The Penalty Conundrum:
Under this act, a substantial penalty of ₹10 lakh is levied for the failure to disclose or for furnishing inaccurate particulars of foreign assets or foreign incomes in the tax return. The only exception is for foreign bank accounts with balances less than ₹5 lakh during the year. However, the controversy arises when the penalty is applied indiscriminately without considering the context or intent of the taxpayer.
A recent tribunal decision has brought to the forefront the harsh implications of this provision. In this particular case, a taxpayer and her husband had remitted funds from India to an overseas bank account under the Liberalized Remittance Scheme. They then jointly invested in an overseas fund using these funds. While interest income was duly disclosed in the first year, the capital gains were offered to tax only in the fourth year. The taxpayer failed to declare her investment in the fund in the Foreign Assets Schedule for the initial three years, leading to a penalty of ₹10 lakh for each of those years.
The tribunal’s decision to uphold these penalties highlights a lack of discretion and proportionality in the application of the law. While the taxpayer claimed it was a genuine oversight and that the asset was not undisclosed, the tribunal argued that the law did not require the asset to be acquired from undisclosed funds. This raises concerns about fairness and the potential for unwarranted penalties in cases of genuine errors.
A Need for Prudence:
Previous tribunal decisions have taken a more lenient approach, emphasizing the need for discretion in penalty imposition. They have recognized that penalties should be imposed only in cases where the law is deliberately flouted, dishonest conduct is evident, or obligations are consciously disregarded. In genuine cases where foreign assets are acquired from disclosed income, but inadvertently omitted from the Foreign Assets Schedule, a penalty may not be justified.
Moreover, the law does not explicitly demand assets to be disclosed solely in Schedule FA. Any disclosure within the tax return should suffice. Furthermore, declaring income from such foreign assets not only indirectly discloses their existence but also demonstrates the taxpayer’s intention to comply with tax obligations.
The Impact on Taxpayers:
The ramifications of such stringent penalty provisions are concerning. There are numerous instances where foreign assets have been acquired from disclosed income, with income tax paid accordingly, but these assets may have been unintentionally omitted from Schedule FA. Issuing penalties in such cases may result in unnecessary litigation, financial strain, and anxiety for taxpayers. In some instances, the cumulative penalties might even surpass the value of the unreported asset.
Reconsidering the Penalty Structure:
The central question that arises from these recent developments is whether the penalty under the Black Money Act matches the gravity of the offense. Imposing a hefty ₹10 lakh penalty for mere oversights, especially in cases where assets are acquired from disclosed funds, appears disproportionate.
The Act primarily intended to target individuals who had acquired foreign assets through undisclosed income, justifiably imposing penalties proportionate to the size of the offense, often amounting to three times the asset’s value. However, applying the same penalty to oversights and genuine mistakes in disclosing assets acquired from taxed income seems unfair.
A Call for Reform:
In light of the unintended consequences and the potential for unjust penalties, it is essential for the government to review the penalties stipulated under the Black Money Act. A one-size-fits-all approach does not serve the interests of justice or taxpayers’ rights.
The government should consider introducing a more nuanced penalty structure that differentiates between deliberate tax evasion and inadvertent omissions. A nominal penalty or a system that factors in the circumstances of each case could be more appropriate for genuine mistakes in asset disclosure.
The Black Money Act of 2015 was enacted with the noble intention of tackling undisclosed foreign assets and incomes. However, the recent tribunal decisions highlighting the stringent interpretation of its penalty provisions raise valid concerns about fairness and proportionality.
Reform in the penalty structure is not just a matter of justice but also one of pragmatism. Unjust penalties can lead to unnecessary litigation, burdens on taxpayers, and a strain on resources.
The government must strike a balance between enforcing tax compliance and ensuring that genuine taxpayers are not unfairly penalized for inadvertent errors. A careful review and reform of the Black Money Act’s penalty provisions can lead to a fairer and more effective tax system, benefitting both the government and its citizens.