Earlier this year the Finance Act, 2016 introduced a new penalty provision in income tax law. At the same time the government announced an Income Disclosure Scheme (IDS) allowing taxpayers who had evaded taxes to come clean and declare undisclosed income and assets but at a penal rate.
Then last week, after the demonetisation move, the finance ministry announced the Pradhan Mantri Garib Kalyan Yojana (PMGKY), another income disclosure scheme for those who have evaded tax, evaded the IDS but now want to come clean. Alongside it also proposed changes in penalties applicable on black money.
Thus the penalties applicable on black money, or undisclosed income or wealth, have changed four times this year. This ready reckoner details the seasonal changes and computes the liabilities as they’ve changed.
Budget 2016
Till May 2016, black money was taxed as unexplained income at 35.54 percent (30 percent tax plus prevalent surcharge) under Section 115 BBE of the Income Tax Act, 1961. Based on whether it was under-reported or misreported income, a penalty would apply.
Then in May, the Finance Act, 2016 rewrote penalties applicable on under-reported and misreported income by creating a new section 270A in the law. Earlier the penalties ranged from a minimum 100 percent to a maximum 300 percent. These were changed this year to two fixed rates.
Section 270A says if the income assessed by the tax department is more than what is disclosed by a taxpayer in his returns, it amounts to under-reporting and is subject to 50 percent penalty. Misreporting of income, for instance, misrepresentation or suppression of facts, attracts a 200 percent penalty.
The Math For Section 270A
- Under-reported Income: Rs 100
- Tax Rate: 35.54 percent (including surcharge and cess)
- Tax: Rs 35.54
- Penalty at 50 percent of tax: Rs 17.77
- Total: Rs 53.31
- Misreported Income: Rs 100
- Tax Rate: 35.54 percent (including surcharge and cess)
- Tax: Rs 35.54
- Penalty at 200 percent of tax: Rs 71.08
- Total: Rs 106.62
Enter IDS - The Final Redemption
In May 2016, the central government also introduced the IDS - an income disclosure scheme - described by Prime Minister Modi in a radio broadcast as “the last chance for a no-questions-asked disclosure of assets”.
The IDS provided those possessing undisclosed assets with a four-month window, June 1 to September 30, to disclose such assets and pay 45 percent tax on the value of the asset as of June 1, 2016.
The Math For IDS
- Value of disclosed asset on June 1: Rs 100
- Tax Rate: 37.50 percent (including surcharge and cess)
- Tax: Rs 37.50
- Penalty at 7.5 percent of asset value: Rs 7.50
- Total: Rs 45
PMGKY - The Final, Final Redemption
And then came demonetisation, the invalidation of Rs 500 and Rs 1,000 currency notes, in what the government called a fight against black money. 3 weeks into the ensuing cash crunch the government threw open a window for tax evaders - The Pradhan Mantri Garib Kalyan Yojana (PMGKY).
Under PMGKY, taxpayers can disclose only that unaccounted income which is in the form of cash or deposits (and not all assets as permitted by IDS) in an account maintained with specified entities like banks, post office etc.
The scheme imposes a 30 percent tax, surcharge of 33 percent of tax and a penalty of 10 percent of tax. The effective tax and penalty payout totals 50 percent of the income. Further, 25 percent of the income is to remain locked-in for four years, in an interest - free deposit scheme that will be used to fund social welfare.
The Math For PMGKY
- Disclosed cash: Rs 100
- Tax Rate: 30 percent
- Surcharge at 33 percent of tax: Rs 10
- Penalty at 10 percent of income: Rs 10
- Total: Rs 50
- Proportion of income to be locked in: 25 percent
- Lock-in Amount: Rs 25
- Total (tax + surcharge + penalty + lock-in amount): Rs 75
If You Still Haven’t Come Clean
For those who missed the IDS bus and do not want to avail of PMGKY, there is the Taxation Laws (Second Amendment) Bill, 2016.
Amendment 1
The Bill amends Section 115(BBE) of the Act to double the tax rate levied on unexplained credit, investment and cash to 60 percent. A surcharge of 25 percent of tax and 3 percent cess make it an effective tax rate of 77.25 percent. A penalty of 10 percent of tax payable will be levied in instances where the Assessing Officer determines the income.
The Math For Amended Section 115(BBE)
- Value of unexplained cash credit, investment, cash or other assets: Rs 100
- Tax Rate: 77.25 percent (including surcharge and cess)
- Tax: Rs 77.25
- Penalty (specific cases) at 10 percent of tax: Rs 7.72
- Total: Rs 84.97
Amendment 2
The Bill also amends Section 271AAB of the Act that prescribes penalties for search and seizure cases. The penalty provisions for undisclosed income detected during tax departments search operations are about to become more stringent.
Before the Bill was introduced in the Parliament, the penalty applicable on undisclosed income in search and seizure cases was 10 percent of income if the taxpayer admitted to that income and paid taxes on it; 20 percent if the income was not admitted but tax was paid on it and 60 percent in any other case. The amendment now provides for only two penalty rates, 30 percent if income is admitted and taxes are paid on it and 60 percent in any other case.
The Math For Section 271AAB
Pre-amendment
- Undisclosed Income Seized: Rs 100
- Tax Rate: 35.54 percent (including surcharge and cess)
- Tax: Rs 35.54
- Penalty Rates: 10 percent, 20 percent and 60 percent of income
- Penalty: Rs 10, Rs 20 and Rs 60
- Total (tax + penalty): Rs 45.54, Rs 55.54 and Rs 95.54
Post-amendment
- Undisclosed Income Seized: Rs 100
- Tax Rate: 77.25 percent (including surcharge and cess) {as per amended 115(BBE)}
- Tax: Rs 77.25
- Penalty Rates: 30 percent and 60 percent of income
- Penalty: Rs 30 and Rs 60
- Total (tax + penalty): Rs 107.25 and Rs 137.25
Commenting on the amendment of Section 271AAB Sudhir Kapadia, senior tax partner at EY said that the enhancement in penalties apply with effect from tax year 2016-17 onwards not only for undisclosed incomes discovered pursuant to demonetisation but also to any other unexplained cash credit, investment, cash or other assets.
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