Monday, September 12, 2016

Income Declaration Scheme 2016- Whether beneficial to declarants & How

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.
(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.
Surcharge @ 12%

Add: Education Cess @ 3%
Normal Effective Tax Rate
Add: Interest u/s 234B for 15.5 months
Total Effective Tax Rate

 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
Discounting Factor as on 30th Sept , 2016
PV of Tax rate under IDS
11.03 %
10.60 %
19.97 %
Effective tax Rate to be paid under IDS, 2016 as on 30th Sept. 2016

1.      Discounting rate has been taken as 1% which is equal to the rate of interest u/s 234B.

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
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.
Surcharge @ 12%

Add: Education Cess @ 3%
Normal Effective Tax Rate
Add: Interest u/s 234B for 27.5 months
Total Effective Tax Rate
Add: Minimum Penalty u/s 271(c ) @ 100% of tax
Total Effective tax rate ( minimum penalty)

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
Maximum Tax rate for an Individual
Add: Education Cess @ 3%
Normal Effective Tax Rate
Tax Due
Add: Interest @ 1%  u/s 234B for 144 months
Add: Minimum Penalty @ 100% u/s 271(c)
Total Tax to be paid

                Case (b) Tax liability under IDS if a registered immovable property is declared:
                Computation of registered Cost of acquisition :
Registered Cost of Acquisition
Period of acquisition
Cost Inflation index for 2004-05
Cost Inflation index for 2016-17

Indexed registered cost of acquisition
                 Computation of tax payable under IDS,2016
Assessable value under IDS, 2016
Indexed registered cost of acquisition
Tax Rate under IDS
Total Tax under IDS
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.
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.