Foreign Assets & Accounts info included in new ITR form

In its efforts to check black money stashed in foreign banks, government has introduced a new column seeking details of foreign assets in the Income Tax Return (ITR) forms for the assessment year 2012-13. Taxpayers, who hold foreign bank accounts or properties, will now have to furnish details of their foreign assets which include information like country name, address of the bank, name mentioned in the account and peak balance during the year, after converting the value of the foreign currency in INR.

Similar information will also have to be provided by the taxpayer to I-T authorities if he holds financial interest in any entity abroad, details of overseas immovable property and any other other asset outside India.

The I-T department, in the new ITR, has also asked the taxpayer to furnish to it details of account/accounts abroad in which the taxpayer has “signing authority”.

Finance Minister Pranab Mukherjee had announced in his Budget speech earlier this month that new steps will be taken to make compulsory the reporting of assets held abroad by Indians.

“Furnishing of return by such a resident (with assets abroad) would be mandatory irrespective of the fact whether the resident taxpayer has taxable income or not,” the Budget statement had said.

The proposal would be effective from April 1, 2012 with retrospective effect.

No other changes have been made in the six other ITR forms.

Small Business - Tips to plan your taxes for 2012

Tax laws are subject to change every year, allowing individuals and small business owners to plan how their tax savings can pan out. For any business, big or small, a diligent approach to tax planning is sure to open up new tax saving avenues, taking advantage of the business deductions for which it qualifies.

This article is an attempt to trigger meaningful discussions between the tax payer and the tax advisor, looking to create awareness about potential benefits of tax planning.

A few aspects which will substantially impact your business are listed below:

1. Follow your tax laws closely | Hire consultants

As long as your tax filing is appropriate, there will be no roadblocks. However, for inappropriate filings, say, incorrect computation of sales tax, payroll tax & income tax, penalties, fines and punitive interest costs will add up. In case you do not have in-house assistance or unable to spend time on tax research to evaluate your business’s financial situation throughout the year, a CPA can help, by reviewing your overall position and providing you with the expert tax planning counsel you need today and in the years ahead. By combining unrivaled education, training and experience with a focus on your financial situation, a CPA can recommend sound strategies designed to make your goals a reality.

2. Make use of deductions | Expense related

Some deductions you should research on and take advantage of are automobile deductions, home office deductions, travel expense and entertainment expense deductions. Utilizing deductions helps to deduct business costs from gross income. Section 179 deductions apply to most tangible personal business property in service during the tax year, such as computers, office furniture, vehicles and machinery. These provide immediate tax relief on newly purchased equipment, helps improve cash flow and increase investment options for small businesses.

3. Classify your business | Different types have varied tax rates & liabilities

Proper classification of your business can help in reduction of your tax rates. You will be best advised to research on various types of businesses and what type your best fit is. Some business classifications are Sole Proprietorship, Partnership, Limited Liability Corporation, S-Corp, C-Corp among others with special tax statuses for some of them.

4. Plan for the future | Beware of tax traps

Ask yourself the following questions, and come up with viable plans for the future:

1. Have I created the most tax efficient type of business?
2. What is the best tax efficient way to save for my retirement?
3. What is considered a reasonable salary by IRS standards?
4. In case I wish to expand my business across states, what are the stipulations on multi-state taxability?
5. Is there a requirement to report my foreign assets? Non-disclosure may lead to onerous penalties from IRS. Take care if you own a bank account, real estate, business or other assets in a foreign country.
6. What is the IRS purview on business succession – most effective way to leave behind a business while avoiding a huge tax bill?

4. Pay out taxes in installments

In case you face difficulties in paying your taxes in full, you can negotiate a deal with the IRS wherein monthly repayment is possible. This will be beneficial especially for small business owners. Choose the right payment plan based on your need and eligibility. However, be wary of interest payments that might harm your business. 

  

Voluntary disclosure for foreign assets

Article by Mr. Karthikeyan in The Hindu Business Line dated 01.02.2012:

Mr X, an industrialist, constantly looks out for news items for a possible offer of a Voluntary Disclosure scheme by the Government, especially involving offshore assets. Mr X has funds stashed away in tax havens such as Switzerland, and is aware that he is incorrect in not disclosing the income abroad. No doubt, any voluntary disclosure scheme not only reduces the morale of the honest tax payers, but also gives a signal to dishonest ones that they can wait for the next voluntary disclosure scheme. India has witnessed no less than three voluntary disclosure schemes in the past three decades. The last such offer, the Voluntary Disclosure of Income Scheme (VDIS) 1997, was conceived to fight internal black money generation — an unconventional, but successful tool.

More than 350,000 people disclosed heretofore undisclosed income and assets under the scheme, and brought Rs 7800 crore in additional revenue to the government. Though it was considered a successful scheme, it must be mentioned that it was criticised for putting the rationale of timely and honest tax payment to question.

OFFSHORE INITIATIVES

Apart from India, many countries, such as the US, UK, Germany, France, Portugal, Israel, Greece, and South Africa have introduced voluntary disclosure programmes in the past, and some of these countries have done it more than once. Also, a majority of these voluntary disclosures were offshore programmes aimed at bringing back funds stashed outside the country. In this context, it is relevant to go through the details of two such amnesty programmes introduced by one of the biggest economies — the US, that too within a short span of three years. The first was called Offshore Voluntary Disclosure programme 2009, and the second, Offshore voluntary Disclosure Initiative 2011.

As per US Treasury rules, it is mandatory for all its citizens to disclose annually the details of financial accounts held abroad. Additionally, any income from these accounts must be disclosed in the tax return. The Bank Secrecy Act regulations requires that all US citizens with foreign accounts file Form 90-22.1 – Report of Foreign Bank and Financial Accounts (FBAR), if the taxpayer has an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in a foreign country, with an aggregate value of more than $10,000, at any point in a calendar year.

The penalty for failing to file an FBAR includes comprehensive civil fines, imprisonment of up to 10 years, or both.

PENALTIES

The Internal Revenue Service (IRS) came out with the first voluntary disclosure programme during 2009, and the subsequent one during February 2011. The latest disclosure required that taxpayers file 8 years of back tax returns, reflecting unreported foreign source income, calculate interest and penalties each year on unpaid tax, and apply a 25 per cent penalty on the highest balance of the undeclared financial accounts in the past eight years.

As many as 16,550 taxpayers availed this amnesty opportunity to avoid criminal prosecution. The very fact that the penal provisions, even under amnesty, are harsh, acts as a deterrent, and makes most taxpayers toe the line in future.

None of the past amnesty programmes in India had harsh penalties or steep tax rates unlike other countries, but the Indian Government was able to collect some much-needed revenue. Though the current scenario has enabled the Government to fix tax evaders with reliable data and with favourable clauses introduced in the Double Taxation Treaty with Switzerland etc., unless a strong political will is demonstrated, desired funds stashed overseas may not be easily brought back.

Setting aside the morality of the idea of allowing tax evaders to escape criminal prosecution, such offshore voluntary disclosure (with a high tax rate and penal provisions) will attempt to bring back illicit funds to put them to good use, rather than losing them altogether. With a slowing economy in the backdrop, much-awaited infrastructure projects need to have funds pumped in from the fiscal system.

An additional fact that might encourage such taxpayers is the current appreciation of the dollar, which might well offset the penal effect of the disclosures by bringing in more money on conversion.

(The author is a Coimbatore-based chartered accountant.)