Earlier this year, Government of India introduced the Income Declaration Scheme, 2016 (Scheme) in the Finance Act, 2016.
The Government has now issued a circular on 20 May 2016 clarifying certain important provisions relating to the Scheme. The Income Declaration Scheme Rules, 2016 (Rules) have also been notified vide notification dated 19 May 2016. The Rules provide methods for valuation of various assets such as quoted and unquoted shares / securities, immoveable property, jewellery, works of art, etc. As per the Rules, the value of the assets such as shares, immoveable property, bullion, etc. which is required to be declared would be the higher of the 'cost of acquisition' or the 'fair market value' (determined in the prescribed manner) as on 1 June 2016.
The Government has also issued detailed clarifications in the form of questions and answers (Q&As) with a view to clarify doubts surrounding the Scheme which contain clarifications to 14 issues. While a link to this circular is provided below, some of the important questions dealt with in the Q&As are summarised below:
- Can a declaration be made of undisclosed income which have been assessed to tax and the case is pending before an appellate authority?
No. This is due to the fact that the declarant is not entitled to re-open any assessment or reassessment made under the Income-tax Act, 1961 (Income-tax Act). Therefore, he is not entitled to avail the tax compliance in respect of those assets. However, such a declarant can voluntarily declare other undisclosed income for the said assessment year which has not been assessed under the Income-tax Act.
- Where an undisclosed income in the form of investment in asset is declared under the Scheme and tax, surcharge and penalty is paid on the fair market value of the asset as on 1 June 2016, then will the declarant be liable for capital gains on sale of such asset in the future? If yes, then how will the capital gains in such case be computed?
Yes, the declarant would be liable for capital gains under the Income-tax Act on sale of such assets in future. As per the current provisions of the Income-tax Act, capital gains are computed by deducting cost of acquisition from the sale price. However, since the asset would be taxed at its fair market value, the cost of acquisition for the purpose of capital gains would be the fair market value as on 1 June 2016 and the period of holding would start from the said date (i.e. the date of determination of fair market value for the purposes of the Scheme).
- As per the Scheme, declaration cannot be made where an undisclosed asset has been acquired during any previous year relevant to an assessment year for which a notice under the specified sections of the Income-tax Act has been issued. If the notice has been issued but not served on the declarant, then how will he come to know whether the notice has been issued?
The declarant would not be eligible for declaration under the Scheme where the undisclosed income relates to the assessment year where a notice under a specified section of the Income-tax Act has been issued and served on the declarant on or before 31 May 2016. The declarant is required to file a declaration regarding receipt of any such notice in Form-1.
- Whether at the time of declaration under the Scheme, will the Principal Commissioner / Commissioner do any enquiry in respect of the declaration made?
After the declaration is made, the Principal Commissioner / Commissioner would enquire whether any proceeding (under specified sections of the Income-tax Act) is pending for the assessment year for which the declaration has been made. Apart from this, no other enquiry would be conducted by him at the time of declaration.
- What are the consequences if no declaration under the Scheme is made in respect of undisclosed income prior to the commencement of the Scheme?
As per section 197(c) of the Finance Act, 2016, where any income has accrued or arisen or received or any asset has been acquired out of such income prior to the commencement of the Scheme and no declaration is made under the Scheme, then such income would be deemed to have been accrued, arisen or received or the value of the asset acquired out of such income would be deemed to have been acquired in the year in which a notice under specified section of the Income-tax Act is issued by the assessing officer, and accordingly, the provisions of the Income-tax Act would apply.
- Will the declarations made under the Scheme be kept confidential?
The Scheme incorporates the provisions of section 138 of the Income-tax Act relating to disclosure of information in respect of taxpayer. Therefore, the information in respect of declaration made is confidential as in case of return of income filed by the taxpayer.
The Q&As issued by the Government are quite helpful and address some of the pertinent and practical questions concerning the Scheme. The Government and the income tax department are making all out efforts for the success of this Scheme. Based on the feedback to the Scheme and Rules, the Government may consider issuing further clarifications / assurances to the taxpayers.
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