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Demonetisation – Black Money Hoarders to Shell out more Tax than Ever

Demonetisation – Black Money Hoarders to Shell out more Tax than Ever

Demonetisation is a term well acquainted by everyone in the past month. On the night of November 8, 2016, India witnessed the single most important economic reform to be done since Independence. All of the Rs.500 and Rs.1000 notes were no longer a legal tender in overnight. This major decision was primarily focused to unearth the Black Money present in the country. In furtherance to this move, the Government has decided to amend the taxation laws so that people do not find illegal ways to convert their existing black money into black money again.

The two main takeaways from the amendment are:

  • Voluntary disclosure will attract a tax @ 50% including penalty.
  • Unaccounted income or assets will attract a tax @ 85% including penalty.

Taxation Laws (Second Amendment) Bill, 2016 was passed in the Lok Sabha on November 29, 2016. The Bill amends provisions of the Income Tax Act, levying higher rates of tax for the defaulters. Section 115BBE of the Act is amended to increase the tax rate for the offenders. Those people with unaccounted assets, credits, investments or cash and those found illegally converting money will have to pay 60% tax along with the concerned penalties which would amount to a total of 85%. The minimum level of penalties under Section 271AAB has also been increased from 10% to 30% of the income. The 50% tax for voluntary disclosure is included along with the Bill as a part of the Pradhan Mantri Scheme.

Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY)

In the Tax Laws Amendment Bill, the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) has been proposed. A person voluntarily disclosing his black money will come under this scheme. Those who declare will be required to pay a tax at 30% and a penalty at 10%, both on the undisclosed income. A surcharge of 33% of the tax paid, called Pradhan Mantri Garib Kalyan Cess, will also be levied. Adding up to a total of 50%. The declarant has to deposit 25% of this declared income in the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016, which is a four-year interest free deposit. The monies in this scheme is to be used for welfare purposed such as irrigation, housing, toilets, primary health care, and education.

Overview of Amendments Proposed                                                       

PARTICULARS EXISTING PROVISIONS PROPOSED PROVISIONS
     
General provision for penalty PENALTY (Section 270A)

Under-reporting – @50% of tax

Misreporting – @200% of tax

(Under-reporting/ Misreporting income is normally difference between returned income and assessed income)

No changes proposed
Provisions for taxation & penalty of unexplained credit, investment, cash and other assets TAX  (Section 115BBE)

Flat rate of tax @30% + surcharge + cess

(No expense, deductions, set-off is allowed)

 

TAX  (Section 115BBE)

Flat rate of tax @60% + surcharge @25% of tax (i.e. 15% of such income). So total incidence of tax is 75% approx.

(No expense, deductions, set-off is allowed)

PENALTY (Section 271AAC)

If Assessing Officer determines income referred to in section 115BBE, penalty @10% of tax payable in addition to tax (including surcharge) of 75%.

Penalty for search seizure cases Penalty (271AAB)

(i) 10% of income, if admitted, returned and taxes are paid

(ii) 20% of income, if not admitted but returned and taxes are paid

(iii) 60% of income in any other case

Penalty (271AAB)

(i) 30% of income, if admitted, returned and taxes are paid

(ii) 60% of income in any other case

Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) New Taxation and InvestmentRegime Undisclosed income in the form of cash & bank deposit can be declared:

(A) Tax, Surcharge, Penalty payable

Tax                   @30% of income declared

Surcharge          @33% of tax

Penalty              @10% of income declared

Total                  @50% of income (approx.)

 

(B)  Deposit

25% of declared income to be deposited in interest

free Deposit Scheme for four years.

 

Conclusion

The Amendment to the Act intends to curb the widespread presence of Black Money in the country and at the same time the Government can use them for welfare activities. The declaration scheme is a last chance for the defaulters to come out of their closets and disclose their unaccounted income. There had been several instances where many were trying to illegally convert their black money even after demonetising the higher denomination notes. Levying of higher rates of tax is bound to instill fear in the minds of the defaulters and would eventually bring down the amount of Black money drastically.

 

Source: Press Information Bureau, Government of India Ministry of Finance (Dt: 28.11.2016)

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