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Foreign assets become a tricky terrain in income tax return filing

Mumbai, July 24, 2023

Many were, and some still are, oblivious of the price of not disclosing overseas stock options which have been vested but not exercised, ongoing retirement schemes like 401(k) in the US, and beneficial interests in offshore companies.

As the July 31 tax deadline approaches (amid hopes it may be pushed back due to the rains), many professionals, businessmen, and diaspora members who have returned are trying to figure out ways to disclose certain foreign assets to avoid an encounter with the taxman.

Many were, and some still are, oblivious of the price of not disclosing overseas stock options which have been vested but not exercised, ongoing retirement schemes like 401(k) in the US, and beneficial interests in offshore companies. 

Amid a spate of notices in the last one year from the income tax (I-T) department, after it stumbled upon information which were missing in the IT returns (ITRs), these well-heeled taxpayers are being cautioned by tax practitioners and advisors.

"Many infotech sector employees, who are back from the US, have their funds invested in the 401 (k) plans. Now, the foreign assets (FA) schedule in the ITR form has no specific column for sharing details of such funds. The only option is to report them as "any other capital asset", but here one needs to give details of the date of acquisition and amount of total investment. However, for 401(k) plans, there is no one date of acquisition as the amount had been invested every month while the person was working in the US. Also, what people have is the present fund value, not the amounts invested. Many people are not even reporting these funds in the FA schedule which may have serious consequences," said Manish Dafria, a chartered accountant. Failing to disclose an asset in the FA schedule, introduced a decade ago, could trigger a penalty of ₹10 lakh while not reporting any income for tax could mean forking out 120% of the tax amount.

Even if a person decides not to report stock options as they have not been exercised, the I-T department may nonetheless come to know about them from overseas authorities as the financial entity holding the stock option accounts could disclose the name of all 'beneficiaries'. So, like the 401 (k) plan, it may be safer to report even those stock options (from foreign employers) whose vesting period may have just started.

As per the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard Rules, 401 (k) is a non-reportable account for financial institutions. "It is similar to the NPS account in India. So, under the exchange of information mechanism, foreign governments would not report 401(k) accounts to India. But since schedule FA requires one to report all kinds of foreign assets, 401(k) is considered a reportable account. Though, technically, a 401(k) account is maintained through a financial institution, which, in turn, invests in bonds/stocks, it falls under the category of 'equity and debt interest held'. But since it is not specifically covered, one may report it as 'other assets' held outside India," said Siddharth Banwat, partner at a large CA firm.

Many taxpayers are also unaware that they should separately apply to the I-T department to ensure that the amounts accruing in the 401 (k) account are taxed only at the time of withdrawal.

The FA schedule requires an assessee to spell out its 'beneficial interests' in overseas assets.

"Say, an individual has invested less than 10% capital in a UK company, which has further invested less than 10% capital of a German company. As per the overseas investment regulations under FEMA, the UK company has no 'control' in the German company and hence such indirect investment in the German company would not require any reporting to the RBI. However, it may still be subject to reporting requirements under Table B of Schedule FA," said Harshal Bhuta, partner at the CA firm PR Bhuta & Co.

On the one hand, not disclosing could mean holding back some of the information on beneficial interests; on the other hand, reporting it could invite a notice from the department as the tax office software detects that there is no matching remittance for investment in the US company. More importantly, in case of multiple stepdown investments, how many layers does one report?

What's also worrying is the possible mismatches between the information in the ITR (based on income and transactions in a financial year) and the information received by the I-T office from foreign governments which share data pertaining to a calendar year. Say, someone who bought shares of a Nasdaq company in January 2023 and sold in March 2023, will pay capital gains tax but not report the assets while filing ITR for FY23.

"There will be certain incomes (earned between January and March 23) that will be offered to tax in return for AY 2023-24, but the assets and incomes will be reported in next year's return (AY 2024-25) as they would get covered in the next financial year. This period mismatch may result in queries from the tax department as income would have already been offered in a prior year (AY 2023-24)," said Ashish Mehta, partner at the law firm Khaitan & Co.

Mehta feels that though there would be practical issues in reporting the exact date of acquisition in 401 (k) accounts (given the frequency of contributions and accruals), the conservative view would be to report the date (or, dates) from which contributions began.

"When it comes to offshore assets, one must be ultra-cautious, considering the adverse implications. The general rule that must be followed is 'report when in doubt'," he said.You Might Also Like:

[The Economic Times]

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