Income tax department to take closer look at bank accounts, property or stocks abroad

MUMBAI: Next time, you will think twice before opening a bank account in Jersey or buying a property in London — even if the transaction is legitimate. Everyone having accounts with offshore banks, or owning properties or stocks abroad will be soon asked a string of questions by the tax office — how the money was earned, how was it transferred, was the Reserve Bank of India informed, and most importantly, what lies beyond the accounts and shareholdings.

The apex body, Central Board of Direct Taxes (CBDT), has directed all tax circles that assessing officers should identify all foreign assets declared in income-tax statements and “examine various aspects related to the foreign assets such as verification of source of investment, taxability of income arising from the assets, etc”. The communique reached tax offices 10 days ago.

“These accounts may have been opened under the liberalised remittance scheme (LRS) of RBI and money may have been transferred using proper banking channels, but it may not reveal the full picture,” said a senior tax officer on condition of anonymity.

“What if a person holds $10 worth shares in a shell company which in turn owns assets worth millions of dollars?” said the senior tax officer. In the assessment year 2012-13, individuals were first given the chance to declare their foreign assets when the income-tax department introduced a new column in the tax return form. The recent directive from CBDT comes at a time scrutiny notices, pertaining to that year, are being finalised. “Such cases will be timebarred after March 31, 2015. Now scrutiny notices will be prepared keeping the declared foreign assets in mind,” said a tax consultant.

Resident individuals were first allowed in February 20014 to hold accounts with overseas banks, buy properties and invest in securities traded in offshore financial markets. RBI had lowered the eligibility limit for foreign exchange remittances under the liberalised remittance scheme (LRS) to $75,000 in 2013 when the rupee came under pressure, but later raised it to $125,000 in June 2014 when the currency market stabilised.

In February this year, RBI in its monetary policy statement announced the LRS limit was being enhanced to $250,000 per person per year. But some of the state-owned as well as foreign banks in India are reluctant to handle higher remittances with the government yet to come out with a notification to ratify the central bank’s decision.

MISUSE OF LRS WINDOW

Indications are that many individuals who have declared foreign assets may now receive scrutiny notices. According to the CBDT letter to tax offices, “In respect of other cases also which have been selected for scrutiny, where verification of foreign assets is not mentioned as one of the reasons for selection, the assessing officer should examine the schedule FA (foreign assets) of the income-tax return for similar verification.”

According to a senior chartered accountant, while most overseas investments are legitimate, there are instances where the LRS window has been used to float companies in Dubai and other convenient tax-free zones. “Bank accounts of these newly incorporated entities in Dubai have been used to receive funds transferred from Swiss bank accounts.

Between early 2010 and April 1, 2011, when the information-sharing pact between India and Switzerland came into force, a substantial amount of funds is believed to have moved from the numbered accounts to Dubai,” said the person. Indeed, the central bank had subsequently turned down several fund remittance applications for setting up new offshore companies. Instead, banks were told to remit funds for investment in existing securities.

“If there are shell companies and holding entities, we do not expect assessees to reveal what all assets are being held. Strictly speaking, they may not be under any compulsion. But then we have to enquire and will have to ask questions,” said another tax officer.