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Customer Care No.

91-1145562222

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, 2016addressing question no. 5 which is reproduced as
under:
2.1CBDTCircular 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.
2.2Analysis 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%Care
to 31%.
It is being interpreted in some circles that since the above clarification
states
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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
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the issue should be clarified so that there does not remainwww.taxmann.com
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