Tax Talk: Black money Act – Implications for employers

The provisions of the newly enacted Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) can get triggered when an ordinarily resident of India has any income from a source outside India not reported in a tax return, or where no return has been filed to report such income. Such undisclosed foreign income (UFI) would be taxed at 30% and can be subject to a penalty of up to three times the tax amount. The

Act also provides for up to seven years’ imprisonment. The provisions are also attracted when there is failure to disclose overseas assets generated out of income taxable in India.

Implications for employers

The Act provides that abetment, or inducing another person to make a false return or aiding in concealment of foreign income, would attract prosecution. Where the employer is responsible for payment of overseas income of an ordinarily resident employee and such income is not reported in Form 16, it needs to be seen whether proceedings under the Act for “abetment” can be initiated.

Outbound deputation

When an Indian employer deputes employees overseas, salary is usually paid in India while living allowances, accommodation benefits, per diems, etc are paid overseas. In many cases, overseas tax and social security costs are also met by the employer. To the extent these are taxable in the hands of an ordinarily resident employee but not disclosed in Indian tax return, such income could be categorised as UFI and the provisions of the Act can get triggered. Employees could be held liable to tax, penalties and prosecution under the Black Money Act.

From an employer’s perspective, non-inclusion or non-disclosure in Form 16 of such foreign income of an ordinarily resident employee may be construed as abetment. It is possible that the employer would not have included certain overseas payments in the Form 16 since an exemption is availed under the domestic tax law. However, employees may not be aware of the tax positions adopted by the employer and wrong statements made to the tax authorities could trigger queries on tax withholding to the employer.

Sensitising the employees on these issues  is, therefore, important.

Inbound deputation

Such employees could trigger “ordinarily resident” status in India after 2-3 years of stay here. It is important that any remuneration in respect of such employees is captured comprehensively by the employer. Challenges could arise with respect to bonus payments, stock option income and other trailing income. Where the employee is tax equalised, the onus of reporting these payments falls squarely on the employer, more so when the employee is equalised on his personal income as well. This definitely necessitates a review of the compensation collation process as well as tax positions currently being adopted by the employer in relation to expatriates.

With respect to inbound expatriates, questions with respect to disclosure of overseas social security and pension funds such as 401K balances, taxability of employer contribution to pension funds and accretions thereto could arise.

The taxability of the contributions could be in question, necessitating a review and fortification of tax positions adopted.

Employee communication

Sensitising employees on their disclosure responsibilities and ensuring the positions adopted in the tax return are in sync with the positions reflected by the company would go a long way towards enhancing employee awareness. That would help lighten the burden on employees and the employer.

Where there is non-disclosure with respect to past years, employers need to proactively take steps for correction and encourage employees to avail the one-time disclosure opportunity.

The author is a director at Deloitte Haskins & Sells LLP

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