All You Wanted to Know About Income Declaration Scheme 2016

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29 June 2016 

Keen to unearth black money, the Indian government has unveiled a new scheme for domestic taxpayers in a limited period compliance window to declare their undisclosed income whether in the form of investment in assets in India or otherwise, and clear up their past tax transgressions. Such people would have to pay a tax of 45%, including 30% basic tax, 7.5% as Krishi Kalyan Cess and 7.5% of the undisclosed income as penalty.

The Income Declaration Scheme, 2016 (the Scheme) has been introduced as Chapter IX of the Finance Act, 2016. The Scheme is effective from 1st June to 30 September 2016. 

Here are answers to some questions that a taxpayer may have about the scheme

Question: 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?

Answer: Yes, the declarant will be liable for capital gains under the Income-tax Act on sale of such asset in future. As per the current provisions of the Income-tax Act, the capital gains is computed by deducting cost of acquisition from the sale price. However, since the asset will be taxed at its fair market value the cost of acquisition for the purpose of Capital Gains shall be the fair market value as on 01.06.2016 and the period of holding shall start from the said date (i.e. the date of determination of fair market value for the purposes of the Scheme).

Question: Where a notice under section 142(1)/ 143(2)/ 148/ 153A/ 153C of the Income-Tax Act has been issued to a person for an assessment year will he be ineligible from making a declaration under the Scheme?

Answer: The person will only be ineligible from declaration for those assessment years for which a notice under section 142(1)/143(2)/148/153A/153C is issued and the proceeding is pending before the Assessing Officer. He is free to declare undisclosed income for other years for which no notice under above referred sections has been issued.

Question: 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 section 142, 143(2), 148, 153A or 153C 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?

Answer: The declarant will not be eligible for declaration under the Scheme where the undisclosed income relates to the assessment year where a notice under section 142, 143(2), 148, 153A or 153C 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.

Question: In a case where the undisclosed income is represented in the form of investment in asset and such asset is partly from income that has been assessed to tax earlier, then what shall be the method of computation of undisclosed income represented by such undisclosed asset for the purposes of the Scheme?

Answer: As per sub-rule (2) of rule 3 of the Income Declaration Scheme Rules, 2016, where investment in any asset is partly from an income which has been assessed to tax, the undisclosed income represented in form of such asset will be the fair market value of the asset determined in accordance with sub-rule (1) of rule 3 as reduced by an amount which bears to the value of the asset as on the 1.6.2016, the same proportion as the assessed income bears to the total cost of the asset. This is illustrated by an example as under:

Investment in acquisition of asset in previous year 2013-14 is of Rs500 out of which Rs200 relates to income assessed to tax in AY2012-13 and Rs300 is from undisclosed income pertaining to previous year 2013-14. The fair market value of the asset as on 1June 2016 is Rs1,500.

The undisclosed income represented by this asset under the scheme shall be:

1,500 minus (1,500 X 200/500) = 900

Question: Can a declaration be made of undisclosed income which has been assessed to tax and the case is pending before an Appellate Authority?

Answer: As per section 189 of the Finance Act, 2016, the declarant is not entitled to re-open any assessment or reassessment made under the Income-Tax Act. Therefore, he is not entitled to avail the tax compliance in respect of such income. However, he can declare other undisclosed income for the said assessment year, which has not been assessed under the Income-tax Act.

Question: Can a person against whom a search/ survey operation has been initiated file declaration under the Scheme?

Answer: 

(a) The person is not eligible to make a declaration under the Scheme if a search has been initiated and the time for issuance of notice under section 153A has not expired, even if such notice for the relevant assessment year has not been issued. In this case, however, the person is eligible to file a declaration in respect of an undisclosed income in relation to an assessment year, which is prior to assessment years relevant for the purpose of notice under section 153A.

(b) In case of survey operation, the person is barred from making a declaration under the Scheme in respect of an undisclosed income in which the survey was conducted. The person is, however, eligible to make a declaration in respect of an undisclosed income of any other previous year.

Question: Where a search/ survey operation was conducted and the assessment has been completed but certain income was neither disclosed nor assessed, then whether such unassessed income can be declared under the Scheme?

Answer: Yes, such undisclosed income can be declared under the Scheme.

Question: What are the consequences if no declaration under the Scheme is made in respect of undisclosed income prior to the commencement of the Scheme?

Answer: 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 shall be deemed to have been accrued, arisen or received or the value of the asset acquired out of such income shall be deemed to have been acquired in the year in which a notice under section 142/143(2)/148/153A/153C is issued by the Assessing Officer and the provisions of the Income-tax Act shall apply accordingly.

Question: If a declaration of undisclosed income is made under the Scheme and the same was found ineligible due to the reasons listed in section 196 of the Finance Act, 2016, then will the person be liable for consequences under section 197(c) of the Finance Act, 2016?

Answer: In respect of such undisclosed income which has been duly declared in good faith but not found eligible, then such income shall not be hit by section 197(c) of the Finance Act, 2016. However, such undisclosed income may be assessed under the normal provisions of the Income-tax Act, 1961.

Question: If a person declares only a part of his undisclosed income under the Scheme, then will he get immunity under the Scheme in respect of the part income declared?

Answer: It is expected that one should declare all his undisclosed income. However, in such a case the person will get immunity as per the provisions of the Scheme in respect of the undisclosed income declared under the Scheme and no immunity will be available in respect of the undisclosed income, which is not declared.

Question: Can a person declare under the Scheme his undisclosed income which has been acquired from money earned through corruption?

Answer: No. As per section 196(b) of the Finance Act, 2016, the Scheme shall not apply, inter-alia, in relation to prosecution of any offence punishable under the Prevention of Corruption Act, 1988. Therefore, declaration of such undisclosed income cannot be made under the Scheme. However, if such a declaration is made and in an event it is found that the income represented money earned through corruption it would amount to misrepresentation of facts and the declaration shall be void under section 193 of the Finance Act, 2016. If a declaration is held as void, the provisions of the Income-tax Act shall apply in respect of such income as they apply in relation to any other undisclosed income.

Question: Whether at the time of declaration under the Scheme, will the Principal Commissioner/ Commissioner do any enquiry in respect of the declaration made?

Answer: After the declaration is made the Principal Commissioner/ Commissioner will enquire whether any proceeding under section 142(1)/143(2)/148/153A/153C is pending for the assessment year for which declaration has been made. Apart from this no other enquiry will be conducted by him at the time of declaration.

Question: Will the declarations made under the Scheme be kept confidential?

Answer: The Scheme incorporates the provisions of section 138 of the Income-tax Act relating to disclosure of information in respect of assessees. Therefore, the information in respect of declaration made is confidential as in the case of return of income filed by assessees.

Question: Is it necessary to file a valuation report of an undisclosed income represented in the form of investment in asset along with the declaration under the Scheme?

Answer: It is not mandatory to file the valuation report of the undisclosed income represented in the form of investment in asset along with the declaration. However, the declarant should have the valuation report. While e-filing the declaration on the departmental website a facility for uploading the documents will be available.

RBI's vision document on payment systems shies away from uniform charges

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29 June 2016 

While talking about aiming to make payment systems cashless through four strategic measures, the Reserve Bank of India (RBI)'s vision 2018 documents falls short of making uniform the consumer charges as well as convenience charges levied by banks and merchants for similar services. Non-uniformality of charges is what leads to several grievances of banking customers. As pointed out by Moneylife in the past, banks have discovered that it is extremely easy to pick the pockets of depositors and customers to make them pay for a variety of basic services, because they are too disorganised to pose a challenge. 

The Vision-2018 document released by the central bank focuses on four strategic initiatives like responsive regulation, robust infrastructure, effective supervision and customer centricity. RBI also talks about improving five broad contours like coverage, convenience, confidence, convergence and cost. "For coverage, we aim to enable wider access to a variety of electronic payment services. Convenience would be provided by enhancing user experience through ease of use and of products and services. Similarly, we will build confidence by promoting integrity of systems, security of operations and customer protection. Convergence would be achieved by ensuring inter-operatibility across service providers. We also aim to make services cost effective for both the users and service providers," the central bank says.

However, according to consumer activists, there is no uniformality on charges levied by banks for different services, like cheque clearance, usage of ATMs, and point-of-sales (POS) terminals. "Charges levied by some POS are as high as 2.5% whereas some POS do not pass on them to customers. Similarly, when it comes to using netbanking facility to pay any bill, MTNL gives 1% discount; BEST does the same thing but levies internet banking charge. Ticket booking through IRCTC is chargeable by some banks and not by other banks. ICICI bank charges for online National Electronic Funds Transfer (NEFT) while Bank of Baroda (BOB) and YES Bank do not. This one leads to consumer complaints which we all consumer activists have been facing for quite some time," says Abhay Datar, retired banker and consumer activist, who is associated with Moneylife Foundation's free helplines.

Meanwhile, banks are eliminating the convenience of their massive investment in core banking solutions (which promised anytime, anywhere banking) by dreaming up new charges. A senior citizen told Moneylife about how he was levied an ‘intercity charge’ of Rs50 for depositing cash in his own bank account in Bengaluru (not his home branch). A Moneylife reader was charged a fee to deposit cash in his own account. Reversing these charges requires a sustained battle, so most depositors simply give up.

According to RBI, all segments of electronic payments, particularly retail electronic payments, have shown healthy growth both in terms of volume and value of usage. For example, RTGS and NEFT volumes increased almost threefold between 2013 and 2016 reflecting greater adoption of the system by all segments of users. Similarly, with increasing number of banks offering mobile banking services and driven by the growth in e-commerce and use of mobile payment applications, the volume of mobile banking transactions has increased nearly seven-fold and the value of transactions has shown a steep rise. Card transactions have also grown significantly at both ATMs as well as at the POS with the growth in debit card usage at POS picking up significantly. The growth in volume and value of transactions using prepaid payment instruments (PPIs) issued by banks and authorised non-bank entities has also been significant. 

The volume and value in Immediate Payment Service (IMPS) has also grown significantly with the development of the IMPS as a multi-channel system providing various options to customers to originate transactions. Cheque payments, on the other hand, are showing a declining trend in terms of volume as well as value between 2013 and 2016, the central bank says.

RBI says safety and security of payment systems and transactions is an important factor that helps in boosting the trust and confidence of the customers in using electronic payment mechanisms. It said, it has advised all banks to issue all new cards based on EMV Chip and PIN. 

"Presently the ATMs in the country read and process the card transactions only on the basis of data contained in the magnetic stripe, even though the card may be a Chip and PIN card. With the roadmap in place for issuance of EMV Chip and PIN cards, the aim will be to ensure that all the ATMs in the country migrate to processing of EMV Chip and PIN cards on the basis of Chip data rather than magnetic stripe data," RBI said.

According to RBI, customer acceptance and usage of payment products provide one half of the required network effect in payment systems with the other half coming from the entities willing to accept such payments. It says, "Confidence, convenience, and cost are key aspects that will encourage wider customer adoption and usage of electronic payments. Customers' increasing expectations are driving provider responses. Towards this end, Vision-2018 would strive to keep the customer interest at the centre of payment system policy actions."

The central bank aims to strengthen customer grievance redressal mechanism, enhance customer education and awareness, and protect customer interests.

Strengthening customer grievance redressal mechanism: A robust and responsive customer grievance redressal system is essential to build an environment of trust and confidence in payment systems. Further, customer experience should be uniform irrespective of whether the service is being provided by banks or non-bank entities. Hence, 

i. The Bank would frame necessary guidelines to ensure that existing complaint redressal framework of authorised non-bank entities is improved, and that new payment systems are set up with appropriate mechanisms to address customer grievances in a proactive manner.

ii. Payment System Operators (PSOs) would also be required to adequately train their own front office staff and their agents to understand and appropriately address diverse requirements when servicing their customers.

Enhancing customer education and awareness: Customer confidence in payment systems is reposed with usage combined with better awareness of the product and processes. A well informed customer base would also facilitate faster migration away from cash payments. 

Involvement of stakeholders in this exercise can help to reap greater benefits, and, as such, the Bank would collaborate with other stakeholders in creating an environment of awareness and education on e-payments. Hence, 

i. The Bank, in collaboration with all the stakeholders, would endeavour to enhance customer awareness through structured Electronic Banking Awareness and Training (e-BAAT) programs.

ii. Further, the Bank would prepare a framework requiring PSOs to transparently disclose all fees they charge as part of their service along with the applicable terms and conditions, including liability and use of customer data.

Protecting Customer's interest: The Bank would encourage payment system providers to adopt best practices for protecting customer interests, by putting in place robust fraud and risk monitoring systems. In addition, a regulatory framework to limit customer liability in case of unauthorised transactions would be put in place.

RBI also talks about making available positive confirmation for RTGS transactions, similar to NEFT payments. NEFT system has the feature of sending positive confirmation to remitters regarding the completion of the funds transfer, thus giving an assurance to the remitter that the funds have been successfully credited to the beneficiary account. "In order to provide the same confidence to customers using RTGS system for funds transfer, the Bank will incorporate the feature of positive confirmation for RTGS transactions too. Further, the feature in the NEFT system will also be strengthened by ensuring that all banks send the confirmation in a timely manner," it added.

"Leaving aside the internal aspects like infrastructure and mechanism, the overall approach of the said vision appears to be consumer friendly," Mr Datar says.

Payment & Settlement Systems in India: Vision-2018

Building best of class payment and settlement systems for a “less-cash” India through responsive regulation, robust infrastructure, effective supervision and customer centricity...

Nifty, Sensex may put in a rally – Tuesday closing repor

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28 June 2016 

I had mentioned in Monday’s closing report that Nifty, Sensex were still directionless. The major indices of the Indian stock markets recovered to close in the green on Tuesday. The gains of the major indices at Tuesday’s close of trading were less than 0.50%. The trends of the major indices in the course of Tuesday’s trading are given in the table below:

A sharp rise in US futures markets, a rise in European indices, and a rebounding rupee led key Indian equity indices to trade in the green on Tuesday, while recovering considerably from last week's Brexit hangover. Healthy buying was particularly witnessed in stocks of fast moving consumer goods (FMCG) and healthcare. The BSE market breadth was tilted in favour of the bulls -- with 1,596 advances and 999 declines.

The United Kingdom is likely to explore direct bilateral trade agreements with India post the vote to exit from the European Union, thereby giving a boost to slowing UK-India trade, Development Bank of Singapore (DBS) said on Tuesday. "Post exit EU, the UK is likely to explore direct bilateral trade agreements with other trading partners, including India," DBS said in a research note.

"This might provide an alternate route to India, in comparison to the tough and the drawn-out negotiations on the EU Free Trade Agreement, in turn providing a fillip to a slowing India-UK trade," said DBS. Noting that the UK accounts for 15% of India's total merchandise trade, the report said this share has, however, been declining. Trade in services has also eased. The report highlighted the notable investment links between both countries. The UK is the third largest inward investor into India, after Mauritius and Singapore, with cumulative foreign direct investment (FDI) equity investments of $22.7 billion (from April 2000 to December 2015), or 8% of the total FDI inflows. In turn, India is the third largest investor, based on the number of projects, into the UK. Indian businesses that tap the UK domestic markets are unlikely to face many challenges, DBS said.

State-run United Bank of India on Tuesday said it will focus its lending on Micro, Small and Medium Enterprises (MSMEs) and retail and will avoid capital guzzling sectors. The bank is planning to raise up to Rs 1,000 crore ($145 million) in one or more tranches through a public issue or qualified institutional placement (QIP) or rights issue for which it sought shareholders' approval at its Annual General Meeting. "In 2016-17, the bank's focus areas for lending would be in the MSME and retail segments," Managing Director and Chief Executive Officer P. Srinivas told the shareholders. The bank will strive to achieve all its targets under Mudra Scheme, Standup India scheme and strengthen its retail channels, particularly housing, education and vehicle loan segments, he said. "While making advances, the bank will endeavour to avoid sectors which are capital guzzlers and concentrate on government guarantee schemes. The bank will also augment its resources to ensure wealth generation for the future," he said. The shares of the bank closed at Rs22.45, up 0.45% on the BSE.

The multiple downside risks in the proposed consolidation in the Indian public sector banking (PSB) space far outweighs the potential benefits, said global credit rating agency Moody's Investors Service. The Bank Nifty closed at 17,561.55, up 0.27%.

The US dollar continued to climb against most major currencies after Britain voted to leave the European Union in a historic referendum. In late New York trading on Monday, the euro fell to $1.1019 from $1.1144 of the previous session, and the British pound decreased to $1.3192 from $1.3696. The Australian dollar went down to $0.7343 from $0.7508. The dollar bought 101.99 Japanese yen, lower than 102.24 yen of the previous session.  The dollar rose to 0.9776 Swiss francs from 0.9724 Swiss francs, and it climbed to 1.3092 Canadian dollars from 1.2936 Canadian dollars. Currency movements are considered important by stock market analysts in India, as a substantial portion of the investments come from foreign institutional investors into emerging markets like India. However, international interest rates in the banking sector are expected to be stable and not contribute to volatility.

The top gainers and top losers of the major indices are given in the table below

The closing values of the major Asian indices are given in the table below:

Decision on implementation of 7th Pay Commission soon

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The Union Cabinet is likely to discuss and take a final call on the recommendation to implement the seventh Central Pay Commission. This follows a report submission by the Committee of Secretaries, which has recommended a little less than 20% average hike as against an earlier media report of a hike of 30%. 

According to Religare Capital Markets Ltd, the implementation of the 7th CPC recommendation should boost consumption, reduce slackness in the economy and step up investment demand. Large consumer discretionary names are likely to be the top gainers in this scenario. 

"However," it says, "With the states and public sector units (PSUs) also set to effect similar hikes (some states like Telangana have already done it); we see a permanent fiscal stimulus of $50 billion over the next two years, with significant multiplier effect on gross domestic product (GDP)."

In January this year, the Indian government had set up the high-powered panel to process the recommendations of the 7th Pay Commission which will have bearing on the remuneration of nearly 50 lakh central government employees and 58 lakh pensioners.

A Committee, headed by Cabinet Secretary PK Sinha, has already vetted the 7th Pay Commission recommendation and its report is being translated into a note for Cabinet. The Commission had recommended 23.55% overall hike in salaries, allowances and pension involving an additional burden of Rs1.02 lakh crore or nearly 0.7% of the GDP, says a report from the Business Standard.

The entry level pay has been recommended to be raised to Rs18,000 per month from current Rs7,000 while the maximum pay, drawn by the Cabinet Secretary, has been fixed at Rs2.5 lakh per month from current Rs90,000. 

While the Budget for 2016-17 fiscal did not provide an explicit provision for implementation of the 7th Pay Commission, the once-in-a-decade pay hike for government employees has been built in as interim allocation for different ministries, the newspaper report says.

According to the Religare, the Budget for FY2016-17 has for only Rs70,000-Rs73,000 crore towards 7th CPC wage bill increases and one rank one pension (OROP). As per 7th CPC recommendations, the total requirement would be around Rs1.02 lakh crore for the two payouts. "If only 20% hike is finally awarded, the FY17 incremental spend on wages and salaries and OROP would still be more than Rs90,000 crore, leaving a fiscal gap of about Rs20,000 crore.

The other possibility is that the allowances payment is deferred to next year. Further, as per media reports, the central government employees may get their first higher salaries from July onwards, to be credited on 1st August, along with a likely arrears of six months' since the higher salary is effective from 1 Jan 2016," it added.

4 indicators to watch after a new RBI governor joins

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After September 2016, there would be a new Governor at the Reserve Bank of India (RBI) following the decision of incumbent Dr Raghuram Rajan to not to continue after his terms gets over. In this scenario, there are four indicators to watch for after the new Governor joins. This includes, tapping of RBI's excess funds for capitalisation of public sector banks (PSBs), operation of stressed asset funds, treatment of restructuring and asset quality review (AQR), and rate cuts, says a research note.

In the report, Religare Capital Markets Ltd says, there are certain ramifications of changes in these four key regulatory areas if the new Governor diverges from Dr Rajan's stance. 

Here is the analysis from Religare about the four key regulatory areas and its impact...

1. Tapping RBI’s excess funds for PSU bank capitalisation: 

The Economic Survey 2015-16 (pages 19 & 20) highlighted that the RBI’s capital adequacy ratio at 32% is much higher than the median 16% ratio of all other central banks. The government has stated that even if the RBI brings down capital adequacy to 16%, it will free up Rs3-4 lakh crore for capital infusion into PSU banks and/ or the creation of a bad bank to resolve bad loans. 

"The government has budgeted only Rs70,000 crore for capital infusion over four years. Considering the huge gap between the capital required and that budgeted, the new governor may agree to use the RBI’s capital for banks. In our view, this creates a clear moral hazard, but proponents of such a move see nothing wrong with the government tapping its own funds for a one-time capital injection under Basel III," Religare says.

2. Operation of stressed asset funds: 

The RBI, Indian Banks’ Association (IBA) and banks are in the last stage of finalising norms for the operation of stress asset funds in India. As per media reports, the central bank is against allowing banks to own a majority stake in distressed funds. Also, the RBI believes banks should not contribute meaningfully to stressed funds in the form of debt, as this will do nothing to alter their risk. Additionally, such contributions could involve opaque asset pricing. However, banks are aggressively pushing to be allowed to contribute and/or own stakes in stressed funds. 

Religare says, "If permitted by the new governor, this will be negative for the sector as it will mask the true value of write-offs or haircuts required on such assets and prolong the uncertainty over NPAs."

3. Treatment of restructuring and AQR norms: 

Banks are pitching hard to the RBI for further relaxation of the recently announced restructuring norms and the upgrade of certain borderline cases that were classified as NPA under the RBI’s AQR. 

"Though we agree with certain procedural relaxations or changes, any measures which merely push the problem down the road will be negative for the sector," the research report says.

4. Policy and lending rates: 

Religare feels that if the new governor cuts policy rates more aggressively than Dr Rajan, banks will have to lower lending rates. 

"We do not rule out further changes to marginal cost of funds based lending rate (MCLR) or base rate norms for better transmission of policy rates. If lending rates come off aggressively, banks’ margins will reduce. The correlation between lower rates and higher loan growth or NPAs is very weak," Religare concluded.