Income Declaration Scheme, 2016 – Effective Rate of Tax?

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Income Declaration Scheme, 2016 Effective Rate
of Tax?
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• Introduction
• 1. The Government has introduced Income
  Declaration Scheme, 2016 which has come into
  force from 1st June, 2016. The scheme provides an
  opportunity to persons who have not paid full
  taxes in the past to come forward and declare the
  undisclosed income and pay tax, surcharge and
  penalty totaling in all to 45 of such
  undisclosed income declared. Further, as per
  scheme, declaration of undisclosed income in the
  form of assets is to be made at Fair Market Value
  of such assets as on 1st June, 2016.
• It is felt everywhere that the total impact of
  tax in case of declaration of undisclosed income
  under the scheme is quite high and, therefore,
  the initial response of the taxpayers regarding
  the scheme is not encouraging one.

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• Clarifications issued by CBDT
• 2. The CBDT has issued three sets of Frequently
  Asked Questions (FAQs) containing 36
  clarifications relating to various controversial
  aspects clarifying doubts regarding the operation
  of the scheme. One clarification has been issued
  by the CBDT by way of Circular No. 25/2016, dated
  30th June, 2016 addressing question no. 5 which
  is reproduced as under
• 2.1 CBDT Circular No. 25/2016, dated 30-6-2016
• 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?
• Answer No.
• 2.2 Analysis of above said Circular The above
  clarification is being interpreted in a manner
  that it would reduce the effective rate of tax on
  undisclosed income declared under the scheme from
  45 to 31. It is being interpreted in some
  circles that since the above clarification states
  that department will not make any enquiry in
  respect of the sources of payment of tax,
  surcharge and penalty, it, therefore, would give
  leverage to the taxpayer to make payment of taxes
  on the undisclosed income declared under the
  scheme out of the other undeclared sources and
  such other undisclosed source of income need not
  be made part of total declaration.

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• It is interesting to note that there was front
  page news in "The Economic Times" on 2nd July,
  2016 reporting the above interpretation.
  Moreover, there was a meeting in the evening on
  2nd July, 2016 conducted by the Institute of
  Chartered Accountants of India (ICAI) inviting
  CBDT Chairman and other officials which was
  webcast throughout the country. In the above
  programme, similar views were expressed by an
  eminent tax expert who was speaking regarding
  various aspects of the scheme in the presence of
  CBDT Chairman and other senior officials. There
  was no rebuttal from the CBDT officials on the
  above interpretation, which has also given an
  impression in the minds of the tax experts and
  taxpayers that the scheme shall be operated in
  the above manner and thus, taxpayers may be able
  to reduce the effective rate of tax on
  undisclosed income declared under the scheme from
  45 to 31.
• The above view is prone to litigation and there
  may be different interpretations which can be
  derived out of such clarification. The
  clarification issued by the CBDT stating that
  Department will not make any enquiry in respect
  of source of income, payment of tax, surcharge
  and penalty may also be interpreted to mean that
  in case of deposit of tax in cash on undisclosed
  income declared, Department will not make enquiry
  regarding the manner in which income represented
  by such taxes has been earned.

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• It may not be possible for the government to
  allow or encourage taxpayer to make payment of
  taxes out of undisclosed income without making
  disclosure of such amount under the scheme. On
  one side the scheme requires a person to declare
  all his undisclosed income relating to earlier
  years under the scheme which has been given as a
  last opportunity to the taxpayers to come clean
  and at the same time how can the government allow
  taxes to be paid out of undisclosed income
  without making declaration of such undisclosed
  income.
• In case of judicial interpretation by higher
  courts in case of litigation on the above issue,
  Courts may not approve of the above view being
  expressed by certain media persons and tax
  experts that the effective rate of tax under the
  scheme would get reduced to 31. In such case,
  the undisclosed income representing the taxes
  paid without making proper declaration under the
  scheme may be liable to be taxed by the
  department/Courts at a later stage.
• Conclusion
• 3. In case the intention of the Government/CBDT
  is to grant relief to the taxpayers under the
  scheme so as to make effective rate of tax as
  31, such amendment/clarification should be
  issued in a very transparent and unambiguous
  manner. If it cannot be done through circular,
  Ordinance can be issued by the government for
  this purpose. In case there is no such intention
  of the government, the issue should be clarified
  so that there does not remain any confusion and
  the confidence of the taxpayers in the scheme is
  assured which is very important for the success
  of the scheme.

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