New disclosure scheme could see 50% tax and 4year limit on cash use for unaccounted deposits

The government is likely to introduce an amendment to the income-tax law early next week under which people voluntarily depositing 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 ET. 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.


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.


Conclusion :

The government has done well to end the exchange of old notes for new and ask people, instead, to deposit the old currency in their possession in their bank accounts. This could well have been done right at the outset as well. All that would have been required was to set up additional Aadhaar-issuing counters and bank account-opening counters to help people without know-your-customer documents or bank accounts acquire the bank accounts needed to deposit their cash. The intention would appear to be to have an unmistakable audit trail for the cash surfacing in the banks.

Exchange of notes, even when done only on presentation of an identity document, did not leave a proper audit trail. An ID document could be fake and bank staff do not have the means to verify its authenticity. A bank account, on the other hand, is more solidly linked to an identifiable person.

The intention of the government, clearly, is to get people to come clean. This goal is not achieved by the penal tax rate of 60% the government has announced on income whose source cannot be explained.

Since entrepreneurs have come up who merrily buy up old notes at a 30% discount, people with undisclosed income in their possession have a choice, either to continue with undisclosed income taking a 30% haircut or to come clean and disclose all their income to the government. At the 45% rate of tax and penalty under the Income Declaration Scheme, the additional cost of coming clean would be 15%, but double that in the new scheme of 60% announced by the government.

From the point of view of incentivising people with undisclosed income to come clean and to prevent generation of yet more black money in the hands of those who buy old notes at a discount, it makes sense to extend the Income Declaration Scheme at 45%.

In the interest of protecting tourism revenues and, indeed, the brand value so assiduously built up with the Incredible India campaign, it must be ensured that foreign visitors do not face a shortage of cash at airport exchange counters. That is not the case now. Fast, expeditious action is of the essence.

Source : News Articles

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