The taxman knows…so report your foreign assets or face dire consequences

On November 16, the Central Board of Direct Taxes launched a compliance-cum-awareness campaign for the calendar year 2023 and the relevant assessment year was 2024-25. Accordingly, the Income tax Department has been reminding taxpayers via newspaper advertisements and also sending e-mails to taxpayers identified as having offshore assets on the basis of information shared by foreign tax jurisdictions.

Accurate reporting and compliance with Schedule Foreign Assets (Schedule FA) and reporting income from foreign sources (Schedule FSI) while filing income tax returns is mandatory under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Law). Non-compliance will invite stringent penalty provisions and unforeseeable circumstances.  

What is a foreign asset?

For reporting purposes, foreign assets include bank accounts, depository accounts,  equity and debt interest, cash value insurance contracts or annuity contracts, trusts outside India, in which a taxpayer is a trustee, beneficiary or settlor, or any offshore entity or business, accounts in which a taxpayer is/was having/had signing authority, immovable property and other capital assets outside India, or any foreign custodial account. 

Who is required to report?

A resident taxpayer must mandatorily fill the Schedule FA and Schedule FSI provided in ITR 2 and ITR 3 for the above assets held / income earned at any time during the calendar year 2023. Even if his/her income is below the taxable limit and such assets were acquired from disclosed sources. A resident Indian is one who has stayed in the country for 182 days or more in the year  (in this case 2023-24) preceding the assessment year. If the stay was less than that but above 60 days, s/he can still qualify as a resident Indian if s/he stayed in the country for 365 days, in the prior four years (2022-23, 2021-22, 2020-21 and 2019-20).

How to report now?

If a taxpayer missed the July 31 deadline for filing his/her Return, s/he is still allowed to file a ‘Belated Return’ with applicable interest, and late fee. By filing now, a taxpayer can avoid more severe consequences that follow later. Since the ‘Original Return’ is filed after the due date but three months before the end of the relevant assessment year, it is called a belated return.  A taxpayer should select a proper and relevant Return (other than ITR 1 and ITR 4) and report the above-mentioned foreign assets and income accurately.  

A taxpayer is also allowed to revise his/her Return if filed within the due date, subject to certain conditions. There are chances of filing different Return, such as ITR 1 was filed instead of ITR 2 or ITR 3, misreporting income, omission of disclosing a source of income, deductions, bank details, personal information, mismatch of income between the original return and Form 26AS/Annual Information Statement in the relevant original return. Unlike belated return, here no further penalty will be levied. However, if the assessing officer discovers that the error was intentional / fraudulent, he may levy a hefty penalty. The due date for filing a belated return and revised return for the current assessment year is December 31, 2024. 

Non-compliance 

Failure to comply with the notice or in disclosing a foreign asset held abroad or income earned in foreign shores in the Return of Income will invite a penalty of Rs. 10 lakh and jail term, in serious cases, under the black money law.  

Shared information 

Due to leveraging of advanced technology, data analytics, and India’s agreements with foreign tax jurisdictions like tax treaties, automatic exchange of information (AEOI), common reporting standard (CRS) with 123 countries and Foreign Account Tax Compliance (FATCA) with the US, the tax department is receiving loads of information annually, which are closely monitored to create a more efficient tax system. 

For instance, Germany has recently shared information on properties owned by over 1,000 resident Indians in West Asia. Since October, following UAE’s tip on several wealthy Indians allegedly owning undeclared properties in Dubai, many have received notices from the Foreign Asset Investigation Unit (FAIU). The notices have sought confirmation on whether the source of income had been declared accurately in their income tax returns. 

The ongoing campaign offers a last window before initiating stringent action for non-compliance.