In an effort to encourage tax evaders to file their income tax returns, Finance Minister Arun Jaitley introduced the Income Tax Declaration Scheme in 2016 as part of the Finance Bill, 2016. Under this scheme, anyone who has not disclosed their income or assets truthfully in the previous tax assessment year can divulge the details to the government. In turn, they will have to pay a tax of flat 45% instead of the random penalty amounts enforced.
However, if individuals or companies have “secret stash” of cash hidden away from the taxman’s eyes and that stash is found by the government any time in the future, the amount will be added to the income tax slab of the assessment year in which it comes to light and tax and penalties charged accordingly.
Eligibility Criteria for Income Tax Declaration Scheme:
Section 2(31) of the Income Tax Act specifies which kinds of entities can file tax. These are:
- Hindu Undivided Family
- Association of persons, whether incorporated or not
- Local authority
- Every artificial juridical person not falling in the above categories
All the above 7 categories of entities can declare additional income up to assessment year 2016-17 through the Income Declaration Scheme. The following individuals or companies, however, are not allowed to take advantage of this scheme:
- Persons to whom notices have been issued under Sections 142(1), 143(2), 148, 153A or 153C: This includes those who have been served pre-assessment inquiry notice, scrutiny notice, income escaping assessment notice, notice on assessment in case of search or requisition, and notice on assessment of income of another person.
- Persons on whom a search or survey has been conducted and is ongoing.
- Persons about whose income foreign countries have provided information to the government.
- Persons who are involved in cases under the Black Money Act, 2015.
- Persons notified under Special Court Act, 1992.
- Persons involved in cases under Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, 1985, Unlawful Activities (Prevention) Act, 1967 or Prevention of Corruption Act, 1988.
Key Features of Income Declaration Scheme 2016:
Given below are the main features of this scheme:
- The scheme is valid between June 1, 2016 and September 30, 2016. The date can be extended or shortened by the Central Government.
- The scheme is applicable to both income tax and wealth tax.
- The tax chargeable is 45% – 30% income tax rate + Krishi Kalyan Cess on 25% of this tax (which is 7.5%) + penalty on 25% of the tax (7.5% again).
- You need to pay the taxes within 2 months from the date of declaring the assets/income, or within the date notified by the government.
- If you have declared additional income but not paid taxes by the end of the deadline, the individual/company will be treated as not having made any declaration. Additionally, income tax rate as applicable in a normal case for the previous tax year, would be charged.
- You can only make one declaration – multiple declarations will not be entertained. In case of multiple declarations, only the first one will be considered as valid.
- If the declaration is made by concealing or distorting facts, it will be considered as invalid.
- If you pay the tax and penalty as notified after declaring the additional income/assets, that amount will not be added to your income in any assessment years. It will be considered as disparate from the normal income tax cycle.
- If assets – immovable or movable – are part of your income or wealth declaration, the fair market value of the asset as on June 1, 2016, would be considered as the undisclosed income.
- In case of a declaration made by a company or firm, the assets/income declared by the firm/company will not be counted while calculating the wealth or income of any related or partner firms.
- The undisclosed income cannot be considered as benami transaction in certain cases, where the investment is made in an asset, if the said asset is transferred to the person making the declaration or their legal representative.
- The declaration made under this scheme will not be used to charge any additional penalty or a court case against the individual/company.
- The declaration has to be made to the Principal Commissioner or Commissioner of tax in the relevant jurisdiction.
While the scheme is “quite encouraging” according to financial experts, we will have to wait and watch to see how many declarations will be made and how much revenue the government makes out of it. This is a kind of amnesty scheme offering defaulters a chance to come clean, and is reminiscent of the Voluntary Disclosure of Income Scheme (VDIS) of 1997, which garnered a revenue of over Rs. 7,800 crore (INR 78 billion) for the government. However, while VDIS granted immunity from legal punishments to the individuals/companies who disclosed their true income, the Income Declaration Scheme of 2016 merely offers a “discount” on the tax penalty.
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