Amendments to Tax Laws in Lieu of Demonitization

The bombshell of demonetization sent shockwaves across the nation, as the government sought to capture money launderers red-handed. The impact on income tax regulations and functionality is also widespread. The Income Tax Amendment Bill seeks to make a smooth transition into this new era of currency and disclosure by Indian citizens.

Mon Apr 11 2022 | Govt. Agencies and Taxation | Comments (0)

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A bold pronouncement by the Government of banning Rs.500/- & Rs.1000/- notes to restrain black money, fake currency and terrorist aid created ripples in the country. In order to redeem and declare the undisclosed cash as their income, the holders have to deposit it into their respective bank accounts. Each suspicious bank deposit can be scrutinized by Income Tax department, which thereby involves grueling exercise by IT officers. With the objective to ensure lawful compliances on unaccounted income/cash disclosures and to curb illegitimate means of manipulating tax departments, the Government has introduced certain penal provisions in IT laws that are expected to support the purpose of demonetization.

Amendments made to the Income Tax Act in view of demonetization

In view of demonetization, Lok Sabha, the lower house of the Indian Parliament, has recently passed the Income Tax  Amendment Bill, which  highlights the following propositions and amendments:-   

  • With regard to unaccounted demonetized cash that has been voluntarily declared by the citizens on and before 30th December, 2016 will be taxed at the rate of 50%. The breakup of 50% will be Tax @ 30% + Penalty@10% + surcharge @ 33%. This surcharge is named as ˜Pradhan Mantri Garib Kalyan Cess.   
  • Further, the persons  who disclose this unaccounted income will have to put in 25% of his unrevealed income in  the Pradhan Mantri garib Kalyan Deposit Schme, which is yet to be announced by the Central Government, 2016 This deposit will not attract any interest and can be withdrawn by the depositor only once in 4 years from the date of deposit. As per the Government proposal, the amount will be utilised for public welfare programs such as infrastructure, housing, irrigation, education, health  toilets etc.   
  • People who still have any income undisclosed but is later found out by the Income Tax authorities will be taxed at an exorbitant rate of 85% tax in addition to penalties,  which may then go over 90%.

Implications of these Amendments to the Taxation Laws in India

The objective of introducing these amendments in taxation laws of India is to cover the loopholes that were possibly  utilized to hide black money. These proposed amendments can levy higher tax rates and severe penalties, which can ensure that defaulters can come forward to declare their undisclosed income to prevent exorbitant penalties which can be levied if income is later discovered by IT assessors. This way the Government is giving  defaulters a chance to come clean by way of paying applicable penalty. It will eventually enable the government to generate more revenue, which can be utilized for public welfare functions and for the betterment of the Indian economy.

The amount deposited in Pradhan Mantri Garib Kalyan Deposit Scheme, 2016 can be utilized for several welfare purposes such as health, infrastructure, irrigation etc.

The declarant (i.e. individual, company or entity) must provide satisfactory explanation to the IT officer about his source of income/assets/cash received. In the present context, the definition of satisfactory explanation is not defined and there is a need to issue guidelines/instructions on the same. Also, the powers of tax authorities have to be clearly defined as it would help in conducting investigations and in getting effective results.

Presently,  these amendments are not granting any exemptions/deductions or exceptions in its new disclosure rules. It is quite a drawback for taxpayers who are honest and can explain their source of income received. In consideration to previous announcements in wake of demonetization that there would be no investigations on any deposits upto Rs.2.5 Lakhs in bank accounts has not been properly  proposed  and  is a matter of concern. In the proposed amendments, the Government could have made exemptions to amount deposited under Rs.2.5 lakhs. It would have eased the fears of common and honest taxpayers.

General provisions with regard to penalty   

  • Current provisions: As per Section 270A of the IT Act, Any under reporting of income Taxed at the rate of 50%Any false disclosure or misreporting of income i.e. difference between assessed and returned income Taxed at the rate of 200%
  • Proposed change in the said provision: no amendment 

Provisions with regard to taxation/penalty on inexplicable income, cash, credit, investment or any other assets   

  • Current Provisions: As per Section 115BBE, such unexplained amount/asset/income will be taxed @ 30% in addition to surcharge and applicable Cess. (Herein no set-off/expense/deduction will be allowed].   
  • Proposed amendment in provision: Such income will be taxed at a flat rate of 60% in addition to 25% of tax as surcharge which totals to about 75% tax rate - (here also no set-off/expense/deduction will be allowed). There is an insertion of Section 271AAC, which states that if any IT Assessing Authority discovers any such income as referred in above-mentioned income, then the owner of such unexplained income will bear an additional penalty of 10% of tax (including surcharge) which is besides 75% of said tax. 

In Cash searched and seized Cases - Applicable penalty as per the Act

Current Provision:   

  1. As per Section 271AAB, any income discovered after search and seizure attracts a penalty @ 10% of such income, if it has been admitted, return is filed and where taxes are paid.
  2. If income not admitted but return has been filed and the taxes are paid, then it attracts penalty of 20% of such income. 
  3. In all other cases, it attracts a penalty of 60% of such income. 

Proposed amendments in the said provision:   

  1. If such income is admitted, returned and all the requisite taxes are paid, then penalty of 30% is charged.
  2. In all other cases, it will attract a penalty of 60% of such income.

Pradhan Mantri Garib Kalyan Yojana, 2016:  A new taxation and investment scheme recently introduced provides that any undisclosed income can be declared via cash/bank deposit will also be taxed at following rates:   

  • Tax @ 30% of declared income + surcharge @ 33% of tax+ penalty @ 10% on declared income which totals to about 50% of income 

Deposit: Such declared income can also be deposited up to 25% only in an interest free deposit scheme for 4 years.

In order to deal with the danger of black money after demonetization, the legislative amendments in income tax Laws are considered to have significant implications on the economy.. The introduction of severe penal laws is a right move but it needs carefully implemented so that  its effects  can be  comprehensively assessed. The authoritative power of Income Tax authorities has to be outlined; the contribution of honest tax payers has to be  recognised and  prevent any kind of menace from black money disclosures must be considered in order to issue rules, clarifications, guidelines or forms pertaining to disclosures and to execute the proposed amendments.

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