In the wake of the recent demonetisation of Rs500 and Rs1,000 denomination currency notes, the Narendra Modi Government has now proposed several far-reaching amendments to the Income-tax Act, 1961 by way of the Taxation Laws (Second Amendment) Bill, 2016 that has been presented before the Parliament on 28 November 2016. The Lok Sabha, on 29th November passed the Bill by voice vote amid a ruckus created by the opposition parties over demonetization.
Here are the salient features of the Bill and its possible impact, as described by Manohar Chowdhry & Associates…
1. The amendments proposed in the said Bill affect the existing Sections 115BBE and 271AAB apart from bringing in a new Section 271AAC. Contrary to popular belief, there are no amendments proposed to Section 270A.
2. The primary reason for introducing the Bill is to prevent black money hoarders from finding illegal ways of converting their black money into white and simultaneously giving an opportunity to such persons to pay taxes laced with a heavy penalty and allow them to come clean. Hence, the Government has come up with a new Scheme called ‘Pradhan Mantri Garib Kalyana Yojana, 2016’ (PMGKY).
3. The Scheme allows the black money holders to declare their undisclosed income and avoid vigorous procedures under the Income-tax Act (ITA). The proposed structure of the Scheme is as under :
a. Any declarant under this Scheme can make a declaration of income only by way of cash or a deposit in any account maintained by the declarant with any banking company, post office or such other institutions notified by the Government.
b. Any income declared under the Scheme would attract a tax of 30% of the undisclosed income, a surcharge (to be known as the Pradhan Mantri Garib Kalyan Cess) @ 33% of the tax. Thus, the total tax on such income would be approximately 40%. In addition to this, a penalty @ 10% of the income would also be payable. Thus, the effective tax would amount to approximately 50% of the income.
c. In addition to the tax, surcharge and penalty paid under this Scheme, an additional amount which shall not be less than 25% of the income needs to be deposited under the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016. The amount deposited under such Scheme can be withdrawn only after four years from the date of deposit and would not earn any interest.
d. The period of the Scheme and the manner of the declaration is yet to be notified by the Government.
4. A person who has not opted for this Scheme, and is subsequently found to be holding such undisclosed income would be charged with a tax (under Section 115BBE) @60% of the income and a surcharge of 25% of the tax. The total tax payable in such cases would be 75% of the income. Also, a penalty under a new section proposed to be inserted with effect from assessment year (AY) 2017-18 - Section 271AAC @10% of the tax and surcharge would also be payable. The penalty would work out to 10% of 75% i.e. 7.5% of the income. Thus, in such cases, the total tax outgo would be 82.5%, as opposed to 50% under PMGKY.
5. In the case of any undisclosed income unearthed by way of search, certain amendments are proposed in Section 271AAB whereby two scenarios are possible:
a) Where the concerned tax payer admits and offers to tax the undisclosed income in his return of income and pays the taxes voluntarily and
b) Any other case
In the first scenario, penalty on such undisclosed income would be levied @30% of the income whereas, in the second scenario, penalty would be levied @60% of the undisclosed income.
6. This Scheme does not apply:
a. in relation to any person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (popularly known as COFEPOSA):
b. in relation to prosecution for any offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967, the Prevention of Corruption Act, 1988, the Prohibition of Benami Property Transactions Act, 1988 and the Prevention of Money-Laundering Act, 2002;
c. to any person notified under section 3 of the Special Court (Trial of Offenses Relating to Transactions in Securities) Act, 1992;
d. in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
7. Any declaration made under this Scheme would not be admissible in evidence against the declarant for the purpose of any proceeding under any Act (except to the extent mentioned in para 7 above.
8. The income that is offered to tax under this Scheme would be the gross income and no deductions for any expenses or set off would be allowed from the same.
9. The amount of tax, penalty etc. payable under the Scheme has to be paid before submission of the declaration under the Scheme and no portion thereof would be refundable to the tax payer.
The Chartered Accountancy firm says, “The past few days have seen a lot of action on the part of the Government in its attempt at unearthing black money, bringing to book tax evaders and in channelizing the massive amounts of unaccounted funds into the official economy. The latest tax amendments proposed are in line with this concerted effort.”
The summary of the various amendments can be noted from the table below, which shows the tax outgo in various situations:
As can be seen from the above, the penalties prescribed and the total tax outgo that a tax evader would face are very stiff.
“We welcome the government’s move to punish those who have brazenly evaded taxes and stayed away from contributing towards the nation building process for decades,” the CA firm added.