Modi comes up with another master stroke in the form of amendments of the existing Income Tax laws and introduction of the new Income Disclosure Scheme. With concerns looming large on the fact that the existing Income Tax Laws may be manipulated to convert black money into white, these amendments are expected to tighten loose ends, with additional taxes payable to the Govt.

Tax evasion and insurgence of black money have been the two most common corruption factor in the Indian economy. Evasion of taxes deprives the nation of critical resources which could enable the Government to undertake anti-poverty and development programmes. It also puts a disproportionate burden on the honest taxpayers who have to bear the brunt of higher taxes to make up for the revenue leakage. As a step forward to curb black money, bank notes of existing series of denomination of the value of five hundred rupees and one thousand rupees(hereinafter referred to as specified bank notes) issued by the Reserve Bank of India have been ceased to be legal tender with effect from the 9th November, 2016.

Concerns with the Demonetization Scheme:

Concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 could possibly be used for concealing black money. It is, therefore, important that the Government amends the Act to plug these loopholes as early as possible to prevent misuse of the provisions. The Taxation Laws (Second Amendment) Bill, 2016, proposes to make some changes in the Act to ensure that defaulting assesses are subjected to tax at a higher rate and stringent penalty provision. Apart from that, in the wake of declaring specified bank notes as not legal tender, there have been representations and suggestions from experts that instead of allowing people to find illegal ways of converting their black money into black again, the Government should give them an opportunity to pay taxes with heavy penalty and allow them to come clean so that not only 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. Thus, money coming from additional revenue because of the decision to ban Rs. 1000 and Rs. 500 notes can be utilised for welfare schemes for the poor.

Concern Redressal by the Government:

1. Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016:

Addressing these concerns, an alternative scheme namely, the ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016′ (PMGKY) is proposed to be provided in the Bill. The declarant under this regime shall be required to pay tax @ 30% of the undisclosed income and penalty @ 10% of the undisclosed income. Further, a surcharge to be called ‘Pradhan MantriGarib Kalyan Cess’ @ 33% of tax is also proposed to be levied. In addition to tax surcharge and penalty, the declarant shall have to deposit 25% of undisclosed income in a Deposit Scheme to be notified by the Central Government in consultation with the Reserve Bank of India under the ‘Pradhan MantriGarib Kalyan Deposit Scheme, 2016’. This amount is proposed to be utilised for the programmes of irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc.; so that there is justice and equality.

2. New Penalties and Additional Tax on Black Money Holder:

Providing a window to black money holders, the government today 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.

Proposed Salient Features of New Income Disclosure Scheme:

1.Applicable for undisclosed income in the form of Cash or deposits already made or to be made in bank accounts.

2.Income Tax @ 30% of Cash + Surcharge @ 33% of Tax + Penalty @ 10% of Cash i.e. aggregating to 49.90% of undisclosed income (cash) (Section 199D & 199E)

3.The declarant shall ‘deposit’ minimum 25% of Cash in a Deposit Scheme to be notified by the CG in consultation with RBI. (Section 199F)

4.The ‘deposit’ shall be interest free and shall have a lock-in period of 4 years from the date of deposit [Section 199F(2)]

5.Income Tax + Surcharge + Penalty + Deposit i.e. 74.90% has to be paid to the treasury before making the declaration and the proof of payment is to be attached with declaration.(Section 199H)

6.The amount of undisclosed income (cash) shall not be included in the total income of any assessment year of the declarant. (Section 199I)

7.The undisclosed income may have been earned at any time before 01-04-2017.

8.The declaration made under the scheme shall not be admissible in evidence against the declarant for the purpose of any proceedings under any act except those mentioned in Section 199O (like 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, etc.)

9.If a declaration has been made by misrepresentation or suppression of facts or without payment of 74.90% of cash as per scheme, such declaration shall be void and shall be deemed never to have been made under this Scheme.

10.If a person fails to make declaration as per above scheme, but file IT Return for AY 2017-18 (i.e. for Financial Year 2016-17) declaring any unexplained income/investment, cash credit, etc. under section 68, 69, 69A, 69B, 69Cor 69D (say unexplained income) he shall be liable to pay income tax @60% of such unexplained income + Penalty u/s 271AAC @ 10% of tax payable

11.If any person admits of any unexplained income during a search conducted under section 132, he shall be liable to pay penalty @30% of unexplained income admitted in addition to tax.

12.If any person refused to admit any unexplained income during a search conducted under section 132, he shall be liable to pay penalty @60% of unexplained income admitted in addition to tax.

Amendments at a glance:

Particulars	Existing Provisions	Proposed Provisions
General provision for penalty	PENALTY (section 270A) Under-reporting - @50% of tax Misreporting - @200% of tax (Under reporting/ Misreporting income is normally difference between returned income and assessed income)	No changes proposed
Provisions for taxation & penalty of unexplained credit, investment, cash and other assets	TAX (Section 115BBE) Flat rate of tax @ 30% + sarcharge + cess (No expense, eductions, set-off is allowed)	TAX (Section 115BBE) Flat rate of tax @60% + surcharge @25% of tax (i.e. 15% of such income). So total incidence of tax is 75% approx (No expense, deductions, set-off is allowed) PENALTY (Section 271AAC) If Accessing Officer determines income referred to in section 115BBE, penalty @10% of tax payable in addition to tax (including surcharge) of 75%
Penalty for search seizure cases	Penalty (271AAB) (i) 10% of income, if admitted, returned and taxes are paid (ii) 20% of income, if not admitted but returned and taxes are paid (iii) 60% of income in any other case	Penalty (271AAB) (i) 30% of income, if admitted, returned and taxes are paid (ii) 60% of income in any other case
Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016' (PMGKY)	New Taxation and Investment Regime	Undisclosed income in the form of cash & bank deposit can be declared: (A)Tax,Surcharge, Penalty payable Tax @30% of income declared Surcharge @33% of tax Penalty @10% of income declared Total @50% of income (approx) (B)Deposit 25% of declared income to be deposited in interest free Deposit Scheme for four years.