Demonetisation of currency: Ramifications for tax defaulters

As taxpayers queue up in front of banks, eager to exchange their old Rs 500 and Rs 1,000 currency notes, one of the many questions on their mind is what would happen if they are unable to explain the sudden deposit of money in their accounts? The Government’s warning that unexplained cash deposits above Rs 10 lakh would not only be taxed but a 200 percent penalty imposed on any disproportionate deposit, will also add to the worry. To the common taxpayer, the legal framework within which such treatment may be meted out and the precise scope of ramifications on deposit of unaccounted wealth is unclear.  The income tax law treats any unexplained credit entry in the taxpayer’s books — unexplained investments and any money, bullion, jewellery, whose nature and source cannot be justified — as the taxpayer’s income. Such income is taxed at a flat rate of 30 percent (without the benefit of any deductions, expenses, etc). Similarly, any mismatch between actual cost of investment, bullion, jewellery, etc, and the cost which is accounted for by the taxpayer in its books, is taxed at the hands of the taxpayer. Penalties in case of underreporting income is 50 percent of the tax payable on such underreported income. However, if the underreporting of income is on account of misrepresentation/suppression of facts, or failure to record income or investments in the books or making false entries, the penalty increases to 200 percent. Tax defaulters can also be prosecuted for ‘wilful attempt to evade tax’, with imprisonment of 3 months to 7 years (depending on the quantum of tax default) with a fine.Taxpayers must mull over these ramifications and the credibility of the explanations they plan to offer to justify such disproportionate credit entries in their bank accounts. The alternative is an unsavoury one.By Amit Singhania, Partner, and Gouri Puri, Principal Associate, Shardul Amarchand Mangaldas & Co. Views expressed in the above article are personal in nature and does not represent the view of the Firm they represent