Proposed black money tax changes decoded: What you need to know

Proposed black money tax changes decoded: What you need to know 

With the introduction of an Income Tax Amendment bill in Parliament today, the government has proposed a new income disclosure scheme under the name of the Pradhan Mantri Garib Kalyan Yojana 2016 and simultaneously proposed plugging certain loopholes in the Income Tax Act which could have been exploited by black money holders. The government has offered the carrot – the least tax option of the Garib Kalyan Yojana – and shown the stick and closed the loopholes: the hiked tax and penalties under Sections 115BBE and Section 271AAC and Section 271AAB. 

If unaccounted income is declared under the Garib Kalyan Yojana, then the concerned person pays 30% tax on the income so disclosed plus 33% surcharge on the tax paid plus 10% of the income disclosed as penalty taking the total tax incidence to about 50%. Additionally, 25% of the disclosed income will have to be compulsorily placed in interest-free deposit scheme for four years. Refer table below. 

Further, the income tax amendment bill also proposes to plug certain loopholes in the IT Act which may have been exploited by black money holders. As per tax experts, those depositing unexplained cash in their bank accounts post demonetisation could have tried to pass off that as income of the current financial year i.e. FY2016-17 and pay tax at the normal applicable slab rate which would be 30% in most cases plus the applicable surcharge (on income over Rs 1 crore) and 3% cess 

However, this bill proposes to amend Section 115BBE to plug this loophole, says Sonu Iyer, Tax Partner and People Advisory Services Leader, EY. As per the proposed amendment, with effect from 1.4.2016 in case of unexplained cash/assets/investments etc a 60% tax plus 25% surcharge (of the tax payable) will be levied – totalling to 75% tax approx. Additionally, 10% of this tax would also be leviable as penalty under section 271AAC if undisclosed income is not offered in return by taxpayer and detected by Tax authority subsequently. 

Tax and penalty Provisions for search and seizure have also been made stricter by amending Section 271AAB. In case, unexplained assets/cash is found with you during a search and seizure raid then apart from the tax and surcharge under the amended Section 115BBE, penalty under section 271AAB will also be levied. This means that in case a person holding black money does not declare it on his/her own and instead the unaccounted money is found during a raid then a penalty of 30% of income will be le vied. This means that in case a person holding black money does not declare it on his/her own and instead the unaccounted money is found during a raid then a penalty of 30% of income will be levied if the concerned person admits the tax evasion at the time of the raid and in any other case (if he does not admit at that time) the penalty would be 60% of the unaccounted income, says Iyer. 

Here’s how the proposed tax changes would impact tax payable on disclosure of say Rs 5 lakh unaccounted income, as per Iyer of E&Y. 

Provisions for taxation & penalty of unexplained credit, investment, cash and other assets 

TAX (Section 115BBE) 
Flat rate of tax @60% + surcharge @25% of tax (i.e. 15% of such income) + cess @ 3% of tax & surcharge. So total incidence of tax is 77.25% approx. 

(No expense, deductions, set-off is allowed) 
Example: If Rs 5 lakh is the unexplained credit, investment, cash and other assets, 60% tax is Rs 3 lakh plus Rs 75,000 plus cess @ 3% of tax & surcharge Rs. 11250 which is equal to Rs 3,86,250 lakh i.e. 77.25% of unexplained credit, investment, cash and other assets 

PENALTY (Section 271AAC) 
If Assessing Officer determines income referred to in section 115BBE, penalty @10% of tax payable in addition to tax (including surcharge) of 77.25%. 
Example: In addition to Rs 386250 lakh, Rs 30,000 is to be paid. 
Total tax plus penalty: Rs 4,16,250/-. This comes to 83.25% of the total unaccounted income disclosed. 

Penalty for search/seizure cases 

Penalty (271AAB) 

(i) 30% of income, if admitted, returned and taxes are paid 

(ii) 60% of income in any other case 

Example: Say, income undisclosed and thus seized or searched is Rs 5 lakh. 

(i)30% of Rs 5 lakh i.e. Rs 1.5 lakh 

(ii) 60% of Rs 5 lakh i.e. Rs 3 lakh 

Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) 

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.) 

There is no cess applicable in case of the Garib Kalyan Yojana, Iyer adds. 

(B) Deposit 

25% of declared income to be deposited in interest 
free Deposit Scheme for four years 

Example: Say, income undisclosed is Rs 5 lakh 

A.Tax will be 1.5 lakh, surcharge of Rs 49,500, penalty will be Rs 50,000. Total is Rs 2,49,500 i.e. nearly 50% of undisclosed income. 
B. Over and above A.; Rs 1.25 lakh will be locked in for 4 years without accruing any interest. 

Total tax & penalty payable: Rs 2,49,500 

Sudhir Kapadia, National Tax Leader, EY India says “ There has been much speculation about the abilities of some unscrupulous taxpayers to find silver lining in the ongoing demonetisation of high denomination notes to wash black money into white at the standard normal marginal rates of income tax(30% plus surcharges and cess) without attracting any penalties. This would have been possible under the recently amended general penalty provisions where under for under-reported income, a penalty of 50% of tax was prescribed and for mis-reported income, a penalty of 200% of tax was prescribed. The concern was that if a taxpayer were to voluntarily declare unaccounted income in the ongoing fiscal year and include such unaccounted income as “ unexplained” income in the tax return for the year, there may not arise any penalties as there would be no question of under-reporting or mis-reporting. This is now sought to be decisively curbed by imposition of an effective tax cost of 75 %(tax plus penalties) going up t o 82.5%( if Tax Officer determines such unexplained income). On the other hand, a special disclosure regime(PMGKY) has been announced where under undisclosed cash and bank deposits, if voluntarily declared, would result in a total tax burden(including penalties) of 50% plus a requirement to deposit 25% of declared income as interest free for four years. It is expected that considerable amounts of unaccounted cash and bank deposits will come under this alternative PMGKY scheme as the base case outcome of 75%/82.% tax would make the risk of later detection much higher for such taxpayers”. 

Alok Agrawal, Senior Director, Deloitte Haskins & Sells LLP says: It appears that those who choose to declare their unaccounted cash under the Pradhan Mantri Grabi Kalyan Yojana 2016, will have to pay a tax at the rate of 30 per cent of the undisclosed income. Additionally, a 10 per cent penalty will be levied on the undisclosed income and surcharge called PMGK Cess of 10 percent (33 pe r cent of 30 per cent). This tax, surcharge and penalty would aggregate to 50 percent of the relevant amount. It is interesting to note that under the Income Declaration scheme, the declarant was required to pay an aggregate tax, surcharge and penalty of 45 percent of the undisclosed income. 

He further says: It is also understood that the law will be amended to provide for a flat 60 per cent tax plus a surcharge of 25 per cent of tax (15 per cent), i.e. an aggregate tax of 75 per cent for the ones who do not declare under the PMGKY but whose income is assessed by the Revenue authorities. However, the assessing officer may decide to charge a 10 per cent penalty in addition to the 75 per cent tax. Also, if the current provisions of penalty on under-reporting of income at 50 per cent of the tax, and misreporting (200 per cent of tax) which were introduced in the 2016 Budget will remain and no changes are being made to them, one would need to examine the fine print to see the situations that fall under these provisions as compared to the ones liable to the 75% tax-cum-surcharge and 10 percent penalty.