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12 July 2016
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| IDS(The Total Investment & Insurance Solutions) |
The union government has
launched its ambitious Income Declaration Scheme, 2016 (the scheme or IDS) as
Chapter IX of the Finance Act, 2016. The scheme is effective from 1st June to
30 September 2016. However, several chartered accounts (CAs) have 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. The Total Investment & Insurance Solutions
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 Total Investment & Insurance Solutions
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. However, IDS rules and FAQ do not clarify that.
In fact, the FAQ opens the door to misuse.
To take forward the above example, what if a
person has another Rs5 lakh as undisclosed money over and above the Rs10 lakh
he is declaring? A person with an undisclosed income of Rs15 lakh can declare
Rs10 lakh under the scheme and pay 45% tax from the balance Rs5 lakh of
undisclosed funds. This would mean that he would be able to convert Rs14.5 lakh
of his black money into white and pay Rs4.5 lakh tax on it, effectively
bringing his tax rate under IDS down to 31%. This makes a mockery of the IDS
scheme and the genuine taxpayer, who is paying tax at 30.9% year after year.
The black money holder would be paying the same rate of tax after avoiding such
payment for years. Here is an illustration given by the CA Associations to the
Finance Ministry...
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| Illustration(The Total Investment & Insurance Solutions) |
Is this the intention of
the government? Certainly not, but the FAQ issued by the government opens the
door to precisely this. See this Q&A issued in Circular No. 25/2016 dated
30 June 2016… The Total Investment & Insurance Solutions
“Question
No. 5: Where a valid declaration is
made after making valuation as per the provisions of the Scheme, read with IDS
Rules and tax, surcharge & penalty as specified in the Scheme have been
paid, whether the department will make any enquiry in respect of sources of
income,payment of tax,
surcharge and penalty? (emphasis added) The
Total Investment & Insurance Solutions
Answer: No.”
If the source of tax
will not be questioned, it is easy for the declarer to game the system as
described above. Some CAs are apparently already advising clients to take this
route of including even the 45% tax when they declare undisclosed income. The Total
Investment & Insurance Solutions
The associations says, "As a result of
this FAQ and the reply provided, at various forums, an interpretation has been
discussed that the effective rate of tax in such cases could work out to 31%
instead of 45%."
According to the letter
sent by the associations of CAs, even senior officers from the Income-tax
department are not clear about this issue and are giving different replies.
"The problem that is caused on account of this confusion is that different
people are providing differing advice to potential declarants. Considering the
fact this is an extremely important issue and goes to the very heart of the
IDS, there is an urgent need to clarify whether the view that is being
advocated by some as illustrated above is correct. The reply to FAQ No. 5 in
Circular No. 25 mentioned above needs to be either modified or further
clarified with the help of an example," the letter says. The Total
Investment & Insurance Solutions
The associations have
also requested the Finance Ministry to issue a clarification on this ambiguity
at the earliest. The Total Investment & Insurance Solutions
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