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The Indian government has continuously updated its tax legislation to curb the evasion of taxes and promote transparency. One significant step in this direction was the introduction of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA). Recently, there has been an amendment in Section 230(1A) of the Income-tax Act, 1961 (the Act), to include liabilities under the BMA. This amendment will significantly impact individuals domiciled in India who intend to leave India.
Section 230 of the Act requires an individual to obtain a tax clearance certificate while leaving India in certain specified circumstances. The circumstances would differ basis the individual’s domicile status.
Before leaving India, a person domiciled in India must furnish an undertaking to the income-tax authorities in Form No. 30C, providing basic information such as PAN, purpose of visit, estimated period of stay outside India, etc. However, in certain circumstances, the income-tax authorities may require an individual to obtain a tax clearance certificate for which an application in Form No. 31 is required to be filed. Pursuant to the satisfaction of tax authorities regarding no outstanding liability or sufficient funds being available for the disposal of liabilities under the specified acts[1], the authorities would issue a tax clearance certificate in Form No. 33. This certificate would be valid for the period mentioned therein.
The certificate in Form No. 33 requires tax authorities to certify that the applicant has no outstanding liabilities or that such person has made satisfactory arrangements to pay taxes under the Act, Wealth-tax Act, Gift-tax Act, or Expenditure-tax Act.
With an intent to consolidate various tax obligations arising under the acts administered by the Central Board of Direct Taxes (CBDT) and to promote a more effective tax administration system, the BMA is included in the aforesaid list of specified Acts. This amendment will be effective from 1 October 2024 and applies to a person who is domiciled in India.
For avoidance of any doubt, the CBDT[2] also clarified that the only amendment made in the said section is to include the BMA, while other provisions remain unchanged. The CBDT reiterated that the Tax Clearance Certificate is needed by residents domiciled in India, only in certain situations mentioned in the ensuing para.
This essentially means that such individuals must now ensure that they discharge liabilities under the BMA before leaving India. The BMA targets undisclosed foreign income and assets, imposing stringent penalties and prosecution for non-compliance. Nevertheless, the Finance Ministry has reiterated and clarified that the requirement to obtain a tax clearance certificate is applicable for individuals domiciled in India only in the following situations[3]:
Also, the income tax authority is required to record the reasons for asking such a person to obtain a tax clearance certificate and prior approval from the Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax for the same.
With several notices issued to high-net-worth individuals (who are more likely to have significant foreign assets) in the recent past for undisclosed assets and income, it is evident that the government is reinforcing its commitment to tackling black money stringently.
Specific individuals intending to leave India must now ensure compliance with the BMA, including but not limited to declaring all foreign income and assets, paying the appropriate taxes, and any penalties for undisclosed assets/ income, if any, in addition to other specified Acts mentioned above.
The rationale for including the BMA aligns with global initiatives to increase transparency in financial transactions and reduce tax evasion. Individuals with undisclosed foreign assets and income may face increased scrutiny to ensure their tax liabilities are settled before departure.
Globally, many countries may not have a formal tax clearance requirement. Still, they necessitate compliance with tax obligations by filing returns/forms before departure, which the respective income tax authorities monitor. For example, in the US, the IRS[1] requires certain taxpayers, particularly expatriates, to file Form 8854 (Initial and Annual Expatriation Statement) to certify compliance with tax obligations before expatriation.
Countries participating in global transparency initiatives, such as the Common Reporting Standard by the Organisation for Economic Co-operation and Development, share financial information to combat offshore tax evasion. India’s tax clearance certificate requirement supports these efforts by ensuring taxpayers do not evade liabilities under different laws by leaving the country.
While the concept of a tax clearance certificate is not universally applied, the underlying principle of ensuring tax compliance before departure is common in many countries.
This requirement ensures that individuals settle all tax liabilities, including those related to undisclosed foreign assets, before leaving the country, which promotes transparency and an accountable tax system. The need for tax clearance certificates for residents arises when they travel abroad, especially for reasons other than tourism or short-term visits. However, considering the need of the tax authorities to ensure the fulfilment of certain conditions for asking Indian residents to obtain this certificate, the requirement to obtain such certificates remains low.
[1] Income Act, 1961 or the Wealth-tax Act, 1957, or the Gift-tax Act, 1958, or the Expenditure-tax Act, 1987
[2] vide Press Release dated 20 August 2024
[3] CBDT’s Instruction No. 1/2004, dated February 5, 2004