New norms to report foreign accounts

This year’s ITRs have changed the rules for reporting foreign accounts and assets

The newly-notified tax return forms (ITRs) for the financial year 2018-19 requires the taxpayers who are considered ordinarily resident to disclose their overseas bank accounts/assets, held at any time during the ‘relevant accounting period’. Earlier, these were being reported on a financial year basis.

Instructions to ITR 2 clarified that ‘accounting period’ in this regard would comprise the following: The period from January 1, 2018 to December 31, 2018, where the calendar year is adopted for closing accounts and tax filings in the jurisdictions where such overseas assets/accounts are held; from April 1, 2018 to March 31, 2019, where the financial year is adopted as the basis for closing accounts and tax filings; or that period of 12 months, which ends on any day succeeding April 1, 2018, in those jurisdictions where any other period of 12 months is adopted as the basis for closing accounts and tax filings.

The move is helpful as taxpayers otherwise faced the hassle of different periods being followed abroad, in comparison with India. However, challenges remain.

Challenges

For one, while the foreign accounts/assets can be disclosed on a calendar year/home country tax year basis from now, taxpayers are required to report their overseas income on financial year basis only.

Secondly, consider a situation where a taxpayer qualified as a non-resident/not ordinarily resident in 2017-18 and ordinarily resident in 2018-19. As per the new rule, assets held by him during the three months period of January to March 2018 also will have to be reported if the foreign country in which he holds assets/accounts follows calendar year. This has to be done even though he was a non-resident or a not ordinarily resident in 2017-18 and hence, is not liable to tax in India for his overseas income for the period January-March 2018.

Three, there may be a high value transaction (capital gain), which may be falling in the Indian tax year (2018-19) but not in overseas tax year (calendar year 2018).

Finally, there are certain overseas jurisdictions which neither follow the calendar year nor the financial year and these can throw up another challenge. For example, consider Australia where the tax year is from July to June. In this case, for 2018-19 in India, which accounting period of Australia is relevant becomes a question. If it is July 2017-June 2018, significant period of India tax year reporting is missed and, if it is to be taken later (July 2018-June 2019), the details may not be readily available in view of July 31, 2019 being the deadline to file India tax return for the India tax year 2018-19.

All these cases may get thrown up as exceptions under automated processes and leading to issue of notices by the tax authorities.

Timing of change

All these changes and newer information are being sought after the India tax year ended and the forms are notified.

It would be good if these kinds of changes are notified well in advance in the beginning of the tax year so that taxpayers get the time to compile details properly. Instead of having different years for reporting assets/accounts and income, it should be aligned.

The writer is Partner and Leader, Personal Tax, PwC India

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