The government is giving black money holders a one-time window to pay total tax of 50%, including surcharge and penalty on the unaccounted amounts deposited by them in banks between November 10 and December 30 following the repeal of Rs 500 and Rs 1,000 banknotes. Under a new scheme, Pradhan Mantri Garib Kalyan Yojana (PMGKY) 2016, they can take half the post-tax amount home while the other half will be locked in for four years sans interest. So the total cost of carrying unaccounted cash, with the returns forgone due to the lock-in on 25% of the declarations, would be slightly higher (a four-year term term deposit with State Bank of India fetches 6.5% per annum).
Tax experts were unanimous in predicting that the scheme would be hugely attractive to those who are declaring unaccounted income (PMGKY tax burden is comparable to 45% tax-plus-penalty levied under the recently concluded Income Disclosure Scheme). Calling the government’s approach “very lenient”, they said the amendments to the Income Tax Act would bring certainty to the tax treatment of demonetisation deposits; without these changes, a mass of litigation would have been triggered.
However, if you seek to conceal all or part of the unaccounted income when you file the tax returns for FY17 and the taxman finds out, the total tax on such concealed income would be a prohibitively high 85% (60% tax plus 15% surcharge and 10% penalty), according to the changes proposed in the I-T Act via a money Bill tabled in Parliament by finance minister Arun Jaitley on Monday. While there is leniency for those seizing the PMGKY opportunity, the government also proposed to hike the taxes and penalties for tax evasion, including for search and seizure cases.
The surcharge (33% of tax) applicable under the PMGKY window will be called the PMGK Cess and the proceeds are likely be used for poverty alleviation schemes. The Reserve Bank of India will notify a deposit scheme for the 25% declared income locked in and the fund will be used for irrigation, infrastructure, primary education, primary health, etc.
Section 270 A — which generally provides for a penalty of 50% of tax (total burden 45%) in the case of under-reporting of income and 200% (total burden 90%) in the case of misreporting — will remain unchanged. This provision will, however, not apply in the current instance of post-demonetisation cash deposits. The aforementioned new taxation and investment regime under PMGKY will exclusively take care of voluntary disclosures under PMGKY until December 30.
Additionally, Section 115BBE will be amended to provide for heftier imposts than now on “unexplained credit, investment, cash and other assets”. While currently Section 115BBE provides for a total tax of 33% (including surcharge and cess) and disallows expense, deduction/set-off, the tax rate will be hiked to 75% (60% tax and 15% surcharge), suggesting a stricter view by the government of tax cheats in future. However, if an assessee chooses to deflate his unaccounted income deposited after demonetisation and sidestep the PMGKY, he could await 85% tax, also being brought in via the current amendments.
Revenue secretary Hasmukh Adhia said the I-T department would not ask for the source of funds deposited in banks from November 10 if the entire unexplained income is declared and 50% tax paid on it. “The disclosures will enjoy immunity from wealth tax, civil and other taxation laws but there will be no immunity from FEMA, PMLA, narcotics and black money law,” Adhia said. PMGKY would come in as a new Chapter 9 in Finance Act, 2016, he added.
As per the changes proposed to Section 271 AAB, the penalty for search and seizure cases, if unaccounted income is admitted and taxes paid, would be increased from 10% to 30%. In other cases, the penalty will continue to be 60%.
Girish Vanvari, partner and head of tax, KPMG, said: “The amendments appears to be very strategic and could lead to a win-win situation because if everything goes well, tax collections will go up substantially, further money will be raised in specified bonds for country’s investments needs and further, the assessee would also retain 25% of his undisclosed income to himself for future use.”
Although the income tax exemption threshold is R2.5 lakh at present, government sources refused to commit that demonetisation deposits without matching income below this threshold would be spared from the proposed levies. This is because the government reckons that black money holders have rampantly misused others’ accounts — including the Jan Dhan accounts — to sidestep the taxman.