Indian Government cracks down on Undisclosed Foreign Income and Assets

11 May 2015

The Government of Indian Prime Minister, Mr Narendra Modi, has introduced a bill to the Indian Parliament which proposes to tax undisclosed foreign income and assets of Indian residents at 30 per cent, with substantial penalties and/or imprisonment for non-compliance.

The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill 2015 aims to clampdown on ‘black money’ – including any financial interest in any foreign entity – at the flat rate of 30 per cent.

If one does not comply up to three times the tax will become due – meaning 90 per cent of the undisclosed income or value of the asset can be imposed as penalties; this is in addition to the 30 per cent flat rate tax.  Further, non-intentional failure to file an accurate declaration of foreign income could lead to a fine of INR 1 million (just over £10,000).  The proposed Bill is expected to come into effect in April 2016 and shall apply to all persons who are both resident and/or ordinarily resident in India with effect from Financial Year 2015-16.  Please note the proposed law does not apply to Non-Resident Indians (NRIs).

The law provides for a de minimis exemption of INR500,000 so foreign bank accounts that do not exceed this amount need not be declared. Interestingly the proposed legislation also amends the Prevention of Money Laundering Act 2002 to include tax evasion for the first time as a money laundering offence.

Under the current proposed regulations the penalties for non-compliance will not only apply to legal owners but also be applicable to beneficial owners of undeclared foreign assets, as Indian beneficiaries of trusts including offshore trusts and companies. It is unclear what will be the disclosure duties of Indian beneficiaries of foreign discretionary trusts as the proposed law is silent on the matter.

The understanding is that the new proposed law states that any undisclosed foreign income and assets from a source located outside India such as Swiss Bank accounts, which has not been disclosed by the taxpayer in the return of income filed under the Indian Income-tax Act, 1961 is considered to be ‘Undisclosed Foreign Income’.

There is a definition of “Undisclosed asset located outside India” which means:

1.    any asset (including financial interest in any entity) located outside India,
2.    held by an Indian tax resident or in respect of which he or she is a beneficial owner, and
3.    He or she has no explanation about the source of investment in such asset or the explanation given by him or her is unsatisfactory.

The Bill proposes to impose tax at the rate of 30 per cent on the undisclosed foreign income and the fair market value of undisclosed foreign assets. It is also proposed that no exemption or deduction or set off or any carrying forward will be allowed in respect of such income or assets.

The proposed law provides for strong penalties for the various offences.  This includes a penalty for:

1.    undisclosed foreign income and assets at three times the amount of tax computed
2.    failure to file returns in respect of foreign income and assets
3.    failure to furnish information or for furnishing inaccurate particulars in a return

In addition to the above, the law also provides for prosecution for various offences punishable by imprisonment.

Grace Period for Compliance

The proposed law also permits a grace period for those affected to comply without been subject prosecution or financial penalty in respect of undisclosed foreign income and assets subject to certain conditions.  Those who take up the grace period available will have to pay the new 30 per cent offshore tax plus an additional 30 per cent by way of penalty.

Pindoria Solicitors have been contacted by many clients about the proposed law. If you wish to discuss the grace period or how to properly and legitimately deal with your undisclosed foreign assets and income please contact Pindoria Solicitors as soon as possible on a completely confidential basis.  We are developing legal and compliant solutions for Indian tax residents who currently have undisclosed foreign assets and income.

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