Implications of driving away the black money devil

Vinita Krishnan & Surajkumar ShettyKhaitan & Co One of the most talked about issues, in the present day, is the demonetisation move by the government, the logistical chaos created due to it and the subsequent legislative changes brought to Indian tax laws to tackle the menace of black money. The main issue which is being sought to be covered by way of the proposed amendments is tax on any income (including cash, bullion, jewellery, etc.) which is received from an unexplained source or the source of which cannot be substantiated by the person who is in receipt of such income and penal provisions in this regard. The proposed amendments have been passed by the Lok Sabha. We have sought to discuss the intricacies relating to these amendments and their implications in this write-up.

Proposed Amendment to Tax Laws

The government’s implementation starts with an opportunity to come clean. A person can declare any income and any cash deposit in any account maintained with banks, etc. which was taxable in any year up to financial year 2016-17 (i.e. the current financial year). This declaration can only be filed by such persons who meet the eligibility criteria and have not been specifically barred from making the declaration. Persons being prosecuted under certain specific laws such as Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, Prevention of Money Laundering Act, Black Money Act, etc. have been barred from making this declaration. The total tax outgo in case a declaration is filed would be approximately 50 percent of the declared income/cash deposit. Additionally, the declarant is also required to deposit at least 25 percent of the declared amount in the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016. This amount of deposit (i.e. 25 percent) will not bear any interest and will be locked in for a period of 4 years from the date of deposit and would need to comply with other conditions as may be specified.

Prior to the above announcements regarding the change in tax laws, various chartered accountants and other advisors were of the view that the tax laws, as they stood prior to the amendment, were not equipped to handle certain situations which could arise in this context. One such view was that the cash income could be disclosed in the tax return to be filed for the current financial year and such income would be only exposed to tax of 30 percent and no penalty could be levied in such cases. Various other unscrupulous modes were also being used by people to exchange/get rid of the demonetised currency notes such as purchase of jewellery, foreign exchange, etc.

To address the above, the Government has increased the tax on unexplained credits to 60 percent and the surcharge on such amounts to 25 percent of the tax. Additionally, an amendment is also proposed to the penalty provisions whereby the penalty ranges from 10 percent of the tax amount (in cases where the undisclosed income was detected in a manner other than search by tax department) to 60 percent of the undisclosed income (in cases where the undisclosed income was detected during a search in the premises of the concerned person). Interest would also be additionally levied depending on the amount of tax.

It is obvious that the intention behind these changes to the law and the demonetisation move of the Government, are all aimed at one thing - to curb black money and corruption.The question is - do these moves actually achieve the objectives and if yes, to what extent?

Implications of the proposed amendments

The fear of a common man of getting caught in the net of the tax officers, the Enforcement Directorate, etc. is perpetual. The powers accorded to the authorities are far-reaching. The requirement of the law, in the present context, is that the ‘source’ of any income received by the person (individual, corporate, etc.) should be explained to the ‘satisfaction’ of the tax officer. Given the subjective nature of this requirement, the extent to which the tax officers would seek an explanation from the taxpayer remains to be seen. The Government should consider issuing guidelines / clarifications regarding the ‘explanation regarding the source’ and setting aside any discretionary powers (to the extent possible) of the tax officers in this regard. Any discretion could possibly lead to corruption which would defeat the entire purpose of the present amendments. As an example, currently, in some cases, share capital with high premiums received by Indian companies, including share capital received from non-residents, are being added to their income under the garb being ‘unexplained credits to the books of accounts’ even though such share capital was received through proper banking channels and the source is clearly identified. Going forward, such additions would also be covered within the ambit of the current proposed amendments.

A major concern amongst honest taxpayers has been the absence of any exceptions/ exemptions to the applicability of the new rules. Various officials of the Government have, in the past few days, made statements to the effect that any deposits of cash amounting to Rs 2.5 lakhs into bank accounts, would not be investigated upon and that people making such deposits would not need to worry about any adverse consequences. This clarification is however, missing in the fine print of the amendments. Hence, it is all the more important to understand that the fact that these amendments would not be applicable to all cash deposits into bank account which have taken place post 8 November 2016. The law, in fact, does not even refer to the demonetisation nor does it restrict the applicability to cash deposits made post 8 November. This amendment would apply for all amounts (cash credits in the books of individuals, companies, etc.) for which the concerned person is not able to provide an explanation to the tax officer. Hence, any amount (whether or not, it is more than Rs 2.5 lakhs) would be subject to tax as discussed above, if the explanation regarding its source is found to be unsatisfactory. It would help if the Government made necessary amendments or issued the requisite clarifications to allay the fears of the common man if the intention is actually to provide an exemption to deposits less than Rs 2.5 lakhs from these rigours.

Another practical issue which may arise in the present case could possibly be regarding acceptance of the demonetised currency notes for payment of tax. It is worthwhile to note that, the disclosure scheme requires payment of applicable tax and deposit into the fund of 25 percent of the disclosure amount prior to filing of the declaration. The declaration will not be accepted by the tax authorities if such payments have not been made by the declarant. It was seen that some taxpayers faced difficulties in paying the applicable tax after making a disclosure under the Income Declaration Scheme which ended on 30 September 2016. This resulted in the income tax department and the Reserve Bank of India issuing instructions to banks directing them to accept cash deposits towards payments of tax without enquiring the source of such cash. The Government should issue such instructions to banks so that potential declarants are not dissuaded from making a declaration.

No doubt, the move of the Government to introduce stringent laws for dealing with the black economy is in the right direction. However, the manner of implementation of these laws and the powers of the tax authorities should be reined in and measures should be identified to prevent abuse in any manner. The Government should also issue the rules and the form relating to the disclosures along with necessary clarifications/guidelines to avoid confusion amongst taxpayers.(Authors are Vinita Krishnan, Associate Director and Suraj Kumar Shetty, Senior Associate at Khaitan & Co)