Unaccounted deposits to face 50% tax, 4 year lock-in period
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New Delhi: The government will propose an amendment to the income-tax law to impose a levy on cash deposits from undisclosed income following the withdrawal of Rs500 and Rs1,000 banknotes, a person familiar with the development said.
According to the twin-penalty structure proposed by the government, cash deposits arising from undeclared income will attract a 50% tax if the person or entity subsequently declares it to tax authorities. One-fourth of these cash deposits will also be locked in for a period of four years, the person said, requesting anonymity.
In case the deposits are not declared and a person uses other people to legalize his black money, then the tax and penalty could be as high as 90% of the amount.
In the second case, provisions of the Benami Transactions (Prohibition) Act, which has provisions for a jail term of as many as seven years for the tax evader as well as the person helping to launder illegal wealth, may also apply.
The government’s decision to introduce the amendments comes in the wake of large-scale reports of tax evaders trying to use the bank accounts of the less well-off to legalize their money.
The amendments will provide certainty to the cash depositors, said Rahul Garg, leader of the direct tax practice at consulting firm PricewaterhouseCoopers.
“People will now know how these cash deposits will be dealt with and make an informed decision. People should ideally opt for the voluntary compliance, declare the cash deposits from their undisclosed income in their tax returns, pay the tax and escape protracted litigation,” he said
The surge in cash deposits in the Jan Dhan accounts—opened over the last two years for those who were not part of the formal banking system—has also added to the fear of misuse. According to government estimates, around Rs21,000 crore was deposited in Jan Dhan accounts in the two weeks after 8 November, when Prime Minister Narendra Modi announced the demonetization of high-value notes to clamp down on black money, counterfeit currency and terror financing.
Though the move was widely welcomed, the government has since faced criticism for its shoddy implementation as people, especially in rural areas, face severe difficulties because of inadequate cash in banks and ATMs.
The amendments cleared by the cabinet late Thursday are expected to be tabled in Parliament next week after the President’s assent. Given that the changes are to the income-tax Act, the bill is expected to be tabled as a money bill, ensuring its smooth passage through Parliament.
A money bill can only be introduced in the Lok Sabha, in which the ruling National Democratic Alliance (NDA) has a majority. The Rajya Sabha, where the NDA is outnumbered by opposition parties, cannot make amendments to a money bill passed by the Lok Sabha and can only make recommendations.
The government will also bring in a new law to invalidate the old currency, the person cited above added.
The government does not expect the entire Rs16 trillion of the Rs500 and Rs1,000 notes in circulation to come back into the banking system. This could mean some reduction in the liability of the Reserve Bank of India.