If you are a tax resident of India and have foreign assets, remember to disclose them in your income tax returns. Recently, a taxpayer learnt this the hard way after a penalty of Rs 30 lakh was imposed on her for failure to do so. In a conversation with Moneycontrol, Preeti Sharma, Partner, Global Employer Services at BDO India talks about how to disclose your foreign assets and how to rectify past non-reporting or misreporting of such assets.
As a taxpayer, one always has the temptation to reveal as little as possible to the tax department. But this can turn out to be a costly mistake. Last week, the Mumbai tax tribunal upheld the order of the Commissioner of Income Tax Appeals or CIT (A)—that imposed a penalty of 10 lakh rupees per financial year (Rs 30 lakh) on a taxpayer who had failed to disclose her foreign assets in her income tax returns.
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Moneycontrol spoke to Preeti Sharma, partner at Global Employer Services at BDO India on what all foreign assets must be disclosed in income tax returns, how should they be reported and if you fail to do this, how can you rectify it.
-Anyone who is a tax resident of India (resident and ordinarily resident in India) in any financial year and holds the specified foreign assets, has to disclose these in Schedule FA (foreign assets) in their income tax return.
-Foreign assets that must be disclosed - These are divided into 10 broad categories and are comprehensive enough to cover all types of assets, investments or income sources outside India.
-These include, foreign depository accounts (demat accounts held abroad), foreign custodian accounts (account held by a minor will be a custodian account for the parent), equity or debt interest in any foreign entity, cash value of insurance or annuity contracts, financial interest in any entity (say, if you are a partner in an LLP), immovable properties (such as land, flat etc.), any other capital assets (jewellery, vehicles etc.), foreign bank accounts, interest in any trust outside India, and any other source of foreign income.
-If you are a tax resident of India and have foreign assets, you must disclose them in Schedule FA in the applicable ITR form. This is irrespective of whether these assets are income-generating or not, and whether you have any income in India or not – whether from these assets or from other sources.
-Common problems faced in foreign asset reporting in tax returns – first, identifying the foreign assets that must be reported which may not always be easily understandable by a simple reading of Schedule FA.
-The second problem is to identify the correct period of reporting. For example, if you are filing the tax return for financial year 2022-23, you have to report your earned income during April 2022 to March 2023. But, for foreign assets, the reporting has to be done on calendar year basis (January to December).
-The third problem that one can encounter is when calculating the amount (value of foreign asset or foreign income) that must be reported in the tax return. This amount must be mentioned in Indian rupee terms and therefore, one needs to have clarity on the right exchange rate to be used for this purpose. For example, many foreign assets are required to be reported at their investment value and not their current value. In that case, finding out the correct exchange rate (prevalent at the time of asset purchase) can be a task for the taxpayer.
-Non reporting, misreporting or under reporting of foreign income and assets in the tax return – any of these may lead to penalty under the Black Money Act and the Income Tax Act. If a taxpayer fails to disclose details of foreign assets or furnishes inaccurate information, then there is a flat penalty of Rs 10 lakh per financial year under the Black Money Act. This is irrespective of the value of the asset.
-Also, in a few cases, where the authorities find cause for initiation of prosecution proceedings, then this may even result in imprisonment which may extend up to seven years with fine.
-How to rectify past mistakes - start reporting all your foreign assets or income accurately on immediate basis. That is, whenever you file your next tax return. Also, where possible, opt for revision of past tax returns. Finally, if you have missed paying tax on foreign-sourced income, please take professional guidance to rectify this.
Source : Moneycontrol