India s Continued Crusade Against Black Money Fatca Implications and Ramifications
The government demonetised the Rs 500 and Rs 1,000 notes in a path breaking attempt to curb black money. A window period until December 30, 2016 had been provided to deposit the old notes in the bank accounts.
The intent of the government was clear: bring undisclosed income into the banking system, monitor the cash deposits closely, and initiate action against the defaulting taxpayers. The apprehension, however, was that such income would be offered to tax as the income of the financial year 2016-17 attracting tax at the rate of 30 per cent. The possibility of penalty provisions being attracted was low since the provisions of misreporting of income (where a penalty of 200 per cent was prescribed), or under-reporting of income (where a penalty of 50 per cent was prescribed) would not be triggered.
To plug this loophole, the government has now proposed to tax unexplained credits, investments, money, expenditure etc. at 60 per cent. Further, a surcharge of 25 per cent would be levied on such tax. With the 3 per cent education cess that is applicable, the total tax would amount to 77.25 per cent. This is applicable from April 1, 2016.
Where such income is not offered in the tax return and is detected by tax authorities, an additional penalty at 10 per cent of taxes due (i.e. 6 per cent of undisclosed income) would be levied bringing the total to 83.25 per cent of undisclosed income.
Significantly higher penalties are attracted where the income is detected during search i.e. 30 per cent of undisclosed income where the income is admitted, returned and taxes are paid during search and 60 per cent in other circumstances is applicable.
The government has also provided an opportunity to come clean by declaring undisclosed income and paying taxes with penalty at rates significantly lower than the 77.25 per cent applicable as above. "Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016' (PMGKY)" attracts 30 per cent of undisclosed income as taxes and 'Pradhan Mantri Garib Kalyan Cess' at 33 per cent of tax (9.9 per cent of undisclosed income). With the proposed penalty of 10 per cent of undisclosed income, the total tax cost would amount to 49.90 per cent. The declarant shall have to deposit 25 per cent of undisclosed income for four years in interest-free deposits to be notified by the Reserve Bank of India which is proposed to be utilised for welfare schemes. The window for declaration is expected to be notified by the government shortly.
While drafting the scheme, the government has ensured that the declarants are taxed at a rate higher than the applicable rate of 45 per cent under the recent Income Disclosure Scheme which ended on September 30, 2016. Further, the PMGKY scheme covers undisclosed income in the form of cash or deposit in an account maintained with specified entity and would not include bullions or any other undisclosed investments. Hence, the scheme would encourage depositing of undisclosed income with specified institutions.
A quick summary of the various scenarios is provided below:
| Scenario | Implication | Comments |
| Disclose under PMGKY | Tax and penalty cost – 50 per cent Mandatory deposit of 25 per cent of undisclosed income in 4 year interest free deposits | Disclosure only in respect of deposits made with specified entities viz. RBI, schedule banks etc. Not possible to declare assets such as bullion, Jewellery etc. |
| Disclose as part of 2016-17 tax return | Tax cost – 77.25 per cent No penalty applicable | Disclosure of income invested in non-cash assets may be possible only under this route. |
| Not disclosed by taxpayer, but determined by tax authorities | Tax cost – 77.25 per cent Penalty – 6 per cent | Applicable to non-search cases e.g. determination during scrutiny assessment |
| Determined by tax officer during search | Tax cost – 77.25 per cent Penalty – 30-60 per cent | Results in significant erosion of the income base. |
Essentially the above measures encourage voluntary disclosure of income either via the PMGKY scheme or through the tax returns to come clean and pay taxes. In parallel, the government is tightening the noose by extending the requirement to furnish PAN for cash deposits where the aggregate deposits during the period - November 9 to December 30, 2016 - exceed Rs 2.5 lakh. This is in addition to existing requirement to quote the PAN for cash deposits exceeding Rs 50,000 per day with a banking company or a cooperative bank. The disclosure of PAN requirements is also extended to deposits with Post Office. The government has mandated these institutions to provide the details of the cases where cash deposits to current account exceeds Rs 12.5 lakh during the above period. In case of other cash deposits, the threshold is Rs 2.5 lakh.
Taxpayers who have undisclosed income are well advised to use the opportunity provided under the PMGKY. Taxpayers who have made cash deposits out of disclosed income or can satisfactorily explain the nature and source of cash deposit would not be impacted.
(Saraswathi Kasturirangan is partner and Vijay Bharech is manager with Deloitte Haskins & Sells LLP)
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Source: https://www.ndtv.com/business/crusade-against-black-money-the-saga-continues-1651215
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