Income Declaration Scheme 2016
Central
Board of Direct Taxes on 2nd September, 2016 has issued a circular
regarding
The Income Declaration Scheme 2016.
The Income Declaration Scheme, 2016 (the Scheme) provides an
opportunity to persons who have not paid full taxes in the past to come forward
and declare their undisclosed income and assets.
The Scheme has come into effect from 01.06.2016
and is open for declarations up to 30.09.2016.
Boosting liquidity of taxpayers:
Under IDS an option has been provided for distress sale of
undisclosed asset for payment of tax under IDS. For the purpose of providing a
window for sale of assets for payment of tax dates of declaration and payment
have been kept apart.
Keeping in mind the liquidity considerations
for payment of tax under IDS, the Central Government has provided the
flexibility for making payments in three installments as follows:
•25% payable by 30.11.2016
•25% payable by 31.03.2017
•50% payable by 30.09.2017
Details of Instalments of tax
on undisclosed income to be paid under IDS, 2016
Comparative advantage of IDS over normal Income Tax
Returns:
Case I: If a
co. has concealed its income during 1st qtr of PY 2015-16 amounting to Rs.
1,10,00,000 & decides to reflect this income in its books before filing ITR
as on 30th Sept.2016.
Ans:
(A) Calculation Of Effective Tax Rate under normal ITR to
be filed on 30th Sept. 2016 assuming above Rs.1 crore
Normal Tax rate for an Indian Co.
|
30%
|
Surcharge @ 12%
|
3.6%
|
|
33.6%
|
Add:
Education Cess @ 3%
|
1.01%
|
Normal Effective Tax Rate
|
34.61%
|
Add:
Interest u/s 234B for 15.5 months
|
5.36%
|
Total Effective Tax Rate
|
39.97%
|
Assumptions:
1. Tax will be paid by the
co. on 30th Sept, 2016.
2. Undisclosed business income
relates to 1st Qtr of PY 2015-16.
(B)
Effective Tax Rate payable under
Income Declaration Scheme, 2016.
As per
IDS, 2016, any person making disclosure of concealed income shall be liable to
pay tax @ 45% (incl. of all interest & Taxes). Even this 45% tax can be
paid in 3 installments details of which are provided in fig.1 above.
Therefore,
as on 30th Sept. 2016, effective rate of tax under IDS, 2016 will be
discounted value of 45% tax to be paid in 3 installments.
Calculation of Effective tax rate under
IDS, 2016 as on 30th Sept. 2016 :
Date of Installment
|
Proportion of Tax to be paid
{a}
|
Discounting Factor as on 30th
Sept , 2016
{b}
|
PV of Tax rate under IDS
[45*(a)/(b)]
|
30/11/2016
|
25%
|
1.02
|
11.03 %
|
31/03/2017
|
25%
|
1.06
|
10.60 %
|
30/09/2016
|
50%
|
1.13
|
19.97 %
|
Effective tax Rate to be
paid under IDS, 2016 as on 30th Sept. 2016
|
41.59%
|
Assumptions:
1. Discounting rate has been taken as 1%
which is equal to the rate of interest u/s 234B.
Conclusion:
Now,
on comparing effective tax rate under normal ITR & IDS, 2016, it is
observed that effective tax rate under normal ITR is only marginally lower than
effective tax rate under IDS,2016. Therefore, some may argue that why pay tax
under IDS, 2016.
Yet,
the IDS, 2016 is advantageous as there may be scrutiny of return filed under
under normal system where higher income has been disclosed in ITR. Also , there
are advantages where the income to be disclosed related to definite dates of
the past for which proceedings under section 148 of Income tax Act, 1961 may be
initiated where tax , interest , penalties can be levied & prosecution
proceedings can be initiated.
Case II: If a
Co. has concealed or furnished inaccurate particulars of income in ITR filed,
& assessment proceedings has been initiated by Assessing officer,
Commissioner (Appeals) or the Commissioner
:
Assumptions:
1.
Co. has
concealed the income relating to 1st Qtr. Of PY 2014-15.
2.
Assessment
proceedings in respect of PY 2014-15 has not been started against the co.
(A)
Calculation Of Effective Tax Rate
under normal ITR to be filed on 30th Sept. 2016 where minimum
penalty has been levied by AO.
Normal Tax rate for an Indian Co.
|
30%
|
Surcharge @ 12%
|
3.6%
|
|
33.6%
|
Add:
Education Cess @ 3%
|
1.01%
|
Normal Effective Tax Rate
|
34.61%
|
Add:
Interest u/s 234B for 27.5 months
|
9.52%
|
Total Effective Tax Rate
|
44.13%
|
Add: Minimum Penalty u/s 271(c ) @ 100% of tax
|
44.13%
|
Total
Effective tax rate ( minimum penalty)
|
88.26%
|
Similarly, Total Effective tax rate
where maximum penalty is levied @ 300% of tax amount by AO will be 176.52% ( 44.13% + Penalty @ 300% of Tax).
(B)
Effective Tax Rate under IDS, 2016
will be 41.59% as on 30th Sept. 2016.
Conclusion: According to above calculations, IDS
tax rate is much lower than the rate at which govt. recovers tax in case where
assessment proceedings has been initiated against the assessee. Further, IDS, 2016 provides an immunity against
proceedings of any kind in relation to income as disclosed under IDS,
2016.
To resolve the queries of stakeholders six set of circular (
FAQs) have been issued.
ISSUES RULES
Additional benefit in the form of Lower assessable value
for declaration of registered immovable property:
IDS 2016 grants an option to the declarant to
declare registered immovable property at
Indexed stamp duty value instead of FMV as on 1st June 2016.
This
option is available only if the immovable property is registered with state
govt.
For example. Mr. A purchased a property in 2004-05
for Rs. 10,00,000. The consideration for
this property was paid completely out of undisclosed sources of income. Fair Market Value of such property as on 1st
June 2016 is Rs 40,00,000. Now, Mr. A wants to declare this property under IDS,
2016. What will be the assessable value under normal circumstances if such
property comes under the scanner of taxman or in case of IDS, 2016?
Ans: Registered value of property 10,00,000
Indexed registered
cost of acquisition 22,52,000
FMV as on 1st
June 2016 40,00,000
Case (a) Tax payable under normal assessment
i.e. through notice served by income tax deptt. &
further proceedings :
In case of
proceedings under normal system against undisclosed property, the assessee
shall be liable to pay tax on FMV of
the property along with interest & penalties.
Tax
Liability of assessee under normal assessment proceedings :
Value of Property/Income to be declared
|
40,00,000
|
Maximum Tax rate for an Individual
|
30%
|
Add:
Education Cess @ 3%
|
.9%
|
Normal Effective Tax Rate
|
30.9%
|
Tax Due
|
12,36,000
|
Add:
Interest @ 1% u/s 234B for 144 months
|
17,79,840
|
Add: Minimum
Penalty @ 100% u/s 271(c)
|
12,36,000
|
Total Tax to be paid
|
42,51,840
|
Case (b) Tax liability under IDS
if a registered immovable property is declared:
Computation of registered Cost
of acquisition :
Registered
Cost of Acquisition
|
10,00,000
|
Period
of acquisition
|
2004-05
|
Cost
Inflation index for 2004-05
|
480
|
Cost
Inflation index for 2016-17
|
1125
|
Indexed registered cost of
acquisition
|
23,43,750
|
Computation
of tax payable under IDS,2016
Assessable value under IDS, 2016
|
Indexed
registered cost of acquisition
|
23,43,750
|
Tax Rate under IDS
|
45%
|
Total Tax under IDS
|
10,54,687
|
Under IDS, assessee can pay tax on registered cost of acquisition
which in most cases is lower than FMV as on 1.06.2016.
Therefore, effectively the assessee is paying up less tax under
IDS by declaring immovable property than under normal assessment procedures.
Situations where declaration under IDS, 2016 cannot be
made:
a. Where a notice under sec 142 or section 143(2) or section 148
or section 153A or section 153C of Income Tax act has been issued in respect of
such AY & proceedings are pending before tax authorities.
b. Where a search has been conducted u/s 132 or requisition has
been made u/s 132A in a PY & time limit for issuance of notice for relevant
AY has not expired.
c. Cases covered under Black Money (Undisclosed Foreign Income &
Assets) & Imposition of Tax Act, 2015.
Declare , come clean, avoid penalties & harassment for
notices issued after 31st May,2016
As per the
FAQ's issued by the govt., If an assessee receives a notice under the aforesaid
sections after June 1 , 2016, then assessee has an option to go through the
proceedings of Income Tax deptt. or can simply declare the undisclosed income
,if any & safeguard itself from the
penalties & proceedings under the Income tax Act.
For Example:
The
sale for FY 2011-12 was Rs. 80,00,000 but in order to not come under the
scanner of taxman , the cash sale of Rs. 25,00,000 was concealed. As a result
only, Rs 55,00,000 was disclosed as sales In the FS. Therefore, Inventory is
appearing at a higher value in the books than the actual value. Then , to
offset the effect of increase in stock, trade payable were increased by the
same amount & profit was reduced by the same amount. Now, assessee has received
a notice relating to the above AY on 20th June, 2016. Advice, whether the
assessee should opt for IDS or not.
Ans: Since,
assessee has received notice on 20th June 2016, assessee is eligible to make a
declaration under IDS,2016 & safeguard itself from adverse consequences
that might follow the notice.
Alternative 1: Assessee is confident that he can
prove the officer that there is no such undisclosed income as per the notice
received.
In the above situation the assessee shall comply with the legal
proceedings as per the rules of the deptt. Assessee shall prove innocence
before the deptt. & will be better off without any declaration under IDS,
2016.
Alternative 2: Assessee is confident that he will
not be able to defend his case and adverse consequences will follow.
In the above situation assessee shall opt for IDS since he will be
liable to pay tax @ 45% on his undisclosed income and such declaration will
provide immunity and act as a safeguard to the assessee against any proceedings
relating to the income so disclosed.
Conclusion:
Any notice
served after June 1, 2016 provides an additional advantage in the form of an
option whether to declare undisclosed income under IDS or to undergo the
assessment proceedings.
Therefore
in all those cases where the assessee foresees that chances of favorable
decision are too bleak, this scheme will act as a savior and will immune such
assessee against any penalty and prosecution proceedings. Thus IDS, 2016
provides a last chance to all such assesses to come clean and redeem themselves
of black money.
Our View
IDS is a
step taken by the government to allow taxpayers a final chance to declare
undisclosed income earned inside India or assets acquired from such income and
enjoy their remaining money with full liberty. The government has started many
comprehensive data mining programmes in association with banks, registrars for
property transactions and financial institutions for tracking the defaulting
taxpayers. Therefore all the taxpayers should review their past filings, non
compliances and avail this GOLDEN opportunity to complete and achieve peace of
mind.
Contributed by : CA FINALISTS : TANVEER ALAM & PAWAN DUA (CA ARTICLES AT SANDEEP AHUJA & CO)
