Non-reporting of foreign shares and other foreign assets held by you in your income tax return (ITR) can cost you a lot of money. An individual can be held liable for violation of the Black Money Act, 2015.
As per The Times of India report, a Mumbai Income Tax Appellate Tribunal (ITAT) levied a penalty of Rs 10 lakh for each year where foreign shares and other assets were not reported in the 'Schedule FA' of the ITR on the individual.
An individual is mandatorily required to fill schedule FA of the ITR if they had invested in foreign assets (such as foreign shares, foreign company mutual funds etc.) directly or have held employee stock options (ESOPs) of foreign companies.
"Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 requires a resident individual to provide information of his foreign assets located outside India in the ITR. If he fails to do so the Assessing Officer may levy a straight penalty of Rs 10 lakh on such person. It is essential to understand that section 43 mandates the disclosure of foreign assets in 'Schedule FA' in the relevant ITR form. Simply reporting income from foreign assets in the ITR form without disclosing the assets in Schedule FA will not be considered as fulfilling the disclosure requirement," says Naveen Wadhwa, chartered accountant and Vice President, Taxmann.
"If an individual has purchased virtual digital assets (VDAs) from international exchanges and also storing them in foreign wallets then they have to file schedule VDA and Schedule FA both," says CA Anand Bathiya, Vice President-Bombay Chartered Accountants' Society (BCAS).
However, an individual investing in an Indian- origin scheme which has a foreign investment mandate like Indian mutual funds investing in US, Taiwan, etc., then schedule FA is not required to be filed. "If an Indian individual is buying foreign assets like say Blackrock i-Shares exchange traded fund (ETF) on New York Stock Exchange (NYSE) then schedule FA needs to be filed," Bathiya adds
Also read: How to file schedule FA while filing ITR
Discretionary powers of income tax department
The income tax department has discretionary powers to decide under which law, a taxpayer must be prosecuted for non-disclosure of foreign assets in ITR. "The income tax assessing officer has power to prosecute the individual at fault for non-disclosure of foreign assets either under Income tax Act or Black Money Act. Once the Act is chosen under which the prosecution will go on, the penalty mentioned under that act will be imposed only," says Bhathiya.
"If the individual can prove to the tax department that the mistake was unintentional and not with the intent to evade taxes, the penalty may not be levied. But if the tax department upon further investigation finds that the individual is not only at fault for non-disclosure of foreign assets in schedule FA but also at fault for tax evasion, black money routing outside India, others, rigorous imprisonment will also be imposed along with penalty. This only happens in extreme cases and not merely for non-disclosure failures," adds Bhathiya.
However, the penalty under section 43 of the Black Money Act shall not apply in instances where the foreign asset in question is one or more bank account having an aggregate balance of up to Rs 5 lakh. "This means that if an individual has a foreign bank account(s) and balance in aggregate of all the said foreign bank account(s) does not exceed Rs 5 lakh, then no penalty under section 43 of Black Money Act will be imposed even if such a bank account was not declared in schedule FA," says Anant Jain, Co-Founder and Leader Private Clients at Legacy Growth Partners LLP, a Delhi- based law firm.
"An important point to note here is that this immunity is applicable only for foreign bank account(s). No relief is given if the foreign asset is shares held in a foreign company or other foreign assets," said Wadhwa.
Also, the penalty will be imposed on per defaulting year i.e., the year in which foreign assets were not reported in ITR. If there is more than one year, then the assessing officer can levy the penalty for each defaulting year. This was done by Mumbai ITAT in the case mentioned above.
The Income-tax Act is lenient as compared to the Black Money Act for non-disclosure of foreign assets. An individual's ITR will be termed as 'Defective ITR' for non-disclosure of foreign assets in ITR.
Once the ITR is termed as a defective ITR, an individual is required to file a revised ITR. The revised ITR will be taken for processing by the income tax department. Penal interest can be applicable if there is any additional tax payable.
"Taxpayers need to be mindful of the fact that India has a strong Exchange of Information (EOI) network with several foreign countries under which all the finance and investment related data is shared with the Indian agencies . India currently has Financial Intelligence Analysis Unit (FIAU) who undertakes such task of receiving, analyzing, and disseminating the financial data. The information received under Exchange of Information network is reconciled with the data filled in the FA Schedule of the ITR and proceedings under Black Money Act, Prevention of Money Laundering Act, etc are initiated in case of any discrepancies or mismatches," says Sandeep Bhalla, Partner, Dhruva Advisors, a tax consulting firm.
What information needs to be mentioned in Schedule FA?
"The schedule FA in the ITR requires a taxpayer to disclose all foreign assets (including financial interest in any entity) held by him as a beneficial owner or otherwise including the beneficial interest in a Trust, signatory in a bank account (even on behalf of the Company etc.) at any time during such previous year," says Jain.
An individual should make the following disclosures in Schedule FA:
(a) Any asset held outside India (Shares, Debentures, Life Insurances, Annuity Contract, Immovable Property, or any other capital asset),
(b) Financial or beneficial interest in any overseas entity (partner in an overseas LLP or firm, a beneficiary of a foreign private trust, etc),
(c) Signing authority in any account located outside India (Trading, Depository, Bank, or Custodian Account), and
(d) Income from any source outside India (Dividend, interest, or capital gain).
"Any non-disclosure of the above information in the ITR may result in levy of penalty of Rs 10 lakh under Section 43," says Wadhwa.
Sometimes individuals are of the view that when they have disclosed all the income including overseas income, then what is the need of disclosure in the Schedule FA. "We have also observed that these disclosures are missed by the NRI turning into Residents after coming back to India as they felt that these assets/incomes etc. were acquired by them when they were non-residents of India (NRI). Hence, it should not be the purview of the Indian Income tax Act. We would like to clarify that disclosure in the Schedule FA does not empower Indian tax authorities to impose any taxes unless it is taxable as per Indian laws," says Jain.
