Back-door amnesty for secreted foreign funds

T.C.A.RAMANUJAM | Updated on: May 28, 2011

If an industrial house has secreted away funds abroad, Sec 115BBD gives it an opportunity to bring back the money and legitimise the same.

Right from the Supreme Court onwards, the one fiscal problem agitating the minds of enlightened citizens all over India relates to the problem of secreted funds kept in foreign banks without paying taxes. The Government would like to announce an amnesty scheme to enable account holders in foreign banks to bring home such funds so that the same can be used for developmental purposes.

Difficulty arises in this regard because of the undertaking given before the Supreme Court against bringing in such an amnesty scheme. The Government has now thought it fit to announce a scheme by way of amendment to the Income-Tax Act so as to enable remittance to India from abroad at a concessional rate.

At Para 146 of the Budget Speech, the Finance Minister said, “It has been represented that the taxation of foreign dividends in the hands of resident taxpayers at full rate is a disincentive for their repatriation to India and they continue to remain invested abroad. For the year 2011-12, I propose a lower rate of 15 per cent tax on dividends received by an Indian company from its foreign subsidiary. I do hope these funds will now flow to India”.

The Memorandum accompanying the Finance Bill explains how under the existing provisions of the Income-Tax Act, dividend received from foreign companies is taxable in the hands of the resident shareholder at his applicable marginal rate of tax.

Therefore, in case of Indian companies which receive foreign dividend, such dividend is taxable at the rate of 30 per cent plus applicable surcharge and cess. Finance Bill 2011 has inserted a new section to provide that where total income of an Indian company for the previous year relevant to the assessment year 2012-13 includes any income by way of dividend received from a foreign subsidiary company, then such dividends shall be taxable at the rate of 15 per cent (plus applicable surcharge and cess) on the gross amount of dividends. No expenditure in respect of such dividends shall be allowed under the Act.

New Section 115BBD

The newly inserted Section 158BBD inserted with effect from April 1, 2012 declares,

Where the total income of an assessee, being an Indian company, for the previous year relevant to the assessment year beginning on the first day of April, 2012 includes any income by way of dividends declared, distributed or paid by a subsidiary foreign company, the income tax payable shall be the aggregate of the amount of income tax calculated on the income by way of such dividends, at the rate of 15 per cent.

Not withstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provisions of this Act in computing its income by way of dividends referred to in subsection (1).

For purpose of this clause, dividends will have the same meaning as given in Section 2(22) except sub clause (e) thereof. Section 115BBD (3) (ii) lays down that “subsidiary foreign company means, a foreign company in which the Indian company holds more than half in nominal value of the equity share capital of the company.

Reading the fine print

Not many will understand the implications of the newly inserted Section 115BBD. If an industrial house has secreted away funds in a Swiss bank account, it will now get an opportunity to bring back the money and legitimise the same by paying the concessional rate of tax.

All that it has to do is to set up a subsidiary in one of the innumerable tax havens and transfer funds from the secret Swiss bank account to the account of the newly formed subsidiary in another bank. The subsidiary will then send the moneys by way of dividends to the Indian holding company after creating a pretence of doing financial consultancy work in the tax havens. It would appear the tax havens abroad will only be too eager to register such subsidiary in as short a time as possible.

Remittance from the tax havens to the Indian account of the holding company in India will suffer a tax of 15 per cent. This tax rate is much lower than the rate of 18 per cent levied by Singapore. That is half of the rate that firms and individuals pay in India. No questions will be asked since tax has been paid. Black money in Swiss bank account can now be legitimised.

No wonder, those reading the fine print in the Budget papers have “spotted the beauty of the 15 per cent tax rule” and called it a back-door amnesty scheme.

It should be noted that the newly inserted Section 115BBD will be in operation only for one year, i.e the financial year ending 31.03.2012 relevant to the assessment year 2012-13. Make hay while the sun shines.

(The author is a former Chief Commissioner of Income-Tax.)

Published on May 21, 2011
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