The international business press has recently reported that India has promulgated stricter rules pertaining to tax evasion and related offenses in an effort to limit the number of investigations for tax evasion, including the willful non-disclosure of off-shore bank accounts, which result with taxpayers paying an additional fee in avoiding prosecution and a period of incarceration. In the past, Indian resident taxpayers who did not disclose their foreign bank accounts and other foreign investments required to be disclosed have also avoided prosecution by a special relief rule referred to as “compounding” with the Central Board of Taxes. In seeking this form of “clemency”, the taxpayer is required to pay penalties and fines as well as the amount of taxes owed and in return is not required to serve time in jail. It is reported that during 2014 and 2015, approximately 85-90% of prosecutions were “plea bargained” through the compounding process. The compounding offenses in India are set forth in two broad categories. The first category sets forth what may be considered to be lesser offenses such as failures to file returns, failure to deliver required information statements, etc., and the second category involves higher level offenses such as willful tax evasion, conspiracy to evade or abet the evasion of tax or concealment of transfers of currency or other property, and filing false documents offenses.
Beginning June 17, 2019, India makes it much harder to avoid prosecution and potential jail time for taxpayers who facilitate tax evasion or are charged with certain tax offenses, including offenses charged under the country’s anti-black-money laws — like maintaining undisclosed foreign bank accounts. Several specific income tax violations are no longer subject to mitigation (compounding) and taxpayers charged with such offenses will be prosecuted, and if adjudicated guilty, sentenced to prison even were the accused to pay all taxes, penalties and interest. Such non-compoundable offenses include: (i) failure to turn over documents and books in records in response to a summons or other notice; (ii) transfers of commodities and jewelry, currency, etc. without approval where required; (iii) denial of review of computerized books and records; (iv) money laundering; and (v) offenses related to undisclosed foreign bank accounts or assets in violation of the Black Money Act.
The “compounding” approach, which was adopted in 2014, ran counter to India’s Black Money legislation in 2015, which applies to undisclosed foreign income and assets and its Benami Transactions (Prohibitions) Act of 1988 which blocks fraudulent property transfers. These other laws do not allow for “compounding”. What to do? In response the Central Board of Taxes recently issued new rules that block taxpayers from seeking compounding relief for anti-black-money and Benami violations. The new guidelines went into effect June 17, 2019. It is still possible, however, for taxpayers to petition the Ministry of Finance to file a compounding application even for violations of the Black Money Act of 2015 and the Benami Transactions (Prohibitions) Act of 1988.
India is also affirmatively engaged in efforts with its tax treaty partners, including the United States, to obtain information relating to potential Indian nationals and residents who are non-compliant in India. US-India Income Tax Treaty (1989), Article 28 (Exchange of information and administrative assistance); In re Letters Rogatory Issued by Director of Inspection of Gov’t of India, 385 F2d 1017 (2d Cir. 1967).
This post was provided for informational purposes only and may not be relied upon by anyone reading this post. If you have any question on this issue or pertinent provisions of the US-India Income Tax Treaty (1989), please consult with a legal advisor licensed to practice law in India. You may also call your lead attorney at Fox Rothschild or the undersigned, Chair of the firm’s International Tax and Wealth Planning practice for further information.