During their electoral campaign in 2014, Narendra Modi and the Bharatiya Janata Party promised to ‘bring back’ black money stashed abroad within 100 days of coming to power. Though almost halfway through Modi’s term, this promise remained unfulfilled, with the Government’s efforts to address the issue of black money resulting in only occasional big bang actions. These efforts have ranged from setting up a ‘special investigation team’ for probing the problem of black money, to passing stringent anti black money legislation, and also the opening of two voluntary (but narrow) disclosure windows in relation to undisclosed foreign and domestic assets respectively. Actions also included increased scrutiny of filings, by the introduction of ‘annual information returns’ for high value transactions, and the disclosure of ‘aadhaar number’ and passport number in income tax returns. Our May 2016 blog article took you through the problem of black money and India’s response to the same.
However, the sudden decision to demonetise India’s highest-denomination currency notes took the entire nation by surprise. Since midnight on November 8th, 2016, notes in denominations of ₹500 and ₹1000 are no longer legal tender and have been withdrawn. The bold step taken by the Government has had not only financial, but also social and legal repercussions for citizens. This surgical strike against black money hoarders has plunged into fear and uncertainty millions of honest taxpayers and common citizens holding cash savings. Pursuant to the demonetization scheme, the Indian banking system is witnessing the deposit of large sums of unaccounted and untaxed money; which some foresee, may be diverted towards welfare schemes and used to inject more liquidity into the lending system. Also, as many citizens are in possession of huge amounts of undeclared and untaxed cash reserves, they are struggling to find legal ways to convert the same into the new currency, and yet escape scrutiny and surveillance by the authorities.
It was primarily to prevent such laundering of black money, that the Lok Sabha passed the Taxation Laws (Second Amendment) Bill, 2016 (“Bill”) on November 29th, 2016, giving citizens an opportunity to come clean by paying taxes, albeit with heavy penalties (and perhaps a large helping of guilt and shame as well). Through this step, assuming it goes as planned, the Government would get additional revenue for undertaking welfare related activities, and the declared income would legitimately come into the banking system, where it could be put to better use.
Major Highlights Of The Bill
The Bill introduces the Pradhan Mantri Garibi Kalyan Yojana 2016, (“PMGKY”) under which declarants who choose to declare their cash / deposits, shall be required to pay tax @ 30% of the undisclosed income and penalty @ 10% of the undisclosed income. Further, a surcharge to be called ‘Pradhan Mantri Garib Kalyan Cess’ @ 33% of tax is also proposed to be levied. (Total tax incidence would be at ~50% of the disclosed income). According to the statement of Revenue Secretary Mr. Hasmukh Adhia, “the disclosures made under PMGKY will ensure that no questions will be asked about the source of fund”. The Bill also ensures immunity from wealth tax and other taxation laws. However there is no immunity in relation to offences under the Foreign Exchange Management Act, the Prevention of Money-Laundering Act, the Prevention of Corruption Act, the Narcotic Drugs and Psychotropic Substances Act, etc. Hence, a decision to disclose under PMGKY would entail weighing the pros and cons of making a filing vs. the risk of being discovered by the authorities and prosecuted more severely.
In addition to tax surcharge and penalty, declarants shall be required to deposit 25% of undisclosed income in an interest free deposit scheme to be notified by the Central Government in consultation with the Reserve Bank of India. It is proposed that the money from the scheme would be used for projects in irrigation, housing, toilets, infrastructure, primary education, primary health and livelihood.
The existing provisions of the Income Tax Act, 1961 have been amended for those who forego the opportunity to declare under PMGKY and are later caught with undisclosed cash, to provide for a flat tax @ 60% plus a surcharge @ 25% of tax, which will amount a levy of 75%. Besides, if the assessing officer determines so, further penalty @ 10% can be added to the said amount of 75% of the undisclosed income (totalling to 85%).
The Way Ahead
Given the ongoing drama in the Indian parliament, where the opposition has united in protest against the demonetization, stalled the functioning of parliament, and raised concerns about the manner in which the ruling party introduced and passed the Bill, it remains to be seen if the Bill will actually become law in its current form. Moreover, in light of the statements made by the Government regarding additional steps to be taken against black money, the Bill could be the first step in a larger scale war on black money. As they say, watch this space!