India’s Government and financial machinery has been in overdrive since the evening of 8 November 2016. Amidst the logistical chaos of ‘demonetisation’, legal circles have been abuzz with debates regarding the legal and tax implications of the move of the Government. Following the demonetisation of high denomination currency notes, there has been uncertainty with regard to tax implications on the amounts deposited in banks. The expectations of tax on unaccounted cash / deposits made into the bank accounts varied between tax incidence of as little as 30% to 90% (i.e. 200% penalty on tax).

Clearly, a mere 30% tax on the unaccounted money would be unfair to those who did indeed come clean under the recently closed Income Disclosure Scheme, where the tax rate on the income disclosed was 45% of the value of all assets so disclosed. It was therefore expected that the Government would indeed amend the law to enable taxing the unexplained cash deposits at a rate higher than 45%.

To this effect, the Government has introduced a Taxation Laws (Second Amendment) Bill, 2016 in the Lok Sabha on 28 November 2016.

In addition to increasing the tax rate and penalty on unaccounted or unexplained cash deposits or income, the Government has also introduced an opportunity to participate in a scheme whereby the overall tax incidence is reduced, but 25% of the cash deposited would be locked-in interest free for a minimum period of 4 years.

The proposals are summarised below:

The Opportunity: Garib Kalyan Yojna (i.e. Plan for benefit of the poor)

To provide an opportunity to make the unaccounted wealth available for the benefit the less fortunate in the country, the Government has introduced the ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojna, 2016’ (Scheme).

Under this Scheme, a person can declare any income / cash deposit in any account maintained with specified entities (i.e. RBI, banks, etc.) which is chargeable to tax in any year up to financial year (FY) 2016-17. The declarant would be required to pay 30% tax on the declared amount plus 33% surcharge on tax, to be called Pradhan Mantri Garib Kalyan Cess plus 10% penalty on the amount of undisclosed income.  The total tax outgo would be approximately 50%  of the declared amount.

Additionally, the declarant opting for the Scheme is also required to deposit at least 25% of the declared amount in the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016. The amount so deposited will not bear any interest and would be permitted to be withdrawn after 4 years from the date of deposit and would need to comply with other conditions as may be specified.

Taxpayers can submit their declaration with the designated Principal Commissioner or the Commissioner during the period when the Scheme remains in force. Specific rules and forms for making the declaration will be notified by the Government separately.

A valid declaration made under the Scheme would protect the declarants from applicability of various laws such as the Income-tax Act, 1961 (IT Act), Wealth Tax Act, 1957 etc. as well as the other penal provisions which would be attracted if the Scheme is not opted for.  These are discussed below.

Consequences of not availing the above opportunity

The Government has proposed the following changes to the taxation and penal laws under the IT Act with regard to the unaccounted cash / unexplained credits:

A.Taxpayer offers unexplained credit / cash to tax in his return of income for the FY 2016-17:

  •  Tax at the rate 60% of unexplained credit / cash. The surcharge rate is proposed to be increased to 25% of the tax in these cases.

B. Taxpayer does not offer unexplained credit / cash to tax in his return of income and such amount is detected by the tax department in a search carried out:

  • Tax at the rate of 60% of unexplained credit / cash plus 25% surcharge on tax PLUS
  • Penalty at the rate of 30% of unexplained credit / cash (if the taxpayer admits the undisclosed income, manner of deriving such income and substantiates the manner in which such income is derived, includes the said amount in his return and pays tax on it before a specified date) ELSE
  • Penalty at the rate of 60% of unexplained credit / cash

C.Taxpayer does not offer unexplained credit/cash to tax in his return of income and such amount is detected in a way other than by way of a search:

  • Tax at the rate of 60% of unexplained credit / cash plus 25% surcharge on tax PLUS
  • 10% of the above tax as penalty

Khaitan Comments

From the language of the Bill it is not entirely clear as to whether the deposits made by small savers, housewives and households, which do not exceed the minimum taxable income or Rupees 250,000 would also be subject or exempt from the aforesaid provisions. Senior finance ministry officials have made statements that such deposits will not be investigated by tax department. A clarification in this regard would put to rest any apprehension of harassment to small taxpayers.

The Government has backed its intent with action and has used stringent measures for getting rid of black money and penalising taxpayers indulging in generation and hoarding of black money. The Government is also expected to announce further measures to curb the menace of black money. One would need to wait and see the other measures that may be adopted to fight other aspects of the black economy such as benami assets in the form of real estate or shares and unaccounted wealth in the form of gold, jewellery, etc.