APRIL 29, 2015

By Pradip R Shah, CA

BLACK is said to be beautiful and its association with money has fascinated the tax payers throughout the world. However, time is changing very fast and bountiful black money has started becoming painful. A plain reading of the provisions of Black Money Bill will make one realise how much painful it can be.

The much talked about "Black Money" (BM) bill has been placed before the Parliament on 20 th March, 2015 for discussion under the name "The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015" (UFIA).

Looking at the title one may be be led to think that it has implications for those who have income from foreign sources and foreign assets. However, a detailed analysis of it reveals much more than that. An attempt has been made in this article and other parts to follow to explain its implications to individuals, HUF, Partnership Firm, Companies and others.

It should be noted that this analysis is based on the bill as placed before the Parliament. During the course of discussion, amendments may be proposed and accepted by the Government. In this Part, an attempt has been made to explain the basics.

Before understanding the critical aspects of the Bill, it will be necessary to have clear understanding of certain terms and words which will be used frequently.

Relevance of Status under ITA
The first such word is "Non-Resident" (NR). This term is being used both under Income tax Act (ITA) and Foreign Exchange Management Act (FEMA). Definition of this term under ITA and FEMA differs widely.

Second word for which one has to be cautious is "Resident" . Definition of this term under FEMA and ITA also differs. In fact, there is no relation between the two.

Use of both of the terms under UFIA is with reference to the provisions under the ITA and not under FEMA. It means that if someone is NR under FEMA, it does not necessarily mean that he is NR under ITA. Applicability of UFIA will be with reference to status of the assessee under ITA and not FEMA.

Relevance of Citizenship
Another important aspect to be kept in mind is that in India applicability of Income tax is based on physical presence of an individual in the country and not his citizenship. Therefore, one can be a British or US subject, however he can be Resident in India for tax purposes.

An impression prevails amongst many taxpayers that being Person of Indian Origin (PIO) and having foreign citizenship, they become NR under ITA. It is also assumed that having PIO / OCI card one becomes NR. However, this is not correct. An individual holding PIO / OCI card and being citizen of foreign country can be Resident in India under the ITA. In such a case, he will be subject to all the provisions of ITA and UFIA as well. Holding of PIO / OCI does not confer any special tax benefits, either under ITA or UFIA.

Applicability of UFIA to Asset and Income

Generally, Income Tax bears relation with income as tax is levied thereon. However, in this case, tax will be levied on both i.e. asset and income as well. Since the objective of the Bill is to unearth undisclosed assets located outside India, tax is proposed to be levied on asset as well. Had the asset not been covered herein, the objective of taxing undisclosed income of the past years would not have been realised.

Why should one know about UFIA?
Although it is stated that UFIA is applicable to Residents only, however, it should not be forgotten that it will impact those who have become Residents without their knowledge. Millions of Indians have settled outside India and many of them have become citizens of other countries. For various reasons, some of them may be planning to return to India. Many Indians are planning to emigrate and become NR. All of them and others are going to be affected by UFIA. Following types of individuals will be affected immediately or in future by the provisions of UFIA.

a) Resident having Foreign Asset (FA) and / or Foreign Income (FI)
UFIA is specifically meant for such individuals who have not disclosed FA under ITA or not paid IT on FI. UFIA will be applicable to all these individuals w.e.f. Ass. Yr. 2016-17(i.e. FY 2015-16). In such cases, there is no scope for reorganising the financial affairs attracting the provisions of UFIA from day one.

The most critical cases herein will be those who have emigrated between 2 nd October 2014 and 31 st March, 2015 or who were in India for more than 182 days in the FY 2014-15.

Moreover, those who want to migrate in FY 2015-16 will have to ensure that they do not remain present in India for more than 182 days otherwise the harsh provisions UFIA would be applicable.

b) NR who have already become Resident and having FA and / or FI

This covers the cases of Individuals who were NR in the past and have become Resident having FA and FI. As on today, there are large numbers of such cases. UFIA will be applicable to all these individuals w.e.f. Ass. Yr. 2016-17 (i.e. FY 2015-16).

c) Resident but Not Ordinary Resident (RNOR) for Ass. Yr. 2014-15 and 2015-16 and who will become Resident in FY 2015-16 (Ass. Yr. 2016-17) and thereafter

These are transitional cases wherein an Individual has not become Resident but may become in near future. UFIA will be applicable w.e.f. 1 st April, 2015 and thereafter. These are the most delinquent cases as the time for being compliant to UFIA will be very short.

d) NR individuals planning to return to India in FY 2015-16 and thereafter.
In such cases, UFIA will become applicable from future date when they become Resident. In such cases, it will be possible to plan the affairs in such a way that UFIA and ITA can be complied with.

Let us understand some of the important concept of UFIA.

Entities Covered under UFIA

As under ITA, provisions of UFIA are applicable to Individuals, HUF, Partnership Firm, Companies, Association of Person etc. Implications of UFIA in respect of each one of them are different. Here, we shall discuss the same with respect to Individuals only.

Terminology of UFIA

Barring three important terms viz. "Assessee", "Undisclosed Asset Located Outside India" and "Undisclosed Foreign Income and Asset" , definition as provided under Section 2 of ITA is applicable herein.

Assessee

S. 2(1) of UFIA defines it in two parts viz.

a) a person who is RNOR as defined u/s 6(6) of ITA and

b) by whom tax in respect of undisclosed FI and FA is payable under UFIA.

Meaning of the term "person" and "RNOR" will be as defined u/s 2(31) and 6 of ITA respy.

The most interesting part is the term "undisclosed" which has been defined in S. 4 of UFIA. Since it requires detailed analysis, it has been dealt with separately.

Undisclosed Asset Located Outside India (UFALOI)

S. 2(11) of UFIA defines this term as an asset (including financial interest in any entity) located outside India, held by the Assessee in his name or in respect of which he is a beneficial owner, and he has no explanation about the source of investment in such asset or the explanation given by him is in the opinion of the Assessing officer unsatisfactory.

As can be seen, its scope is very wide. It includes all the types of Assets which is located outside India. The term "asset" is very wide & is a subject by itself. It requires detailed analysis more particularly in the context of various forms in which it is held at global level.

It is not necessary that the asset should be registered in the name of the individual. It can be in the name of some other person for which the individual will liable for the tax. This phrase takes care of income derived by an individual as beneficiary of a trust.

As far as requirement of providing explanation about the source of investment is concerned, since the objective of UFIA is to levy tax on undisclosed income of the past years, it becomes necessary to ascertain the same. A resident might have acquired the asset during the period when he was NR wherein tax is not payable under ITA. Hence, the provisions of ITA can not apply to it.

Explanation offered should be to the "satisfaction" of the Assessing Officer [AO]. This is the most challenging task for various reasons. One of the major challenges will be type of document required by the AO for his satisfaction and the one being available in the foreign country. Each country is having a different tax system and tax terminology. Assessees will have tough time herein.

Undisclosed Foreign Income and Asset
This has been defined as total amount of "undisclosed" income of an assessee from a source located outside India and the value of an undisclosed asset located outside India.

This term is in the context of foreign income not disclosed in Income Tax Return filed for Ass. Yr. 2016-17 and onwards. Income derived prior to 1 st April, 2015 might have been credited to bank account or become claim receivable. Thus, such income will form part of FA and will be covered under Undisclosed Asset Located Outside India.

In the next part we shall examine the methodology of computation, levy of tax and other aspects.