Alleging detection of undeclared offshore assets and investments, the Income Tax Investigation Wing passed an order against Anil Ambani, Chairman of the Reliance (ADA) Group, under the Black Money Act, 2015.


What are the sources of black money?

Sources of black money can be divided into two broad categories, which are: Legal activities and Illegal activities.

1. Legal Activities –

      • Here the basic activity is to earn income legally but evade tax on that income (which can be termed as tax envision).
      • The evasion of tax be it direct tax on income or indirect tax on commodities, results in unexplained income.
      • The factors or causes of tax evasion are the high level of tax rates, less respect to the Government and its laws, lenient penal action, and nature of the economy.

2. Illegal Activities –

      • It consists of criminal part of black money.
      • It includes activities which are of anti-social type like smuggling of goods, embezzlement, forgery, chit funds, production/ trade of contraband goods, illegal mining and falling of forests; hoarding and black marketing of price controlled materials and services, theft, robbery, kidnapping and extortion, human trafficking, etc.


Role of Offshore Trusts

  • A trust is an arrangement where a third party, who is called a trustee, hold assets of the individual or the company that is to benefit from it.
  • It helps large business families to consolidate their assets, financial investments, shareholding, and real estate property.


Are offshore trusts legal in India?

  • Setting up a trust outside India is legal.
  • Under the Indian Trusts Act, 1882, an individual or a company can have a trust as an obligation of the trustee to manage and use the assets settled in the trust for the benefit of ‘beneficiaries’.
  • However, the issue with offshore trust is when they are created in other countries with a totally different tax system, they do not need an office or employees in the company.
  • They are mostly used to avoid any legal responsibilities for the real owner.


About Tax Havens

  • A tax haven, in simple terms, is a country or an independent place where taxes are levied at a low rate.
  • Tax havens offer huge fiscal advantages to the citizens from other countries who seek to reduce their tax burdens.


About the Black Money Act of 2015

  • The Act known as the ‘Black Money and Imposition of Tax Act, 2015 (Undisclosed Foreign Income and Assets or the UFIA)’ became effective from July 1, 2015 with the starting of the one-time compliance window (initially it was prescribed to be effective from April 1, 2016).
  • Black money in the form of undisclosed foreign income and assets comes under the purview of this law. The UFIA Act gives an opportunity to the black income holders to reveal black money and pay a tax within a compliance window time. After this time, black income holders will come under severe penal and prosecution measures prescribed under the law.
  • Undisclosed foreign income and assetis defined as the total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India.
  • Features of the Act –
      • The Act will be applicable to a person: (i) who is a tax resident of India as per the tests of the Income Tax Act, 1961 (ITA); (ii) who is not a person who is a ‘resident but not ordinarily resident’; and (iii) by whom tax is payable under the UFIA Bill on undisclosed foreign income and assets or any other sum of money. The term ‘person’ is not defined in the UFIA Bill so its definition under the ITA must be adopted. As regards individuals, the ITA has a day-count test of physical stay in India. For companies, the test is whether the company is incorporated in India or Place of Effective Management (POEM) is in India.
      • One – time compliance window: A one-time compliance opportunity to persons who discloses their foreign income and assets will be provided. This compliance period was available from July 1 to September 30. Persons who use this compliance window will be permitted to file a declaration before a tax authority, and pay a tax rate of 30% and a penalty at the rate of 100% (of the tax); implying a total tax of 60%. No exemption, deduction or set off of any carried forward losses (as provided under the IT Act) would apply.
      • Income and assets that qualify the disclosure: The total undisclosed foreign income and asset of an individual would include: (i) income, from a source located outside India, which has not been disclosed in the tax returns filed; (ii) income, from a source outside India, for which no tax returns have been filed; and (iii) value of an undisclosed asset, located outside India.
      • Non-disclosure, penalties, prosecution and the criminal procedures:  Not furnishing income tax returns for foreign income and assets or providing misleading information for such foreign income and assets attracts a penalty of Rs 10 lakh under the new legislation. Criminal punishment for such tax evasion practices could attract rigorous imprisonment from three to 10 years and a discretionary fine. However, it is important to note that the Foreign Assets Act provides that persons who have foreign accounts with minor balances, which may not have been reported out of oversight or ignorance, are protected from penalty and prosecution. Different types of penalties and punishment are envisaged under the law depending upon the seriousness of the offence.
      • Administering authority: The Central Board of Direct Taxes and the existing hierarchy of tax authorities under the provisions of the Income Tax Act, including the appeals machinery prescribed thereunder, have been tasked with implementation of the new legislation.