Government notifies valuation rules and issues FAQs on the Income Declaration Scheme, 2016

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from India Tax & Regulatory Services

Government notifies valuation rules and issues FAQs on the

Income Declaration Scheme, 2016

May 25, 2016

In brief

The Finance Minister of India presented the Union Budget for the financial year 2016-17 on 29 February 2016. In his budget speech he proposed a limited period compliance window for domestic taxpayers to declare their undisclosed income whether in the form of investment in assets in India or otherwise, and clear up their past tax transgressions by paying a total of 45% (tax @30%, Krishi Kalyan Cess @7.5% and [email protected]%) of the undisclosed income.

In this regard, the Income Declaration Scheme, 2016 (the Scheme) has been introduced as Chapter IX of the Finance Act, 2016. The Scheme is effective from 1 June 2016 for a period of 4 months (i.e.

till 30 September 2016). Where any disclosure is made under the Scheme and applicable tax and penalty are paid, no scrutiny or inquiry shall be undertaken in respect of such declarations. Further, declarants will be provided immunity from penalty/ prosecution proceedings under the Income-tax Act, 1961 (the Act) or/ and the Wealth-tax Act, 1957 (the Wealth-tax Act).

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.

In detail

The CBDT has recently notified the Income Declaration

Scheme Rules, 2016¹ (the Rules) and issued explanatory notes² along with

clarifications³ in the form of FAQs for better compliance of the Scheme. Key features of the Scheme are summarised as under:-

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

1 Notification No. 33/2016, F.No.

142/8/2016-TPL, dated May 19, 2016

in the form of investment in assets in India or otherwise.

Timelines

 The Scheme shall commence from 1 June 2016 and is available up to 30 September 2016 to make the declaration.

 Applicable tax (including Krishi Kalyan Cess) and penalty shall be paid on or before 30 November 2016.

What can be covered in the declaration?

The declaration shall be made in Form No - 1 with the designated Principal

2 Circular No. 16 of 2016, dated May 20, 2016

Commissioner of Income-tax/

Commissioner of Income-tax (PCIT/ CIT) on or before 30 September 2016. This can be made in respect any income or income in the form of

investment in any asset located in India and acquired from income chargeable to tax under the Act for any financial year (FY) prior to the FY 2016- 17 [assessment year (AY) 2017- 18] for which the declarant had either:

 failed to furnish a return under section 139 of the Act, or

 failed to disclose such income in a return

3 Circular No. 17 of 2016, dated May 20, 2016

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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 in the declaration?

No declaration can be made in respect of any undisclosed income chargeable to tax under the Act for which:-

 A notice under sections 142, 143(2), 148, 153A or 153C of the Act has been issued and served upon the person on or before 31 May 2016 in respect of such assessment year for which the proceeding is pending before the tax officer (also refer FAQ Nos. 2,3 & 5)

 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. (also refer FAQ No. 6)

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.

(refer FAQ No. 7)

 Cases covered under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015.

 Proceeding 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. (also refer FAQ No. 11)

 A person is 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.

Procedural Aspects

 The declaration is to be filed by the declarant up to 30

September 2016 with the jurisdictional PCIT/ CIT 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 PCIT/

CIT 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.

Invalid Declaration

Failure to pay entire amount of tax (including Krishi Kalyan Cess) and penalty on or before 30 November 2016 and/ or any

misrepresentation or suppression of facts or information will render the declaration void.

In cases where the declaration is rendered ineligible due to the reasons mentioned above in section – ‘’What cannot be covered in the declaration’’, then, it shall be deemed as if the declaration was never made and all the provisions of the Act, including penalties and prosecutions, shall apply accordingly. (also refer FAQ No. 9)

Any tax (including Krishi Kalyan Cess) or penalty paid in

pursuance of the declaration shall, however, not be refundable under any circumstances.

Effect of valid declaration Where a valid declaration has been made, the following consequence will follow –

 The amount of undisclosed income declared shall not be included in the total income of the declarant under the Act for any AY;

 The contents of the declaration shall not be admissible in evidence against the declarant in any penalty or prosecution proceedings under the Act and the Wealth-tax Act;

 Assets specified in the declaration shall be exempt from wealth tax;

 Immunity from the Benami Transactions (Prohibition) Act, 1988 subject to transfer of asset to the declarant or his legal representative within the period specified in the Rules;

 Declaration of undisclosed income will not affect the finality of completed

assessments. The declarant will not be entitled to claim re- assessment of any earlier year or revision of any order or any benefit or set off or relief in any appeal or proceedings under the Act in respect of declared

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undisclosed income or any tax, surcharge or penalty paid thereon.

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. (FAQ No. 10) Other Considerations

 In case there is no declaration under the Scheme for

undisclosed income, then such income will be deemed to have been accrued, arise or received in the year in which a notice under sections

142/143(2)/148/153/153A/153 C of the Act is issued. (refer FAQ No. 8)

 At the time of declaration, no inquiry will be conducted by the PCIT/ CIT except inquiring whether any proceeding under section

142/143(2)/148/153/153A/153 C of the Act is pending for such AYs. (refer FAQ No. 12)

 The information in respect of the declaration made will be kept confidential similar to case of returns filed by the taxpayer. (refer FAQ No. 13)

 Subsequent sale of assets disclosed in the form of investment shall be liable to tax under the head “capital gains”. The cost of acquisition for the said purpose would be the fair market value (FMV) as on 1 June, 2016 and the period of holding shall start from the said date. ( refer FAQ No. 1) How does one value

undisclosed assets?

 Where the income chargeable to tax is declared in the form of

4 Registered Valuer means a person registered as a valuer under section 34AB of the Wealth Tax Act, 1957

5 Quoted share or security in relation to share or security means a share or security quoted on any recognized stock

investment in any asset, the same will be valued at its FMV on 1 June 2016.

 FMV shall be determined for various assets as tabulated below:

1. Bullion, jewellery or precious stones;

archaeological

collections, drawings, paintings, sculptures or any work of art; and immovable property

Higher of -

 Cost of acquisition; and

 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 valuer⁴. 2. Shares and Securities

A. In case of share and securities quoted⁵ on any recognised stock exchange–

Higher of –

 Cost of acquisition;

and

 Price as determined in the following manner –

o 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 o Where there is no

trading on 1 June, 2016, the average of the lowest and highest price of exchange with regularity from time to time, where the quotations of such shares or securities are based on current

transaction made in the ordinary course of business.

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 securities⁶ Equity shares

Higher of –

 Cost of acquisition; and

 FMV as on 1 June, 2016 determined by the formula ^{𝐴+𝐵−𝐿}

(𝑃𝐸)×(𝑃𝑉), where:

A= book value of all the assets (other than bullion, jewellery, precious stones, artistic works, shares, securities and immovable

property) as reduced by:

(a) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any, and (b) any amount shown

as asset including the unamortised 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

6 ‘Unquoted share and security’ in relation to share or security means share or security which is not a quoted share or security.

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manner provided in this rule;

L= book value of liabilities, but not including the following amounts, namely:-

(i) the paid-up 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 income-tax 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 thereto;

(v) any amount representing provisions made for meeting liabilities, other than

ascertained liabilities;

(vi) any amount representing

contingent liabilities other than arrears of dividends payable in

7“Balance sheet” in relation to any company means the balance sheet of such company (including the notes annexed thereto and forming part of the accounts) as on 31st day of March, 2016, which has been audited by the auditor of

respect of cumulative preference shares;

PE= total amount of paid up equity share capital as shown in the balance sheet⁷;

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 1^st day of June, 2016, , on the basis of the valuation report obtained by the declarant from a registered valuer.

3. Interest of a person in a partnership firm or in an association of persons (AOP) or a limited liability partnership (LLP) of which he is a member

The net assets of the firm, AOP or LLP on the 1^st 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 the company appointed under the Companies Act, 2013 (18 of 2013) and where the balance sheet as on 31st day of March, 2016 is not audited, the balance sheet (including the notes annexed thereto and forming part of the accounts)

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 (𝐴+𝐵−𝐿), determined in the manner provided under ‘2. Shares

& securities’ above.

4. 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 1^st day of June, 2016.

 Where investment in any asset is partly from an income which has been assessed to tax prior to AY 2017-18, 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 1^st day of June, 2016, the same proportion as the assessed income bears to the total cost of the asset.

(also refer FAQ No. 4)

 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 which has been approved and adopted in the annual general meeting of the shareholders of the company

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on the departmental website a facility will be available. (refer FAQ No. 14)

The takeaways

The Scheme indeed provides a one-time opportunity to declarants to come clean by paying 45% (as tax, cess and penalty) to the government. Any suppression of facts and/ or information may result in the declaration being considered as void. In that event, although the declarant may not be subjected to any penal consequences under the Scheme, the information

submitted may be used by the revenue authorities for assessment/ re-assessment of income under the existing provisions of the Act or/ and Wealth-tax Act. Therefore, declarants should be vigilant and diligently make full and complete disclosure in relation to their undisclosed income or

undisclosed income in the form of investment in any assets in India.

Let’s talk

For a deeper discussion of how this issue might affect your business, please contact:

Tax & Regulatory Services – International Assignment Services

Gautam Mehra, Mumbai +91-22 6689 1154

[email protected] Kuldip Kumar, Gurgaon +91-124 616 9609

[email protected] Sundeep Agarwal, Mumbai +91-22 6119 8438

[email protected] Ravi Jain, Bangaloress +91-80 4079 6024 [email protected]

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For private circulation only

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.

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