Pradhan Mantri Garib Kalyan Yojana: Post ‘last chance’ IDS, comes a new declaration scheme

The Pradhan Mantri Garib Kalyan Yojana, 2016, is somewhat similar to IDS, except that the tax rate is higher at 50 per cent and a quarter of the declared income will be locked in for four years

The government’s new scheme on declaration of black money comes even as the deadline for paying first tax installment under the Income Declaration Scheme (IDS)— pitched as a “last chance” for those having black money to come clean — is yet to come to a close. Under the IDS, which offered a four-month window to make declaration till September 30, the first installment of 25 per cent tax has to be paid by November 2016 and taxpayers are allowed to make the payment for tax and penalty in three installments by September 30, 2017.

The Pradhan Mantri Garib Kalyan Yojana, 2016 is somewhat similar to IDS, except that the tax rate is higher at 50 per cent and a quarter of the declared income will be locked in for four years. During campaigns prior to the IDS, the government had categorically denied any extension to the scheme.

Prime Minister Narendra Modi, in his ‘Mann ki Baat’ programme on All India Radio on June 26, had said with reference to the scheme: “We can free ourselves of various burdens just by paying a fine. I have also promised that for those who voluntarily declare to the government their assets and their undisclosed income, then the government will not conduct any kind of enquiry. Not once will it be asked as to from where all this wealth came and how it was acquired. And so, here is  a good chance for you to become a part of a transparent system. At the same time, I want to tell the people of the country that please consider this plan, which is up to 30th September as your last chance…” Two days later, on June 28, finance minister Arun Jaitley reiterated this. “People who have (undisclosed) income and have stayed outside the income tax net, this (IDS) is the last chance to declare them and sleep peacefully,” he said after a meeting with industry chambers and tax professionals.

But with the deposits of old currency notes of Rs 500 and Rs 1,000 notes rising sharply across the bank accounts ever since the government recalled high-denomination currency notes on November 8, alongside suspicion of black money operators and syndicates using others’ accounts to turn black money into white, the government moved amendments to the Income Tax Act on Monday to impose high penalties on unexplained credit, investments, cash and other investments. Between November 10 and November 27, banks reported exchange and deposits of old notes worth Rs 8.45 lakh crore (exchange of Rs 33,948 crore and deposits of Rs 8.11 lakh crore), as per RBI data released on Monday. During this period, an amount of Rs 2.16 lakh crore had been withdrawn by people from their accounts.

A day after the November 8 announcement on currency withdrawal, the finance ministry officials had indicated that the government would not touch people, especially small businessmen, housewives, artisans and workers, depositing up to Rs 2.5 lakh. “We would be getting reports of all cash deposited during the period of 10th November to 30th December,2016 above a threshold of Rs. 2.5 lakh in every account. The department would do matching of this with income returns filled by the depositors. And suitable action may follow,” Revenue Secretary Hasmukh Adhia had said on November 9.

On Monday, though, as against earlier assurance of no scrutiny of small deposits, the finance ministry officials said the tax department may scan accounts of individuals depositing up to Rs 2.5 lakh in case of discrepancies or suspect transactions. People splitting their cash pile and depositing smaller chunks into family members accounts will be under the taxmen’s watch, the officials said. The government moved the legislative changes to tax laws after finding that existing provisions of imposing 200 per cent penalty on misreporting on income may not be tenable on incomes that are disclosed and advance taxes on these are paid. A person declaring higher income than previous year, but paying tax at slab rate and surcharge/cess, could have escaped the levy of penalty.

A Way forward

Even as officials said the proposed amendments were not “technically retrospective”, the changes will kick in from eight months back — April 1, 2016. Explaining the proposed amendments to the taxation laws, Adhia on Monday said this was “not a retrospective amendment” as the financial year is still on and people have not filed returns.

Former CBDT chairperson M C Joshi said: “The amendment could have been termed retrospective had the government imposed penalty on something that had no penalty earlier. The current provisions on I-T Act already enable tax authorities to examine cases of unaccounted wealth. This (amendment) is like writing something which is already there and now they are authorised to scan suspicious accounts.”

To fight against black money Government with cooperation of RBI has recently withdrawn bank notes of existing series of denomination of the value of Rs.500 and Rs.1000 [Specified Bank Notes (SBN)]. However, black money hoarders have started misusing various loopholes in the existing law for concealing black money.

Pradhan Mantri Garib Kalyan Yojana

To tackle this issue and prosecute such persons, Government has today tabled an alternative Income Declaration Scheme namely, ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) in the parliament which ensure higher tax and stringent penalty provision against such practices.

Continuing with the crackdown on black money, the Narendra Modi government is looking to introduce a new tax structure for undisclosed income. The government is proposing to levy a total tax, penalty and surcharge of 50% on the amount deposited post demonetisation. A higher taxe and stiffer penalty of up to 85% will be levied on those who don’t disclose, but are caught. The new tax scheme will be called Pradhan Mantri Garib Kalyan Yojana for income disclosure.

FM Arun Jaitley introduced a bill to amend the Income Tax law. Those who choose to declare their ill-gotten wealth stashed till now in banned 500 and 1000 rupee notes under the Pradhan Mantri Grabi Kalyan Yojana 2016, will have to pay a tax at the rate of 30% of the undisclosed income. Additionally, a 10% penalty will be levied on the undisclosed income and surcharge called PMGK Cess at the rate of 33% of tax (33% of 30%).

Further, the declarants have to deposit 25% of the undisclosed income in a scheme to be notified by the government in consultation with the Reserve Bank of India (RBI). The money from the scheme would be used for projects in irrigation, housing, toilets, infrastructure, primary education, primary health and livelihood so that there is justice and equality, said the Statement of Objects and Reasons of the Bill.

For those who continue to hold onto undisclosed cash and are caught, existing provisions of the Income Tax law will be amended to provide for a flat 60% tax plus a surcharge of 25% of tax (15%), which will amount a levy of 75%. Besides, if the assessing officer decides he can charge a 10% penalty in addition to the 75% tax.

Meanwhile, the government has warned that those who are using other people’s bank accounts to convert their black money will be severely punished. Not only that, those who allow their accounts to be misused for this purpose will also face prosecution. The Finance Ministry’s warnings come in wake of reports that people are misusing JanDhan accounts to deposit their black money, paying a premium to the poor person who is allowing his/her bank account to be used. The Finance Ministry said has said, “Tax evasion activities by some people using other persons’ Bank A/Cs to convert their black money can be subjected to income tax & penalty. Also the person who allows his or her bank account to be misused for this purpose can be prosecuted for abetment under Income Tax Act.”

Pradhan Mantri Garib Kalyan Yojana

Under Pradhan Mantri Garib Kalyan Yojana, 2016, the black money declarant shall be required to pay tax at flat rate of 30% of the undisclosed income. Additionally, 10% penalty will be charged on the undisclosed income and surcharge of 33% will also be levied on tax part (not on penalty). This surcharge will be collected as Pradhan Mantri Garib Kalyan Cess and will be used to accelerate poor welfare to eliminate poverty.

In addition to tax, penalty and surcharge totaling to approximate 50%, the black money declarant has to deposit 25% of the undisclosed income in a Deposit Scheme to be notified by the RBI in consultation with the Government under the ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. The deposited money will not fetch any interest and shall be available to withdraw only after 4 years.

Pradhan Mantri Garib Kalyan Yojana, 2016

 

The money under Pradhan Mantri Garib Kalyan Deposit Scheme is proposed to be utilized for projects in irrigation, housing, toilets, infrastructure, primary education, primary health and livelihood so that there is justice and equality.

The Bill also proposes to amend Section 115BBE of the Income Tax Act to provide hefty tax, surcharge and penalty on unexplained credit, investment, cash and other assets. For those who continue to hold black money/unaccounted cash and are caught by the department, existing law 115BBE is proposed to be amended to levy tax at steep rate of 60% plus a surcharge of 25% of tax (25% of 60% i.e. 15%) totaling to levy of 75%. Besides, an assessing officer on his discretion can levy a penalty of 10% in addition to the 75% tax, taking the total tax liability to 85%.

The existing provision of penalty of under-reporting of income and misreporting of income at 50% and 200% of tax remains unchanged. Under-reporting or misreporting of income means the difference between the return income and assessed income.

The Current penalty provisions of search and seizure under section 271AAB are 10% of income, if admitted and taxes are paid, 20% if not admitted but taxes are paid and 60% in any other case. This is replaced with 30% if income is admitted and taxes are paid and 60% in any other case.

If Black money is disclosed under Pradhan Mantri Garib Kalyan Yojana Scheme then no questions will be asked regarding the source of income and would be given immunity from wealth tax, civil laws and other taxation laws but not from EMA, PMLA, Narcotics, and black money act.

An overview of the amendments proposed in the Bill are placed below;

Overview of Amendments Proposed

Voluntary Cash Disclosure Scheme

 

Understanding the Impact of the proposed tax changes:

Say someone has disclosed Rs.5 lakhs as Unaccounted Income in form of cash or bank deposits:A) Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY)

1. Tax, Surcharge and Penalty

Tax @ 30% – Rs.1.50 lakhs

Surcharged @ 33% of Rs.1.50 lakhs – Rs.49,500

Penalty @ 10% of Declared Income – Rs.1 lakh

Total Tax, Surcharge and Penalty – Rs.2,49,500 (i.e. approx. 50% of declared income)

2. Deposits

25% of the declared income i.e. Rs.1.25 lakhs to be deposited without interest for 4 years.

Provisions for taxation & penalty of unexplained credit, investment, cash and other assetsB) Tax under section 115BBE

Tax at 60% – Rs.3 lakhs

Surcharge @ 25% of Rs.3 lakhs – Rs.75,000

Total Tax u/s 115BBE – Rs.3.75 lakhs i.e. 75% of unexplained amount.

C) Penalty under section 271AACIn case assessing officer decides to levy of penalty of 10% in addition to tax and surcharge than

Penalty 10% on unexplained amount – Rs.50,000

Total Tax, surcharge and penalty comes to Rs.4,25,000 i.e. 85% of the unexplained amount.

D) Penalty for search and seizure under section 271AAB1. 30% of income, if admitted, returned and taxes are paid

Penalty 30% – Rs.1.50 lakhs

2. 60% of income, in any other case

Penalty 60% – Rs.3 lakhs

Summary

Providing a window to black money holders, the government on Monday proposed to levy a total tax, penalty and surcharge of 50 per cent on the amount deposited post demonetisation while higher taxes and stiffer penalty of up to 85 per cent await those who don’t disclose but are caught.

Nearly three weeks after Prime Minister Narendra Modi announced junking high denomination 500 and 1000 rupee notes, Finance Minister Arun Jaitley introduced a bill to amend the Income Tax law+ which also provides for black money declarants a mandatorily depositing of 25 per cent of the amount disclosed in anti-poverty scheme without interest and a four-year lock-in period+ .

Those who choose to declare their ill-gotten wealth stashed till now in banned 500 and 1000 rupee notes under the Pradhan Mantri Garib Kalyan Yojana 2016, will have to pay a tax at the rate of 30 per cent of the undisclosed income.

Additionally, a 10 per cent penalty will be levied on the undisclosed income and surcharge called PMGK Cess at the rate of 33 per cent of tax (33 per cent of 30 per cent).

Further, the declarants have to deposit 25 per cent of the undisclosed income in a scheme to be notified by the government in consultation with the Reserve Bank of India (RBI).

The money from the scheme would be used for projects in irrigation, housing, toilets, infrastructure, primary education, primary health and livelihood so that there is justice and equality, said the Statement of Objects and Reasons of the Bill.

For those who continue to hold onto undisclosed cash and are caught, existing provisions of the Income Tax law will be amended to provide for a flat 60 per cent tax plus a surcharge of 25 per cent of tax (15 per cent), which will amount a levy of 75 per cent.

Besides, if the assessing officer decides he can charge a 10 per cent penalty in addition to the 75 per cent tax.

The current provisions of penalty on under-reporting of income at 50 per cent of the tax, and misreporting (200 per cent of tax) will remain and no changes are being made to them.

Under-reporting/misreporting income is normally difference between returned income and assessed income.

The Taxation Laws (Second Amendment) Bill, 2016 proposes to amend Section 115BBE of the Income Tax Act to provide for a punitive tax, surcharge and penalty on unexplained credit, investment, cash and other assets.

Against current provision of 30 per cent flat tax rate plus surcharge and cesss, a steep 60 per cent tax will be levied on such income together with 25 per cent surcharge of tax (15 per cent of such income). So total incidence of tax will be 75 per cent with no expense, deductions or set-off allowed.

Also, the assessing officer can levy an additional 10 per cent penalty, taking the total tax incidence to 85 per cent.

The current provisions for penalty in cases of search and seizure are proposed to be amended to provide for a penalty of 30 per cent of income if it is admitted, returns filed and taxes paid. In all other cases, 60 per cent will be the penalty.

Currently, the penalty is 10 per cent of the income, if the income is admitted, returned and taxes are paid. Penalty is at 60 per cent in all other cases.

 Under the new Pradhan Mantri Garib Kalyan Yojana, besides 50 per cent tax, surcharge and penalty, a quarter of the declared income will be to be deposited in interest free deposit scheme for four years.

Revenue secretary Hasmukh Adhia said the deterrent provisions were necessary so that people have the fear of hoarding black money.

“The disclosures in PMGKY scheme will ensure that no questions will be asked about the source of fund. It would ensure immunity from wealth tax, civil laws and other taxation laws. But there is no immunity from FEMA, PMLA, Narcotics, and black money act,” he said.

 Deposits which have been already made from November 10 will be covered under PMGKY. “Last date we will notify after the bill is passed but it is likely to be December 30. PMGKY will come in as a new Chapter 9 in Finance Act 2016,” he said.
Highlights
  1. Under the scheme, cash deposits in old notes above a threshold and that is declared to Income Tax authorities, will attract a 50 per cent tax. Half of the remaining deposits, or 25 per cent of the original deposit, will not be allowed to be withdrawn for four years.
  2. However, a higher 90 per cent tax and penalty will be imposed if assessees do not declare the unaccounted cash voluntarily and it is discovered by income tax authorities.
  3. If cash seized in raids can be explained, a 30 per cent fine will be imposed. If it cannot be explained it will attract a 60 per cent fine.
  4. The government, said sources, has also proposed a new bond scheme called the Pradhan Mantri Garib Kalyan Yojana, which would allow deposits in old currency with a tax penalty of 50 per cent and will provide immunity from income tax scrutiny.
  5. After Prime Minister Narendra Modi announced the notes ban aimed at eliminating corruption and black or undeclared money, people were given a 50-day window beginning November 10 to deposit 500 and 1,000 rupee notes, with an option for a one-time exchange of 4,000 rupees.
  6. The exchange, which was later limited to a maximum of Rs. 2,000 per person, has been withdrawn this week and all old notes must now be deposited in bank accounts.
  7. There has reportedly 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 suspicion that these accounts may have been used to launder black money.
  8. The cabinet approved amending the Income Tax Act to plug these loopholes. The government, said sources, felt that the purpose of the demonetisation to uproot corruption would be defeated if black money made its way back into the system through benami deposits or proxy deposits.
  9. While the government’s move has been praised for its intent, opposition parties have united to attack the notes ban for its planning and implementation. Opposition leaders have argued that the current scheme will not curb black money.
  10. PM Modi yesterday hit out at critics saying, “Some people criticising the demonetisation don’t have a problem with the government’s preparedness; their problem is that they didn’t get time to prepare.”
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