to pay following tax, cess and penalty at the following rates on the amount of Income Disclosed:
- Income Tax at the rate of 30% on the declared income,
- Surcharge at the rate of 25% on the taxes (above) payable (i.e., at the rate of 7.50% of the disclosed income) &
- Penalty at the rate of 25% on the taxes (above) payable (i.e., at the rate of 7.50% of the disclosed income)
So, the total applicable income tax rate is 45% of the income declared under the scheme.
This special rate of tax, surcharge and penalty specified in the Scheme will override any rate or rates specified under the provisions of the Income-tax Act or the annual Finance Acts.
What are the timelines?
- To make the declaration: 1 June 2016 to 30 September 2016.
- To pay the applicable tax and penalty: On or before 30 November 2016.
Scope of scheme
- The declaration can be made in respect of (a) any income or (b) income in the form of investment in any asset located in India and acquired from income chargeable to tax under the Act.
- Such a declaration can be for any financial year (FY) prior to the FY 2016- 17 [assessment year (AY) 2017- 18]
- Undisclosed income or assets arises due to either of the following :
- Failure to furnish a return under section 139 of the Act, or
- Failure to disclose such income in a return furnished before the date of commencement of the Scheme i.e., 1 June 2016, or
- Where the income has escaped assessment by reason of the omission or failure on the part of such person to furnish a return under the Act, or failed to disclose fully and truly all material facts necessary for the assessment or otherwise.
What cannot be covered under the declaration?
No declaration can be made in respect of any undisclosed income chargeable to tax under the Act for which:-
- A notice has been issued and served upon the person on or before 31 May 2016 under sections 142, 143(2), 148, 153A or 153C of the Act in respect of such assessment year for which the proceeding is pending before the tax officer.
- A search has been conducted under section 132 or a requisition has been made under section 132A or a survey has been carried out under section 133A in a previous year, and the time for issuance of a notice under section 143 (2), section 153A or section 153C for the relevant assessment year has not expired. However, in case the assessment is completed but certain income was neither disclosed nor assessed then such assessed income can be disclosed under the Scheme.
- Cases covered under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015.
Person who can’t make declaration
- A person in respect of whom proceedings for prosecution of any offence punishable under Chapter IX (offences relating to public servants) or Chapter XVII (offences against property) of the Indian Penal Code or under the Unlawful Activities (Prevention) Act or the Narcotic Drugs and Psychotropic Substances Act or the Prevention of Corruption Act are pending shall not be eligible to make declaration under the Scheme.
- A person notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act or a person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, subject to the conditions specified in the Scheme shall also not be eligible for making a declaration under the Scheme.
Who has to submit & sign the Declaration?
Below is the list of category of Declarants & respective signing authorities who can sign the Declaration;
|S.No.||Status of the|
|Declaration to be signed by|
● where individual is absent from India, person authorized by him;
● where individual is mentally incapacitated, his guardian or other
person competent to act on his behalf.
● where the karta is absent from India or is mentally incapacitated
from attending to his affairs, by any other adult member of the HUF
|3.||Company||● Managing Director;
● where for any unavoidable reason the managing director is not able
to sign or there is no managing director, by any director.
|4.||Firm||● Managing partner;
● where for any unavoidable reason the managing partner is not able
to sign the declaration, or where there is no managing partner, by
any partner, not being a minor.
|Any member of the association or the principal officer.|
|That person or by some other|
- The declaration is to be filed by the declarant up to 30 September 2016 with the jurisdictional PCIT/ CIT
- The declaration can be filed in paper form or through online in the e-filing website of the Income tax department using the digital signature of the declarant or through electronic verification code.
- Upon receipt of declaration from the declarant, the Principal Commissioner/ Commissioner will enquire whether any proceeding under section 142(1)/143(2)/148/153A/153C is pending for the assessment year for which declaration has been made. He shall issue the acknowledgment in Form No – 2 to the declarant within 15 days from the end of the month in which the declaration has been made.
- Proof of payment of tax (including Krishi Kalyan Cess) and penalty shall be furnished by the declarant to such PCIT/ CIT in Form No – 3.
- The PCIT/ CIT shall grant a certificate in Form No – 4 to the declarant within 15 days of the submission of Form No – 3.
Effect of valid declaration
Where a valid declaration has been made, the following consequence will follow –
Where a person declares only a part of his undisclosed income then he will get immunity only in respect of undisclosed income declared under the Scheme and no immunity will be available in respect of income which has been not declared.
In the following situations, a declaration shall be void and shall be deemed never to have been made:-
- failure to pay entire amount of tax and penalty on or before 30 November 2016;
- any misrepresentation or suppression of facts or information
Any tax or penalty paid in pursuance of the declaration shall, however, not be refundable under any circumstances.
In respect of such undisclosed income which has been duly declared in good faith but not found eligible due to the reasons listed in section 196 of the Finance Bill, 2016, then such income shall not be hit by section 197(c) of the Finance Act, 2016. However, such undisclosed income may be assessed under the normal provisions of the Income tax Act, 1961.
Will the declarations made under the Scheme be kept confidential?
The Scheme incorporates the provisions of section 138 of the Income tax Act relating to disclosure of information in respect of assessees. Section 138 relates to treating material disclosed as confidential. It also provides for such “classified material” not being produced or used in court except in order to institute or assist in the course of a prosecution for any offence committed in relation to tax.
Therefore, the information in respect of declaration made is confidential as in the case of return of income filed by assessees. However in cases where a court seeks information of these declarations, where litigation is ongoing, information could be disclosed by the taxman to the court only.
Valuation of undisclosed assets
Where the income chargeable to tax is declared in the form of investment in any asset, the same will be valued at its fair market value (FMV) on 1 June 2016.
Applicable Rule: Rule 3 of the Income Declaration Scheme Rules, 2016
The method for determining the FMV for various assets which is tabulated below:
|Undisclosed asset||Fair Market Value|
|▪ Bullion, jewelry or precious|
▪ archaeological collections,
sculptures or any work of
▪ immovable property
|Higher of :
a) Cost of acquisition; and
b) The price that the asset shall ordinarily fetch if sold in
the open market on the valuation date (i.e. 1 June
2016), on the basis of the valuation report obtained
from a registered valuer.
|Shares and Securities||A. In case of share and securities quoted on any recognized
Higher of :
a) Cost of acquisition; and
b) Price as determined in the following manner –
● The average of the lowest and highest price of such
shares and securities quoted on a recognised stock
exchange as on 1 June, 2016; or
● Where there is no trading on 1 June, 2016, the
average of the lowest and highest price of such
shares and securities on a recognised stock
exchange on a date immediately preceding 1 June,
2016 where such shares and securities were traded
on recognised stock exchange.
B. In case of unquoted share and securities Equity shares
Higher of :
a) Cost of acquisition; and
b) FMV as on 1 June, 2016 determined by the formula
퐴+퐵−ᵃ /(ᵄᵃ)×(ᵄᵄ) , where:
A= book value of all the bullion, jewelery, precious
stones, artistic works, shares, securities and immovable
property) as reduced by:
(a) any amount of incometax paid, if any, less
the amount of incometax refund claimed, if
(b) any amount shown as asset including the
unamortized amount of deferred expenditure
which does not represent the value of any asset;
B= FMV of bullion, jewellery, precious stones, artistic
works, shares, securities and immovable property as
determined in the manner provided in this rule;
L= book value of liabilities, but not including the
following amounts, namely:
(i) the paidup capital in respect of equity shares;
(ii) the amount set apart for payment of dividends
on preference shares and equity shares;
(iii) reserves and surplus, by whatever name called,
even if the resulting figure is negative, other
than those set apart towards depreciation;
(iv) any amount representing provision for
taxation, other than amount of income tax paid,
if any, less the amount of incometax claimed as
refund, if any, to the extent of the excess over
the tax payable with reference to the book
profits in accordance with the law applicable
(v) any amount representing provisions made for
meeting liabilities, other than ascertained
(vi) any amount representing contingent liabilities
other than arrears of dividends payable in
respect of cumulative preference shares;
PE= total amount of paid up equity share capital as
shown in the balance sheet ;
PV= the paid up value of such equity shares;
C. Unquoted Shares and securities (other than equity shares
in a company)
Higher of :
a) its cost of acquisition; and
b) the price that the share or security shall ordinarily
fetch if sold in the open market on the 1st day of
June, 2016, , on the basis of the valuation report
obtained by the declarant from a registered valuer.
|Interest of a person in a|
● partnership firm or
● in an association of
persons (AOP) or
● a limited liability
of which he is a member
|The net assets of the firm, AOP or LLP on the 1st day of June,
2016 shall first be determined and the portion of the net asset
of the firm, AOP or LLP as is equal to the amount of its capital
shall be allocated among its partners or members in the
proportion in which capital has been contributed by them and
the residue of the net asset shall be allocated among the
partners or members in accordance with the agreement of
partnership or association or LLP for distribution of assets in
the event of dissolution of the firm, association or LLP, or, in
the absence of such agreement, in the proportion in which the
partners or members are entitled to share profits and the sum
total of the amount so allocated to a partner or member shall
be treated as the value of the interest of that partner or
member in the partnership or association.
Net assets of the firm, AOP or LLP for this purpose is
calculated as (퐴+퐵−ᵃ), determined in the manner provided
under ‘2. Shares & securities’ above.
|Any other asset||The valuation shall be higher of:
a) its cost of acquisition or the amount invested; and
b) the price that the asset would fetch if sold in the open
market on the 1st day of June, 2016.
Valuation of asset when investment is partly from an income which has been assessed to tax prior to AY 2017-18
In such a case, the FMV of the asset as determined above shall be reduced by an amount which bears to the value of the asset as on the 1st day of June, 2016, the same proportion as the assessed income bears to the total cost of the asset. (Sub-rule (2) of rule 3 of the Income Declaration Scheme Rules, 2016)
This is illustrated by an example as under:
Investment in acquisition of asset in previous year 2013-14 is of Rs.500 out of which Rs.200 relates to income assessed to tax in A.Y. 2012-13 and Rs.300 is from undisclosed income pertaining to previous year 2013-14. The fair market value of the asset as on 01.06.2016 is Rs.1500. The undisclosed income represented by this asset under the scheme shall be:
1500 minus (1500 X 200 )/500 = Rs.900
Computation of Capital gains on subsequent sale of assets disclosed
Subsequent sale of assets disclosed in the form of investment shall be liable to tax under the head “capital gains”. For this purpose,
The cost of acquisition = The fair market value (FMV) as on 1 June, 2016
The period of holding shall start from the June 1, 2016
The valuation report is required to be obtained but the same is not mandatorily required to be filed along with the declaration form. However, while e-filing the declaration on the departmental website a facility will be available.
Is it an amnesty scheme?
Per se, Income Disclosure scheme is not an amnesty scheme as disclosures will be charged at 45 per cent as against the normal rate of 30 per cent. In amnesty (scheme), we just pay tax and get away with it. Here, we have to pay 50 per cent more than normal tax and we have to pay it at current values, not at some old assumed value.
However, by nature, this income disclosure scheme is amnesty because the government — except collecting 45 percent tax (with surcharge and penalty) — is lenient towards tax evaders. The same people may not respond to pay 45 percent tax, as it’ll be convenient for them not to pay at all.
It may be an opportunity for those who didn’t disclose their income and pay tax to voluntarily come forward and compensate, it is apprehensive that the success rate of the scheme meant to bring out undisclosed income in the mainstream will be satisfying.
Firstly, immunity granted under the I-T Act and the Wealth Tax Act may not be enough to lure tax evaders. Tax evaders are unlikely to come forward to declare their hidden wealth on fears of harassment by other agencies, unless there is blanket immunity from prosecution and harassment under other laws.
Secondly, the tax rate itself is steep. Also, the tax is based on Fair Market Value of the asset as on June 1, 2016, whereas the original cost may be much lesser. In such cases, the taxpayers may still opt for the Settlement Commission or other options.
To refer the Chapter IX of the Finance Bill, 2016: http://www.incometaxindia.gov.in/Budgets%20and%20Bills/2016/Finance_Bill_2016.pdf
To refer the Circulars and notifications on Income Disclosure scheme, 2016: