[Opinion] Non-Disclosure of Foreign Assets and Consequences under Black Money Act

CA Sri Harsha & CA Narendra – [2023] 152 taxmann.com 557 (Article)

1. Background

1.1. In order to counter the tax avoidance by residents in India by way of non-disclosing the income earned outside India, Central Government has introduced Black Money Act with effective from 01.07.2015. Though the IT Act levies tax on global income earned by residents, as there are inherent limitations for applicability of IT Act. The objective of the Black Money Act is to levy tax on undisclosed foreign income/or assets located outside India.

1.2. Every resident and ordinarily resident, while filing the return of income, shall disclose all foreign assets (including investment in shares and securities) and income on such foreign assets in Schedule FA. Non-submission of such Schedule FA in the return attracts consequences under the Black Money Act. In this Article, concept of ESOPs has been considered for better explaining the consequences under the IT Act and Black Money Act. The same principles would equally apply to other nature of assets as well.

1.3. It is general practice that a multinational company allots stock to its employees or employees of its Indian subsidiary under the global/normal ESOP scheme. In recent times, non-reporting of such employee stock options in the income tax returns has created a buzz in the industry. In some newsmedia,it was highlighted that the Government of India was in possession of information that many of the residents have not disclosed such ESOPs in their returns and hinted that the non-reporting of such ESOPs in India is liable for a huge penalty.

1.4. Companies may provide stock to employees either by way of ESOPs or RSU. The difference between the ESOPs and RSU is that in the former case, a company issues ESOPs to its employees at pre-determined exercise price. Once the conditions of granting ESOPs have been satisfied by the employee, after the expiry of vesting period, he can exercise the option to purchase the shares of the company at the price determined at the time of granting ESOPs.

1.5. However, in the case of RSU, a company issues shares of a company to its employee at free of cost. These RSU would be vested with employee subject to satisfaction of terms.Though there are conceptual differences between ESOPs and RSUs, there is no difference in taxation of underlying stocks under both the schemes.

1.6. In this Article, consequences, and reporting requirements under the provisions of the IT Act and the Black Money Act have been discussed in detail. The article has been divided into three parts, following the life cycle of ESOPs:

• Consequences & Reporting Requirements at the time of issue of ESOPs.
• Consequences& Reporting requirements in respect of income earned from such stocks.
• Consequences & Reporting requirements at the time of disposal/alienation of stocks.

1.7. Before understanding the consequences and reporting requirement, it is required to understand the method of exchange of information between two countries. In order to combat the possible tax evasion, G20 and OECD countries have agreed to develop CRS on Automatic Exchange of Information. Under the above initiative, Government of India has joined Multilateral Competent Authority Agreement under which Government of India is receiving information from more than 90 countries across the world. We believe that based on the above arrangements, Government of India would be in a position to obtain information of the assets located outside India which are held by Indians.

2. Consequences &Reporting requirements at the time of issue of ESOPs

2.1 Head of income

Section 17(2) of the IT Act states that any stock issued by the employer to its employee at free of cost or at concessional rate is considered as perquisite in the hands of the employee and such perquisite is chargeable to tax as income from salary.

2.2 Year of taxability

The question arises is in which year such perquisite is taxable i.e., whether it is year of granting, over period of vesting period or year of vesting or year of exercise.

2.3. Under Section 17(2) of the IT Act, perquisite by way of ESOP is taxable in the year in which the option is exercised by the employee. However, in the case of RSU, as stocks are automatically vested, such stocks are taxable in the year of vesting.

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