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Customer Care No.

91-1145562222

Effective Tax Rate on


undisclosed income under
IDS, 2016 is still 45% - here
is why
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Introduction
1.Under the Income Declaration Scheme, 2016
('IDS, 2016' or 'the scheme') a person is
required to declare his undisclosed income by
paying tax, surcharge and penalty totalling to
45% of such undisclosed income declared.
Recently, there has been some discussion in the
media that effective rate of tax on undisclosed
income has come down to 31% from 45%. This
conclusion seems to have been arrived at by
drawing an inference from the response to the
5th question of the 3rd set of FAQs issued on
30th June, 2016 wherein it has been assured
that no departmental enquiry shall be made in
respect of sources of payment of tax, surcharge
and penalty.
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The relevant question reads as under:
"Question No.5 : Where a valid declaration is made after making valuation as per the provisions
of the Scheme, read with IDS Rules and tax, surcharge & penalty as specified in the Scheme
have been paid, whether the department will make any enquiry in respect of sources of
income, payment of tax, surcharge and penalty?
Answer: No"
The basis of arriving at 31% tax rate is as follows: Suppose, Mr. X has an undisclosed income of
Rs. 145 and out of Rs. 145 , he declares Rs. 100 and accordingly, he pays tax of Rs. 45
(Rs.10045%). Now, drawing support from response to question No.5 Mr. X is of the view that
after declaration he will have a total legitimate income of Rs. 145 [Rs.100 which was declared
under the scheme plus Rs.45 for which no question shall be asked regarding its source] and
accordingly the effective tax rate is 31% (45/145100).
2. Why, here is why the aforesaid view does not reflect the correct position.
The basic requirement for making a declaration under the IDS is that there should be
undisclosed income which has so far remained untaxed. The scheme does not define as to
what constitutes "undisclosed income", but section 183 of the scheme categories it in three
parts-First part covers a case where the person has failed to furnish a return of income under
section 139 of the Act. Second part covers a case where the person has failed to disclose any
Customer
No. 91-11income Care
chargeable
to tax in the return of income before the commencement www.taxmann.com
of IDS i.e., 1 June

As can be observed, section 183 nowhere provides that if one is successful in explaining the source of income
to the satisfaction of the Assessing Officer ('AO'), such income shall be treated as legitimate income, even
though no tax has been paid in respect of such income.
Further, on perusal of the scheme and the forms, it is clear that the scheme does not require disclosure of the
manner in which undisclosed income has been derived by the declarant as it merely requires disclosure of
income assessment year-wise and head-wise (salary, income from house property, capital gain etc.). In that
sense, the issue dealt with by Question No.5, is merely clarificatory in nature.
Moreover, the scheme doesn't mandate a declarant to disclose his entire undisclosed income. It is entirely
upto him whether to disclose his entire undisclosed income or part income. The only condition is that he must
pay the full amount of tax (including surcharge and penalty) within the specified timeline in respect of
undisclosed income declared by him under this scheme. However, he will get the immunity only in respect of
such undisclosed income which he declares under the scheme, the balance shall be subject to tax under the
Income-tax Act whenever the AO detects such income.
This aspect has been clarified by the CBDT in its FAQ [Circular No. 17 of 2016, dated 20.6.2016]
"Question No.10 : If a person declares only a part of his undisclosed income under the Scheme, then will he
get immunity under the Scheme in respect of the part income declared?
Answer: It is expected that one should declare all his undisclosed income. However, in such a case the person
will get immunity as per the provisions of the Scheme in respect of the undisclosed income declared under the
Scheme and no immunity will be available in respect of the undisclosed income which is not declared."

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Further, this position emerges from the combined reading of section 188 and section 197(c)
of the scheme. For ready reference the relevant extracts of section 188 and section 197(c)
have been re-produced as under:
"Undisclosed income declared not to be included in total income.
188. The amount of undisclosed income declared in accordance with section 183 shall not be
included in the total income of the declarant for any assessment year under the Income-tax
Act, if the declarant makes the payment of tax and surcharge referred to in section 184 and
the penalty referred to in section 185, by the date specified under sub-section (1) of section
187."
"Section 197. For the removal of doubts, it is hereby declared that
** ** **
(c) where any income has accrued, arisen or received or any asset has been acquired out of
such income prior to commencement of this Scheme, and no declaration in respect of such
income is made under this Scheme,
(i)such income shall be deemed to have accrued, arisen or received, as the case may be; or
(ii)the value of the asset acquired out of such income shall be deemed to have been acquired
or made,in
in which a notice under section 142, sub-section (2) www.taxmann.com
of section 143 or
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