Crusade Against Black Money - The Saga Continues!

The government demonetised the Rs 500 and Rs 1,000 notes in a path breaking attempt to curb black money. A window period until December 30, 2016 had been provided to deposit the old notes in the bank accounts.

The intent of the government was clear: bring undisclosed income into the banking system, monitor the cash deposits closely, and initiate action against the defaulting taxpayers. The apprehension, however, was that such income would be offered to tax as the income of the financial year 2016-17 attracting tax at the rate of 30 per cent. The possibility of penalty provisions being attracted was low since the provisions of misreporting of income (where a penalty of 200 per cent was prescribed), or under-reporting of income (where a penalty of 50 per cent was prescribed) would not be triggered.

To plug this loophole, the government has now proposed to tax unexplained credits, investments, money, expenditure etc. at 60 per cent. Further, a surcharge of 25 per cent would be levied on such tax. With the 3 per cent education cess that is applicable, the total tax would amount to 77.25 per cent. This is applicable from April 1, 2016.

Where such income is not offered in the tax return and is detected by tax authorities, an additional penalty at 10 per cent of taxes due (i.e. 6 per cent of undisclosed income) would be levied bringing the total to 83.25 per cent of undisclosed income.

Significantly higher penalties are attracted where the income is detected during search i.e. 30 per cent of undisclosed income where the income is admitted, returned and taxes are paid during search and 60 per cent in other circumstances is applicable.

The government has also provided an opportunity to come clean by declaring undisclosed income and paying taxes with penalty at rates significantly lower than the 77.25 per cent applicable as above. "Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016' (PMGKY)" attracts 30 per cent of undisclosed income as taxes and 'Pradhan Mantri Garib Kalyan Cess' at 33 per cent of tax (9.9 per cent of undisclosed income). With the proposed penalty of 10 per cent of undisclosed income, the total tax cost would amount to 49.90 per cent. The declarant shall have to deposit 25 per cent of undisclosed income for four years in interest-free deposits to be notified by the Reserve Bank of India which is proposed to be utilised for welfare schemes. The window for declaration is expected to be notified by the government shortly.

While drafting the scheme, the government has ensured that the declarants are taxed at a rate higher than the applicable rate of 45 per cent under the recent Income Disclosure Scheme which ended on September 30, 2016. Further, the PMGKY scheme covers undisclosed income in the form of cash or deposit in an account maintained with specified entity and would not include bullions or any other undisclosed investments. Hence, the scheme would encourage depositing of undisclosed income with specified institutions.

A quick summary of the various scenarios is provided below: