It is not very uncommon in today’s times for individuals to have investments in offshore jurisdictions. While HNIs have invariably diversified their investments into various jurisdictions (e.g. through offshore trust structures), due to the global mobility available to individuals in different vocations, having offshore accounts or investments in offshore markets has become even more commonplace.

Many Indians have also started investing in the global stock markets using the liberalized remittance scheme. However, as enticing as the opportunities may sound, one must be aware of the tax implications and reporting requirements of such investments.

Individuals (and other taxpayers) who are tax residents of India are subject to tax on their global income. Therefore, they are required to include their global income in the tax computations and discharge their Indian taxes accordingly. A credit for taxes paid in the foreign jurisdiction is available against the Indian tax liability.

Also, every resident person who (a) holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India; or (b) has signing authority in any account located outside India; or (c) is a beneficiary of any asset (including any financial interest in any entity) located outside India, is required to file his Indian tax return and provide details of such holdings/ interests in the return. The tax return form contains a ‘Schedule FA – Details of Foreign Assets and Income from any source outside India’ for providing relevant details.

Failure to pay tax on income earned from global assets would result in various interest and penal consequences as prescribed under the tax laws. The penalty would be as high as 200% of the tax payable if such taxes are not paid by the taxpayer.

Additionally, the department may also initiate prosecution under the Income Tax Act to punish tax evasion. The term of punishment could be up to 7 years where the amount of taxes evaded exceeds INR 25 lakhs. Various other penalties and punishments are prescribed for failure to furnish information, documents, etc.

A few years back, in the aftermath of various data leaks from banks in tax havens across the world, India had introduced the ‘the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’ (‘Black Money Act’) to deal with unaccounted offshore wealth being accumulated by Indian tax residents.

At that time the Government had announced an amnesty scheme to permit disclosures of erstwhile unaccounted / undisclosed offshore assets with payment of tax at 30%, penalty of 100% of such tax and interest as applicable.

However, the benefit of the amnesty scheme was only available for a limited period. As of today, failure to disclose the offshore assets in the tax return or pay tax on such assets could attract stringent consequences under the Black Money Act. The Black Money Act levies tax, penalty and interest on ‘undisclosed foreign income and asset’.

The definition in this context is important as that determines if the non-disclosure would be covered with the ambit of the Black Money Act or the Income Tax Act. ‘Undisclosed asset located outside India’ means an asset (including financial interest in any entity) located outside India, held by the taxpayer in his name or in respect of which he is a beneficial owner, and he has no explanation about the source of investment in such asset or the explanation given by him is in the opinion of the Assessing Officer unsatisfactory. Therefore, lack of satisfactory explanation regarding the source of investment could be a determining factor in this context.

The Black Money Act prescribes a flat tax rate of 30%, plus a penalty of three times the tax, and applicable interest. Further, a penalty of INR 10 lakhs is also prescribed for failure to file a return or on failure to furnish information regarding the offshore assets in the tax return. Taxpayers may also be prosecuted for up to 7 years for failure to file a return or on failure to furnish information regarding the offshore assets in the tax return.

An important aspect to note is that the offence of wilful attempt to evade any tax, penalty or interest under the Black Money Act has also been included in the list of punishable offences under the Prevention of Money-laundering Act, 2002.

Further, the Foreign Exchange Management Act, 1999 also provides that where any foreign exchange, foreign security, or any immovable property, situated outside India, is suspected to have been held in contravention of section 4 of this Act, the relevant authorities may seize a value equivalent, situated within India, of such foreign exchange, foreign security or immovable property.

Therefore, all in all, one needs to be vigilant of all the relevant laws when making investments outside India to steer clear of any legal issues going forward. Diversifying into different geographies may seem attractive, however, the legalities of such investments need to be understood in full. There would also be the laws of the jurisdiction where one seeks to invest to be taken care of.

(Authors are Kumarmangalam Vijay and Suraj Shetty (Of-Counsel), JSA Advocates & Solicitors )