Post demonetisation, the Government has passed the Taxation Laws (Second Amendment) Act, 2016 that brings some very important changes to the provisions regarding voluntary disclosure of income.
Firstly, we have a new scheme – Pradhan Mantri Garib Kalyan Yojana – this scheme for voluntary disclosure of income is open till March 31, 2017 and I’ve covered it in detail in this post: Pradhan Mantri Garib Kalyan Yojana – Important Points
Apart from PMGKY, another welcome development is that Section 115BBE which deals with taxation of undisclosed income has been amended. Correspondingly, a new penalty provision u/s 271AAC has been introduced. The effect of the amendment is that now you have an on-demand scheme available throughout the year to voluntarily disclose your undisclosed income – you just have to declare the same in your tax return and pay the appropriate tax.
Now, since till March 31, 2017, both PMGKY and 115BBE windows are open, NRI (or for that matter, a resident) may face a confusion to willing to come clean is whether to go for PMGKY or this scheme – in that regard, please also check a separate post: How should NRI disclose undisclosed income (black money) in India
Let us understand Section 115BBE and Section 271AAC and the resulting implications.
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Section 115BBE and Section 271AAC – Then and now
First, let us look at the wordings of the respective sections – I have emphasized the main changes in the text:
115BBE. (1) Where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D , at the rate of thirty per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).
Following sub-section (1) shall be substituted for the existing sub-section (1) of section 115BBE by the Taxation Laws (Second Amendment) Act, 2016, w.e.f. 1-4-2017:
(1) Where the total income of an assessee,—
(a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or
(b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a),
the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent; and
(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).
Following section 271AAC shall be inserted after section 271AAB by the Taxation Laws (Second Amendment) Act, 2016, w.e.f. 1-4-2017 :
271AAC. (1) The Assessing Officer may, notwithstanding anything contained in this Act other than the provisions of section 271AAB, direct that, in a case where the income determined includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D for any previous year, the assessee shall pay by way of penalty, in addition to tax payable under section 115BBE, a sum computed at the rate of ten per cent of the tax payable under clause (i) of sub-section (1) of section 115BBE:
Provided that no penalty shall be levied in respect of income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D to the extent such income has been included by the assessee in the return of income furnished under section 139 and the tax in accordance with the provisions of clause (i) of sub-section (1) of section 115BBE has been paid on or before the end of the relevant previous year.
(2) No penalty under the provisions of section 270A shall be imposed upon the assessee in respect of the income referred to in sub-section (1).
(3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.
Main points of new Section 115BBE and Section 271AAC
So, if we look at the earlier and revised definition of Section 115BBE and the new Section 271AAC, following important changes can be noted:
- Scheme is applicable to resident as well as NRI, PIO etc. Also, it applies to all types of assessees like HUF, trust etc.
- The scheme comes into effect from 01/04/2017 – i.e. from AY 2017-18 onwards.
- Apart from a situation where the Assessing Officer (AO) finding out undisclosed income in any assessment (Also read: Gift by NRI to Resident: Also be aware of Section 68 of ITA), new Section 115BBE now gives you the opportunity to come forward and declare your undisclosed income of past years in a tax return filed u/s 139
- The tax return in which a disclosure can be made is only the one made u/s 139 – this means, original/revised/belated all returns qualify. However, a return filed in response to a tax notice received u/s 142 or 148 will NOT qualify for the voluntary disclosure.
- The erstwhile tax rate of 30% has been increased to 60% – this has been done to ensure that people do not pass of undisclosed income of past years in tax return and get off with a reduced 30% rate.
- Apart from this, there is a cess of 25% which takes the effective rate of tax to 77.25%
- If you disclose in tax return but do not pay the tax by March 31 of the respective financial year (presumably by way of advance tax), there is a penalty of 10% – this takes the effective tax rate to 83.25%. The same rate will also apply if income is found by AO himself in assessment proceedings.
- If undisclosed income is detected in a search by Income Tax Department (ITD), effective rate will be 87.25%/97.25%107.25%/167.25% depending upon the penalty
- Erstwhile Section 270A which applied to under-reported/misreported income has virtually become redundant in view of these tax changes.
- Section 115BBE applies to all assets – be it cash, deposit, property, jewellery etc.
- Section 115BBE provisions also apply to RED MONEY (i.e. proceeds of crime)
- Unlike PMGKY which offers certain immunity from prosecution etc. under Income Tax Act, there is NO such benefit in case a voluntary disclosure is made in Section 115BBE.
- Undisclosed foreign income chargeable to tax under Black Money Act cannot be declared u/s 115BBE (also read: Black Money Act: An Analysis)
- For assessment years earlier to AY 2017-18, the erstwhile old Section 115BBE read with Section 270A will be applicable – in such a case, effective tax rate will be in the range of 45-90%
My views on this Scheme
- The ITD will release the utilities for filing tax returns around end April 2017 – hopefully, there should be a separate field for declaration of undisclosed income u/s 115BBE.
- A specific situation where the assessee pays the tax for undisclosed income by March 31 and before filing tax return, he receives a notice u/s 142 – in such a situation, will the effective tax rate be 77.25% or 83.25%. In this context, it may also be noted that the penalty u/s 271AAC is not mandatory – if assessee shows a reasonable cause, it can be dropped. In view of this, in my view, effective rate in such cases should be 77.25% however ITD should provide a clarification.
- No immunity for declaration of crime money means that it is not a proper amnesty scheme. People having such income may want to be doubly precautious if they want to use this window or not, as it can lead to implications under other Acts, which are far more severe and include imprisonment and confiscation of assets.
- The only difference between self disclosure by assessee and detection by ITD (otherwise than by search etc.) is 6% of the total income – in my view, it is not very attractive given the fact that there is no promise of confidentiality/immunity. I am not sure on how many people will come ahead and disclose under this scheme.
Hope the post has been of service to you. Please share your thoughts/feedback in “comments” section below.