The Complicated Task of Reporting Foreign Income

The IT department, with a view to deter people from taxing or parking funds abroad and enabling repatriation of funds deposited abroad, has devised an effective reporting mechanism in the ITR itself, which tracks the offshore income and assets of a resident taxpayer. Is for. Changes in the ITR form have ensured better description of assets and income of taxpayers on one hand, and have given taxpayers heebie-jeebies on the other.

The resident taxpayer having foreign assets or foreign interest is required to disclose the same in the ITR form at any time during the relevant accounting period. Therefore, a foreign asset or interest even for one day during the year triggers the reporting requirement. This condition is applicable only to ‘ordinary residents’ and hence, is a huge sigh of relief for ‘not ordinarily residents’ and ‘non-residents’. Income tax laws make ITR filing mandatory for individual taxpayers, who may not be required to file ITR on account of income below the basic exemption limit, if one is a ‘beneficiary owner’ or a ‘beneficiary’ of a foreign asset or foreign financial Is. interest.

The ITR prescribes a separate section ‘Schedule FA’ to provide details of possible forms of foreign assets, foreign interests and related income received by the resident taxpayer. However, the schedule is not included in ITR 1 and ITR 4, which may put some taxpayers in a dilemma. For example, a person whose only salary income (does not exceed . 50 lakhs) may be of the opinion that he is complying by filing ITR 1 only to find that the ITR form chosen on holding foreign assets may be incorrect. Thus, a taxpayer having foreign assets should be careful and diligent while selecting the applicable ITR form, to avoid wrong return forms, seen as non-compliant filing.

Schedule FA deviates from the concept of ‘financial year’ and refers to assets held during the accounting period to address concerns where the foreign jurisdiction hosting the asset/account is in India for the financial year (i.e. from 1st April to 31st April). other than March).

The schedule has been designed in a comprehensive manner and seeks details of foreign depository accounts and foreign custodial accounts maintained by the taxpayer along with the maximum balance during the period. Investment in foreign equity and debt, foreign real estate are some of the aspects that come to one’s mind and form part of the disclosure requirement.

Financial interest in a foreign entity whether as an agent, nominee or advocate is also included in the Schedule. Having a signing authority in a foreign bank account also makes a resident assessee subject to such reporting.

An important aspect is the conversion of the value of foreign assets and earnings into the reporting currency (INR). The values ​​in Schedule FA are required to be disclosed after converting them into Indian currency by applying the “SBI Telegraphic Transfer Purchase Rate” of foreign currency on the date of maximum balance in the account or the date of investment or the closing date of the accounting period.

Due to its comprehensive nature, taxpayers may miss disclosure of minutes in Schedule FA, making it incomplete and may be viewed as non-disclosure, although unintentionally. The rigors of the penal consequences arising again from the Black Money Act are far-reaching and include tax liability at a flat rate of 30% of the value of undisclosed foreign assets or income and, in addition, three times of the tax so computed. Fine.

Disclosure in Schedule FA does not exempt the taxpayer from subsuming similar details under other sections of ITR even at the cost of duplication. For example, shares held in an unlisted foreign company should also be separately disclosed in the ‘General’ section of the ITR form. Individuals misunderstand a disclosure requirement that could result in reporting inconsistencies. Further, where the total income of a person exceeds 50 lakhs, the disclosure of foreign assets in Schedule AL is required to be repeated. The majority reporting requirements for foreign assets and income not only warrant a one-time data collation activity at the time of return filing, but require the taxpayer to be careful in tracking variations in his foreign asset and income profile throughout the year. Although laborious, none of the aspects can be taken as trivial and diligence is important to avoid unintended punitive consequences.

Sandeep Jhunjhunwala is a Partner at Nangia Andersen LLP. This column is co-authored by Amita Jeevarajani and Abhishek Mehta.