Friday, December 2, 2016
Currency withdrawal: 50% tax, 4-year lock-in for unaccounted deposits
The government proposes to introduce amendments to the Income Tax Act in Parliament next week that will enable it to take penal action against those who made unaccounted cash deposits of scrapped high-denomination currency notes after November 8.
The change in tax law, a month after the government’s one-time compliance window under the Income Declaration Scheme came to an end, will empower tax officials to impose a minimum 50 per cent tax and a 4-year lock-in for half of the remaining amount of unaccounted or suspicious deposits, two persons familiar with the development said.
While this structure will apply to voluntary disclosures, a higher rate of tax and penalty of total 90 per cent tax will be imposed on those who do not disclose their unaccounted cash deposits voluntarily.
These I-T Act amendments were discussed in the Union Cabinet meeting, chaired by Prime Minister Narendra Modi, on Thursday night. “The government will introduce amendments to the Income Tax Act giving effect to this in the ongoing session of Parliament,” a source said, adding that these amendments are likely to be introduced on Monday or Tuesday after seeking the President’s nod.
After the government’s announcement of withdrawal of old Rs 500 and Rs 1,000 notes, the government had stated that cash deposits above the threshold of Rs 2.5 lakh until December 30 will be under the scanner of tax authorities. The tax authorities had said a peak rate of tax and 200 per cent penalty would be levied on such cash deposits originating from unaccounted income made during November 10-December 30, but many experts raised questions on the 200 per cent penalty lacking legal validity.
As per amendments to the Income Tax Act discussed by the Cabinet on Thursday night, the government proposes to impose a 50 per cent tax on voluntary declaration of such unaccounted cash deposits above a certain threshold, while half of the remaining deposits, or 25 per cent of the original deposit, will not be allowed to be withdrawn for four years, sources said.
The government is also contemplating issuing a bond in which the 25 per cent ‘lock-in’ money would be parked and can be withdrawn only after four years by the depositor. Out of the additional taxes on unexplained and undisclosed deposits, the government will create a fund to build rural infrastructure, sources said.
The proposed changes in the I-T Act come after the Ministry of Finance last week warned of strict action against tax evaders using other people’s bank accounts to convert their black money into new denomination notes and those persons who allow their bank accounts to be used as a route for conversion of black money into white.
The Pradhan Mantri Jan Dhan Yojana accounts, which have seen a surge of Rs 21,000 crore in deposits since the demonetisation announcement, have been seen as the primary route for conversion of black money into white. As a step to prevent such routing of unaccounted funds, the government had stopped over-the-counter exchange of old currency notes in banks from Thursday midnight while allowing deposits to be made without any ceiling.
The government’s latest move is being seen as a measure to tax those who did not disclose their unaccounted income in the one-time compliance window under the Income Declaration Scheme which ended on September 30.