New disclosure scheme could be 50% tax and 4-year limit on cash use for unaccounted deposits
The government is likely to introduce an amendment in the income-tax law in next week under which people can voluntarily deposit cash that can’t be accounted for in banks will face a tax of 50% and have a fourth of the total locked in a zero-interest instrument for four years. The move comes in the wake of Rs 500 and Rs 1,000 notes ceasing to be legal tender, leading to a surge in deposits of such currency.
Those who don’t declare their unaccounted cash voluntarily will face as much as 30% tax plus a penalty of about 60% (a total levy of 90%) besides prosecution if the black money is detected by the income-tax authorities, a government official told . Those who voluntarily deposit such unaccounted cash in banks may be spared prosecution. The amendments have already been sent to the president for his assent and are likely to be introduced in Parliament next week.
Cash deposits made using the scrapped Rs 500 and Rs 1,000 notes above a certain threshold that are declared to income-tax authorities may attract a 50% levy (30 tax, 20% penalty) as per the amendment to the Income Tax Act, approved by the Cabinet late Thursday night.
This will ensure that the black money declared does not come right back into circulation once tax is paid. Only 25% of the total amount disclosed will be available for immediate use.
The official said the demonetisation announced on November 8 was a big step to put an end to black money and corruption but its purpose would have been defeated if ill-gotten wealth returned to the system through benami deposits. The revenue raised from the process will be deployed in rural areas, he said.
Taxing such deposits is a way of punishing dishonest people but the tax rate could not be the same as that paid by honest citizens or the 45% rate under the Income Disclosure Scheme (IDS) that ended on September 30. Holders of black money who didn’t utilise IDS to declare it should face a higher tax rate and curbs on use of that money. The government had allowed limited use of the two denominations until November 24. They could also be swapped for new notes and deposited in bank accounts.
While swaps at bank counters have been ended, the exemptions have been extended till December 15 but only for Rs 500 notes. The Rs 1,000 note can only be banked. Both notes can still be swapped at RBI offices. The government will amend the law, proving legislative backing for invalidation of the old currency.
There has been a surge in bank deposits, particularly in zero-balance Jan Dhan accounts that swelled by over Rs 21,000 crore in just two weeks, raising the suspicion that these accounts were being used to launder black money. There were also reports that informal channels were being used to launder currency at a 30-35% discount. The disclosure option will allow people to come clean at a 50% cost.
Though the government had talked of levying a peak rate of tax and 200% penalty, it wanted to provide clarity on treatment of deposits being made in banks.
Experts said the underlying message is that tax needs to be paid on income that has escaped the tax net in the past. “If a taxpayer can substantiate the source of the deposits then there is no issue, otherwise, there is likely to be penal action as envisaged,” said Vikas Vasal, partner and national head, tax, Grant Thornton India. “It is pertinent to note that past year’s tax returns and disclosures made in the same will also play a critical role in substantiating the taxpayers’ claim in this regard.”