On 29 November, Lok Sabha passed the Taxation Laws (Second Amendment) Bill, 2016, introduced by the Ministry of Finance a day earlier. This Bill aims to provide another opportunity to tax evaders to disclose their unaccounted wealth and come out clean. It also aims to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision. For this purpose, a new scheme ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY)’ has been introduced under the Bill.
When demonetisation of Rs500 and Rs1,000 notes were announced, those who have unaccounted wealth were caught unaware for not disclosing their assets under Income Declaration Scheme (IDS), 2016 which closed on 30 September. The maximum tax, coupled with surcharge and penalty under the IDS, was 45% of the undisclosed income.
Those who have unaccounted wealth, especially in higher denomination notes, are trying out various means to convert it into legal currency and assets. Many are paying 30-40%, or even more than that of the unaccounted wealth to get it converted. For instance, on 9 November, a day after the announcement, reports suggested that black money holders bought gold and jewellery at up to Rs55,000 per 10 gram, when the metal’s rate was around Rs30,000 per 10 gram. Many also resorted to buying property at 30% more than the market value, besides buying expensive watches and booking railway tickets. But even after that, the leftover money remained as unaccounted wealth.
The Bill has been introduced by the finance ministry after considering experts’ suggestions, “that instead of allowing people to find illegal ways of converting their black money into white again, the government should give them an opportunity to pay taxes with heavy penalty, and allow them to come clean so that not only the government gets additional revenue for undertaking activities for the welfare of the poor, but also the remaining part of the declared income legitimately comes into the formal economy,” said an official release.
Also, concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 could possibly be used for concealing black money.
The new scheme
According to the Bill, if a declarant opts for this scheme, then she will be liable to pay tax at the rate of 30% of the undisclosed income, and penalty at the rate of 10% of the undisclosed income. Further, a surcharge, PMGK Cess, at the rate of 33% of tax is also proposed to be levied. Apart from the tax, surcharge and penalty, the declarant shall have to deposit 25% of undisclosed income in a deposit scheme to be notified by the Reserve Bank of India (RBI) under the ‘PMGK Deposit Scheme, 2016’. The surcharge and penalty totaling to about 50% will be calculated as tax 30%+10% penalty + 9.9% cess (33% of 30%).
So, for instance, if a person deposits Rs10 lakh in her bank account and discloses the same under the scheme, the tax liability for her would be around Rs5 lakh, and Rs2.5 lakh needs to be invested in the tax-free deposit scheme with a lock in period of 4 years. The remaining Rs2.5 lakh will remain at her disposal. But unlike IDS, you would not be able to disclose the assets acquired via unaccounted wealth under this scheme. “The scheme is only in respect of undisclosed income in the form of cash and bank deposits,” said Neha Malhotra, executive director, Nangia & Co.
But similar to IDS, “PMGKY also provides immunity from penalty or prosecution proceedings under provisions of the Income-tax Act, 1961, and the Wealth-tax Act, 1957. It also provides immunity in other tax laws and civil laws,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
If someone opts for this scheme, “any information obtained under the declaration shall not be used as evidence against the declarant for the purpose of any proceeding under any Act other than among others the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; the Indian Penal Code, the Prevention of Corruption Act, 1988, the Prohibition of Benami Property Transactions Act, 1988 and the Prevention of Money-Laundering Act, 2002; the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015,” added Malhotra.
As of now there is lack of information about how one can opt for this scheme. “As per the Bill, the Central Board of Direct Taxes (CBDT) shall make the form and manner of declaration and verification,” said Archit Gupta, founder and chief executive officer, Cleartax.com.
However, most experts are of the view that assessees who have undisclosed income must take advantage of the scheme. “Tax evaders should definitely avail the opportunity of coming clean, else they should stay prepared for harsh proceedings,” said Malhotra.
Someone who has undisclosed income and doesn’t declare it under the new scheme may have to pay higher tax and penalty if caught by the income tax department in future. The amendment Bill has proposed higher tax along with surcharge and cess under section 115BBE for undisclosed income. The Bill proposed tax at the rate of 60% along with surcharge of 25% on the tax, making it effectively 75% of the undisclosed income. A new section 271AAC is also proposed for penalty of 10%. Experts are divided on whether the 10% of the surcharge is also subject to penalty. The Bill has already been passed by the Lok Sabha and now only requires assent of the President to become an Act. It is a money bill and therefore will not require Rajya Sabha’s approval.