Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Tax on asset based on fair market value

Four-month window to declare undisclosed assets and regularise tax records opens on 1 June 2016

The four months’ window to declare unaccounted income under the Income Declaration Scheme 2016, will open on 1 June and remain open till 30 September. This is an opportunity to declare income or assets that were undisclosed. Such assessees would be able to pay tax, cess and penalty totalling to about 45% of the undisclosed income, and will be able to regularise their wealth and income tax records.

In another provision, under the new income tax return (ITR) forms that are to be used for the assessment year (AY) 2016-17, a new section, Schedule AL, has been added. An assessee having income of more than 50 lakh in the last financial year needs to disclose the value of her assets and liabilities (‘AL’) that she was in possession of at the end of the relevant financial year (FY). But which value of the asset has to be shown—the one that it was bought at, or its current market value?

But before we answer that, let us first find out what all an assessee has to disclose.

What to disclose

Any individual or Hindu undivided family (HUF) with a total income of more than 50 lakh in a year needs to adhere to the disclosure clause under Schedule AL. “Since wealth tax was abolished in Budget 2015, wealth tax returns are not required to be filed for FY 2015-16. As a replacement, the government has introduced Schedule AL in the tax return forms to continue to seek asset information of taxpayers," said Archit Gupta, chief executive officer and founder, Assessees who have to file tax returns under any of these forms—either ITR 1, ITR 2, ITR 2A, or ITR 4S—need to disclose their assets and liabilities in these forms. Those using ITR 3, or ITR 4 need to disclose additional information of financial assets such as investment in shares, mutual funds, and so on, in the Schedule AL.

The income declaration scheme is, however, for a different purpose—undisclosed income or assets. “The rules and forms in respect of the Scheme have not yet been notified and are expected to become public shortly," said Neha Malhotra, executive director, Nangia & Co. “Till then, those who wish to file a declaration should list down the income on which taxes have not been paid and the assets acquired, and gear up since these assets need to be valued as on 1 June 2016, for the purpose of filing the declaration," she said.

Which value to consider

Under Schedule AL, one has to disclose the cost price of assets and liabilities. There is no need to disclose the current fair market value. For instance, if a house was purchased for 15 lakh in 1995, the assessee has to disclose this price, irrespective of what the market value is at present. If a property has been jointly purchased, “the assessee would be required to disclose the value of the asset to the extent acquired out of her income," said Malhotra.

It would be easier for an assessee to disclose such information if it is a self-acquired asset. But, in case of an inherited property, “the cost to the previous owner shall be taken as cost for Schedule AL. It is similar the case of gold and other gifts," said Gupta.

However, if the purchase price is not available, “a fair market value (FMV) on the date the asset is estimated to be purchased by the first owner should be considered. If the asset was purchased (by the original owner) before 1 April 1981, the FMV on 1 April 1981 may be taken as cost of the asset. In case of gifts, which are assets (for reporting in Schedule AL), the same approach can be taken," Gupta said.

However, unlike Schedule AL, where an assessee needs to disclose an asset’s cost price, under the Income Declaration Scheme 2016, an assessee has to declare FMV of the assets as on 1 June 2016, and pay the tax accordingly.

For instance, if someone has purchased a house valuing 10 lakh out of her undisclosed income in 2005 and she wants to declare that income now, she will have to get the FMV of the house as on 1 June. If the valuer assesses the FMV of the house to be 50 lakh, she needs to pay 45% of the FMV as tax, i.e., 22.5 lakh, by the end of November 2016.

However, if she plans to sell the house in future, the cost of acquisition of the asset would be its FMV as on 1 June for the purpose of calculating capital gains.

The income tax department has prescribed procedures for calculating FMV of assets under various Acts.

For instance, as prescribed under the black money Act, which can be taken as reference to calculate FMV for the income declaration Scheme, FMV of assets such as bullion, jewellery or precious stones have to be determined, between cost of acquisition or the price it will fetch if sold in the open market on the valuation date, the higher amount will be considered.

The same process should be done in case of other assets such as immovable property (house or commercial space), or archaeological collections, drawings, paintings, sculptures or any work of art, as stated in the black money Act.

The assessee can obtain a report of FMV of these assets from a valuer recognised by the government.

If assets are financial in nature, such as shares and securities, the FMV should be evaluated at higher of cost of acquisition or the average of the lowest and highest price of such securities quoted by any established securities market on the valuation date.

When to go to a valuer

If one needs to find out the FMV of assets, a valuer can be helpful. It is also better to use the services of a valuer, rather than arbitrarily deciding an asset’s value, especially since these now have to be declared for the purpose of income tax.

“Government appointed valuers should be used to determine the FMV for all categories of assets, since any difference in valuation may result in hardship for the taxpayer," said Malhotra. “Government approved valuers follow a standard process of valuation and provide a detailed report of assets values, describing the method of valuation followed and mechanism of determining the value," she added.

As of now, a valuer needs to be registered under section 34AB of Wealth Tax Act, 1957, to be a recognised valuer. Fee and charges are also prescribed under the wealth tax Act.

“The fees that a valuer charges depends upon the value of an asset," said S.N. Bansal, general secretary, Institute of Government Approved Valuers, which is based in Delhi.

For instance, after an asset has been assessed and its FMV ascertained, for the first 5 lakh of the value, fee would be 0.5% of it. For the next 10 lakh, it would be 0.20%, for the next 40 lakh, 0.10%, and 0.05% of the value thereafter.

“After valuation, the valuer will provide a detailed report about the asset, such as weight and purity in case of gold and jewellery," said Bansal, adding that it takes about two days to prepare the report.

“Each property commands a different value. We take into account the location, surroundings, facilities, vastu and other aspects while determining the FMV of an house. Similarly, for assets such as paintings, artists’ credentials in terms of earlier works, and recognition are considered," said Bansal.

“The report provided should be kept to be given to the tax authorities, if required," said Malhotra.

The window between June and September is a good opportunity to come clean. While the income declaration window will remain open till 30 September, tax payable on such income can be paid till 30 November. Also, disclosures made under the Scheme will be exempt from prosecution under income-tax Act, wealth tax Act and the Benami Transactions (Prohibition) Act, 1988.