In 2016, the Panama Papers took the world by storm. The Panama papers were essentially leaked documents that contained names and financial information of celebrities, business people, government officials, etc. who had offshore entities for the purpose of evading taxes. And out of the thousands of names released, 500 were Indians. These 500 Indians were said to have properties around Rs. 20,078 crores illegally.
Banking offshore, and investing in foreign assets is not illegal, but hiding it to evade taxes is akin to a crime. Sometimes, the money is hidden not for evading taxes, but because it is a result of unscrupulous activities. This is why governments all over the world are extra cautious when it comes to offshore accounts and offshore banking.
In order to stay on the right side of the law and not attract undue penalties and punishments, it is essential that you report your foreign assets in your income tax returns.
Let’s have a look at what India has done in this regard.
Residential Status
Before you start your filing procedures, you need to first determine if you need to disclose your foreign assets at all in the first place. This is done based on the residential status.
Resident and Ordinarily Resident (ROR) have to report foreign assets.
Non-Residents and Resident but Not Ordinarily residents (RNOR) are exempted from such disclosure of foreign assets. The foreign income of such individuals is not taxable in India unless it is derived from a business or a profession controlled by India.
Queries on Disclosure Requirements
What to disclose?
According to Section 139 of the Income Tax Act, any resident Indian who has an asset located outside India, or has signing authority for an account located outside India, needs to file a return mandatorily.
So, if you are a resident in India and have any equity/debt interest in an entity in the US, or if you have received income from any source outside India, you are required to disclose the details of the same in your IT returns. Disclosure is required if the asset is held for even a single day in the relevant accounting period. If your income is below the exemption limit, you will still have to file your return and divulge the details of the foreign assets. It needs to be reported in the relevant ITR forms (ITR-2, ITR-3, ITR-5, ITR-6, ITR-7). Exhaustive details need to be furnished in Schedule FA of the ITR.
When to disclose?
For assets held in the US, the “relevant accounting period” to be considered is the calendar year since the US follows the calendar year for the purpose of closing accounts and tax filing. For example –
- If you bought assets in the US in January 2022, according to the Indian financial year, it will come under FY 2021-22. But as per recent changes, they need not be reported at the time of filing ITR for 2021-22. Since the US follows the calendar year for the purpose of filing, it will need to be reported only in ITR for FY 2022-23.
- If you bought assets in the US in April 2022, they will need to be reported in the ITR for FY 2022-23.
How to disclose?
The reporting has to be done in terms of INR. For the sake of conversion, the rate of exchange to be followed is the Telegraphic Transfer Buying Rate of the foreign currency as hosted by the State Bank of India on a quarterly basis. The exchange rate to be chosen can be on the date of the peak balance in the foreign account, or on the date of making the investment.
Schedule FA has a total of 10 tables. It is not necessary that all tables will be applicable to all taxpayers. So, it is advised that you go through all the tables and fill only the ones relevant and applicable to you.
- Table A1 is concerned with Foreign Depository Accounts such as Savings or Time deposit accounts with banks. Details such as the name of the financial institution, account number, account opening date, peak balance, interest credited during the accounting period, and the closing balance must be reported in INR.
- Table A2 is concerned with foreign Custodial Accounts like PF and Demat accounts for financial assets like bonds. Details required to be furnished are similar to the previous table like peak balance, and closing balance.
- Table A3 is for Foreign Equity and Debt interest. If you have made investments in shares, securities, or debt instruments in any foreign company, then the details like the initial value of the investment, name of the entity, address of the entity, nature of the entity (whether it is an LLP, listed or unlisted, etc), income earned from proceeds of sale must be disclosed here.
- Table A4 is for Foreign Cash Value Insurance Contract or an Annuity Contract like existing life insurance or medical contracts must be reported in this table. It needs you to disclose the cash value or the surrender value of the contract at the end of the accounting period in INR.
- Table B is to disclose details of financial interest in any entity outside India. This will be applicable to you if you are a partner in an LLP outside India, or if you have voting power in any company incorporated outside India.
- Table C is to disclose details relating to immovable property outside India. This will apply if you own a house or any building in a foreign country, and you will have to reveal the value of the investment at cost.
- Table D is for other capital assets outside India like jewellery (bullion) or motor vehicles (boats, yachts, aircraft), or artwork like paintings. Stocks must not be reported here.
- Table E is for reporting accounts where you are a signature authority and whose details have not been furnished in any of the aforementioned tables.
- Table F is for disclosing details pertaining to a trust created outside India wherein you are a trustee, a beneficiary, or a settlor.
- Table G is for any other income that is not reportable under any of the previous tables.
Furnishing details in Schedule FA is not enough. They must also be furnished in the relevant ITR forms even if it means duplication of information. You may be able to claim a credit if you have paid taxes in the foreign country (US) as well.
The entire purpose of this extensive exercise is to make sure that individuals, especially HNIs do not escape the tax net and pay their dues. This will make sure that the Government also gets its fair share of the revenue.
Penalties and Punishments for not disclosing information regarding foreign assets and income
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act were passed in 2015. This Act, as the name suggests, was brought into effect mainly to deal with the problem of Black Money that was plaguing the nation. It was passed to bring the undisclosed amount back to the country. This Act is applicable to all residents in India.
As per this Act, any and all undisclosed income will be taxed at a flat rate of 30%. Exemptions, deductions, and setting-off of any carry forward losses are not admissible.
The penalty for non-disclosure of foreign assets itself is 3x the amount of tax payable thereon i.e. 90%. This is in addition to the 30% tax that is to be paid.
The penalty for failure to furnish the return concerning foreign assets and income is Rs. 10 lacs.
The penalty for furnishing inaccurate details is also Rs. 10 lacs.
Punishment for failure to furnish returns in relation to foreign assets and income is rigorous imprisonment for a term which is not less than 6 months and extendable up to 7 years with a fine.
Punishment for a willful attempt to evade tax is rigorous imprisonment of not less than 3 years and extendable up to 10 years with a fine.
A one-time compliance opportunity of a limited time period is given to those who have undisclosed foreign assets. A declaration can be filed with the authorities within that time period. This is to be followed by the payment of tax at 30% and a penalty at an equal rate. There is no immunity from penalty, but at the same time, the individuals will not be prosecuted under the more stringent provisions.
Those with minor balances in their foreign accounts (up to Rs. 5 lacs at any point in the year) that may not have been reported due to oversight will not be penalized or prosecuted.
It is essential that you go through the ITR forms and schedules diligently with the help of a CFO consulting service so that you are not subject to any punitive consequences in the future due to non-reporting/underreporting.