Declarants cannot pay tax from undeclared income, govt clarifies the issue raised by Moneylife
Union Revenue Secretary Hasmukh Adhia in a series of tweets said, "...based on our Q&A an impression was created that the effective rate of IDS would now be 31%. We have clarified this point in the fourth set of Q&A, which is being placed on the website today. It is clarified that the effective rate of tax plus penalty plus cess remains at 45%, in case of Income Declaration Scheme." However, the question as to how the government will determine whether the declarant has used other undisclosed income for paying tax under the Scheme to make the effective tax rate at 31% instead of 45% as envisaged, remains open. Of course, it would take only a reckless person to try to pay the tax also from black money since the government has clarified.
In a press release the CBDT
says, "Queries have been received from various stakeholders whether the payment under the Scheme can be made out of undisclosed income without including the same in the income declared, thereby bringing down the effective rate of tax, surcharge and penalty payable under the Scheme to around 31%. The fourth set of FAQs seek to set this issue at rest."
"It is clarified that the intent of the clarification issued vide Question No5 of Circular No25 of 2016 was limited to conduct of enquiry by the Department. It in no way intends to modify or alter the rate of tax, surcharge and penalty payable under the Scheme, which have been clearly specified in the Scheme itself. Sections 184 & 185 of the Finance Act, 2016 unambigously provide for payment of tax, surcharge and penalty at the rate of 45% of undisclosed income.
This is illustrated by the following example—
In a case a person declares Rs100 lakh as undisclosed income, being the fair market value of undisclosed immovable property as on 1 June 2016 and pays tax, surcharge and penalty or Rs45 lakh (Rs30 lakh + Rs7.5 lakh + Rs7.5 lakh) on the same out of his other undisclosed income. In this case the declarant will not get any immunity under the Scheme in respect of undisclosed income of Rs45 lakh utilized for payment of tax, surcharge and penalty but not included in the declaration filed under the Scheme. To get immunity under the Scheme in respect of the entire undisclosed income of Rs145 lakh (Rs100 lakh being undisclosed income represented by immovable property and Rs45 lakh being the payment made from undisclosed income) and pay tax, surcharge and penalty under the Scheme amounting to Rs65.25 lakh i.e., 45% of Rs145 lakh,” the release says.
Earlier, several chartered accounts (CAs) highlighted the gap (or lack of sufficient clarification) in tax charged (45%) and how it can be mis-used to make the effective rate as low as 31%, under the IDS initiative.
Bombay Chartered Accountants’ Society, Ahmedabad Chartered Accountants’ Association, Karnataka State Chartered Accountants’ Association and Chamber of Tax Consultants, in a letter to Hasmukh Adhia, Revenue Secretary have highlighted different interpretations of the reply given to FAQ No5 in Circular No25/2016 issued on 30 June 2016.
The core of the controversy is, nowhere does the government circular or the FAQs (which anyway cannot be used as a reliable source at any legal forum), clarify as to what should be the source of the tax paid on the income disclosed. Under IDS, the effective tax is 45%. A person declaring an income of Rs10 lakh can pay Rs4.5 lakh or 45% as tax, including 30% basic tax, 7.5% as Krishi Kalyan Cess and 7.5% of the undisclosed income as penalty. But what would be the source of this Rs4.5 lakh? Could this be from black money or should it be from white money only? Common sense, dictates that it should be from white money.
The latest clarification from the CBDT states that the declarant will not get any immunity under the Scheme in respect of undisclosed income of Rs45 lakh utilised for payment of tax. However, for this the CBDT and I-T department has to establish that the declarant has used undisclosed funds for paying tax under the Scheme.