Effective Tax Rate on undisclosed income under IDS, 2016 is still 45% - here is why

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Customer Care No. 91-11-45562222
Effective Tax Rate on undisclosed income under
IDS, 2016 is still 45 - here is why
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• Introduction
• 1. Under the Income Declaration Scheme, 2016
  ('IDS, 2016' or 'the scheme') a person is
  required to declare his undisclosed income by
  paying tax, surcharge and penalty totalling to
  45 of such undisclosed income declared.
  Recently, there has been some discussion in the
  media that effective rate of tax on undisclosed
  income has come down to 31 from 45. This
  conclusion seems to have been arrived at by
  drawing an inference from the response to the 5th
  question of the 3rd set of FAQs issued on 30th
  June, 2016 wherein it has been assured that no
  departmental enquiry shall be made in respect of
  sources of payment of tax, surcharge and penalty.

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• The relevant question reads as under
• "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"
• The basis of arriving at 31 tax rate is as
  follows Suppose, Mr. X has an undisclosed income
  of Rs. 145 and out of Rs. 145 , he declares Rs.
  100 and accordingly, he pays tax of Rs. 45
  (Rs.10045). Now, drawing support from response
  to question No.5 Mr. X is of the view that after
  declaration he will have a total legitimate
  income of Rs. 145 Rs.100 which was declared
  under the scheme plus Rs.45 for which no question
  shall be asked regarding its source and
  accordingly the effective tax rate is 31
  (45/145100).
• 2. Why, here is why the aforesaid view does not
  reflect the correct position.
• ?The basic requirement for making a declaration
  under the IDS is that there should be undisclosed
  income which has so far remained untaxed. The
  scheme does not define as to what constitutes
  "undisclosed income", but section 183 of the
  scheme categories it in three parts-First part
  covers a case where the person has failed to
  furnish a return of income under section 139 of
  the Act. Second part covers a case where the
  person has failed to disclose any income
  chargeable to tax in the return of income before
  the commencement of IDS i.e., 1 June 2016. Third
  part covers a case where income of a person has
  escaped assessment by reason of the omission or
  failure on the part of such person to furnish the
  return of income or to disclose fully and truly
  all material facts necessary for the assessment
  or otherwise.

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• As can be observed, section 183 nowhere provides
  that if one is successful in explaining the
  source of income to the satisfaction of the
  Assessing Officer ('AO'), such income shall be
  treated as legitimate income, even though no tax
  has been paid in respect of such income.
• Further, on perusal of the scheme and the forms,
  it is clear that the scheme does not require
  disclosure of the manner in which undisclosed
  income has been derived by the declarant as it
  merely requires disclosure of income assessment
  year-wise and head-wise (salary, income from
  house property, capital gain etc.). In that
  sense, the issue dealt with by Question No.5, is
  merely clarificatory in nature.
• Moreover, the scheme doesn't mandate a declarant
  to disclose his entire undisclosed income. It is
  entirely upto him whether to disclose his entire
  undisclosed income or part income. The only
  condition is that he must pay the full amount of
  tax (including surcharge and penalty) within the
  specified timeline in respect of undisclosed
  income declared by him under this scheme.
  However, he will get the immunity only in respect
  of such undisclosed income which he declares
  under the scheme, the balance shall be subject to
  tax under the Income-tax Act whenever the AO
  detects such income.
• This aspect has been clarified by the CBDT in its
  FAQ Circular No. 17 of 2016, dated 20.6.2016
• "Question No.10 If a person declares only a
  part of his undisclosed income under the Scheme,
  then will he get immunity under the Scheme in
  respect of the part income declared?
• Answer It is expected that one should declare
  all his undisclosed income. However, in such a
  case the person will get immunity as per the
  provisions of the Scheme in respect of the
  undisclosed income declared under the Scheme and
  no immunity will be available in respect of the
  undisclosed income which is not declared."

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• ?Further, this position emerges from the combined
  reading of section 188 and section 197(c) of the
  scheme. For ready reference the relevant extracts
  of section 188 and section 197(c) have been
  re-produced as under
• "Undisclosed income declared not to be included
  in total income.
• 188. The amount of undisclosed income declared in
  accordance with section 183 shall not be included
  in the total income of the declarant for any
  assessment year under the Income-tax Act, if the
  declarant makes the payment of tax and surcharge
  referred to in section 184 and the penalty
  referred to in section 185, by the date specified
  under sub-section (1) of section 187."
• "Section 197. For the removal of doubts, it is
  hereby declared that
• (c) where any income has accrued, arisen or
  received or any asset has been acquired out of
  such income prior to commencement of this Scheme,
  and no declaration in respect of such income is
  made under this Scheme,
• (i)such income shall be deemed to have accrued,
  arisen or received, as the case may be or
• (ii)the value of the asset acquired out of such
  income shall be deemed to have been acquired or
  made,in the year in which a notice under section
  142, sub-section (2) of section 143 or section
  148 or section 153A or section 153C of the
  Income-tax Act is issued by the Assessing
  Officer, and the provisions of the Income-tax Act
  shall apply accordingly."

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