India Lower House Clears Penalty on Large Cash Deposits

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By Siri Bulusu

Nov. 30 — The lower house of India’s parliament approved an amendment to the income tax law that allows the government to charge a penalty on large cash deposits made by individuals and companies, in a continuing effort to crack down on black money and tax evasion.

Amid concerns that existing provisions of the Income Tax Act 1961 had loopholes through which black money would be returned to circulation, the bill was passed unanimously by the lower house on Nov. 29, and awaits passage through the upper house and approval from the president.

The Indian Tax Second Amendment 2016 bill provides a window for individuals and companies to “come clean” under the Pradhan Mantri Garib Kalyan Yojana Scheme, under which individuals pay a total of 50 percent in tax, cess, and penalty on unexplained cash deposits. A 25 percent cut of the total amount is deposited in a non-interest bearing account that will be utilized by the government for welfare purposes for four years, after which the depositor will regain access.

After the PMGKY scheme expires, the total tax will increase to 85 percent on unexplained cash deposits.

“The government “is trying to give a palliative solution rather than going into large scale investigation of delinquent taxpayers or tax evaders,” Sanjay Kumar, a tax partner at Deloitte India, told Bloomberg BNA in an e-mail Nov. 30.

Kumar said the PKGMY scheme is a “big reprieve” as the government may not ask for the source of income, but if people don’t “bite the bait” and declare unaccounted income under that scheme, they will be penalized with a higher tax rate.

Kumar predicts the government may “sugar coat” the scheme by agreeing to keep the information about black money deposits private, in order to keep the door open for deposits. This, he said, has been part of almost all the amnesty schemes that were brought into India so far.

Bill Details

Under the Voluntary Deposit Scheme—Pradhan Mantri Garib Kalyan Yojana—for those with previously undisclosed income who wish to “come clean” and convert black money to white money, the following applies:

  •  Income tax rate: 30 percent;
  •  Surcharge: 33 percent of income tax; and
  •  Penalty: 10 percent;

For those who don’t provide satisfactory explanation of black money to Assessment Officer, the following applies:

  •  Income tax rate: 60 percent;
  •  Surcharge: 25 percent (of income tax);
  •  Education Cess: 3 percent (of income tax + cess); and
  •  Penalty: 10 percent of (tax + total cess);

‘Age-Old Menace.’

“The government is continuing to address the age-old menace of the black or unaccounted economy,” Kumar said in an e-mail.

He added that the government has brought in many schemes or taken a number of steps, such as the Foreign Asset Disclosure Scheme, the Income Disclosure Scheme, the signing of a number of information exchange agreements, and the amending of tax treaties with Mauritius and Cyprus.

“All these steps are tackling unaccounted income from different directions,” Kumar said.

This is the second tax forgiveness measure to be introduced in 2016. The Income Declaration Scheme 2016, valid between June 1 and Sept. 30, 2016, levied a 45 percent tax and allowed previously undeclared income to be deposited with no questions asked.

“The Income Declaration Scheme 2016 was considered the biggest ever disclosure of hidden wealth of black money,” Alok Patnia, founder of TaxMantra, told Bloomberg BNA in an e-mail Nov. 29.

“With the new scheme, 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.”

Patnia said black money hoarders who were evading taxes will be penalized by the new scheme so as to reduce the burden on honest taxpayers. While the Income Declaration Scheme 2016 charged a rate of 45 percent, the new scheme totals 50 percent.

“People who have not paid their taxes, they ought to come out clean,” Girish Vanvari, lead of tax for KPMG India, told Bloomberg BNA Nov. 30. “Anyway it is not legal tender, so you can try to burn it or give it to someone for free. At least this way 50 percent comes back to you.”

Experts expect the government to release a list of frequently asked questions and answers in the coming days.

To contact the reporter on this story: Siri Bulusu at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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