On November 8th evening, Prime Minister Narendra Modi launched his third attack on black money and went off to Japan to ride the bullet train. The first attack was a law in 2015, which turned out to be a damp squib even though it was draconian in scope. The second attack was the Income Declaration Scheme (IDS), which met with far greater success. The government legitimised over Rs 65,000 crore of cash and assets and collected about Rs 30,000 crore of taxes. The third attack is the demonetisation of currency, which surprisingly included the ubiquitous notes of Rs 500 and Rs 1,000. This exposed a lack of proper planning and preparedness with the Reserve Bank of India and banks being caught without an adequate number of smaller denomination notes. This badly affected the poor, the sick, the elderly, the hawkers, the traders and businessmen. But the PM is no mood to let up his attack on black money.
As part of the PM’s war against black money through demonetisation of currency, ministry of finance has announced that deposits up to Rs 2.5 lakh will not be reported to the income tax department. The ministry has also announced that they would be getting reports of all cash deposited during November 10 and December 30, 2016, above the threshold of Rs 2.5 lakh in each bank account. The income tax department would match these deposits with income returns of depositors. In the case of a discrepancy, suitable action may follow. If cash amount above Rs 10 lakh is deposited in a bank account, not matching with declared income, it will be treated as tax evasion. In such a case, tax amount plus a penalty of 200 per cent of the tax payable would be levied according to Section 270(A) of the Income Tax Act.
Experts beg to differ. It appears that the above section applies to a situation where the assessing officer gets to know of income, which has not been declared in the return that has already been filed. However, what if the cash that is deposited under demonetisation is shown as income for this year, that is 2016-17? According to tax experts under Section 69(a), 69(b) and 69(c), this unexplained money deposited now could be considered as the current year’s income (from “other sources”) and one can pay tax at the rate of 33 per cent and become compliant. The return for this year has not yet been filed and so there is no issue of having filed an incorrect or false return that would attract the draconian penalty under Section 270 (A). Indeed, the amount deposited with one’s bank is voluntarily declared and so there is no question of concealment. In other words, demonetisation will allow a person to turn black money into white by paying 33 per cent tax when the tax under IDS was 45 per cent!
According to tax expert Vimal Punmiya, taxpayers are “not required to substantiate source of income, and income can be declared without disclosing the head of income. The penalty for concealment can be levied only on the difference between assessed income and declared income. This view is based on a bare reading of Section 270(A) itself. So penalty of 200 per cent can, under no circumstances, be levied on such income disclosed in the tax return for the current year.” If this interpretation is correct, the government’s officially stated position is wrong. However, the tax department is not likely to relent from its stand, so people may be in for a long round of litigation.
Secondly, this government, like the previous ones, has done nothing to curb the generation of fresh black money. The biggest sources of black money are — the extortion racket run by political parties, the corruption of government officials (thanks to a plethora of complex rules and permits needed) and the under-declaration of income by businessmen and professionals. At least the corruption of babus could have been curbed, by slashing needless red tape. This has not been done. A lower tax regime can perhaps lead to better compliance. In fact, taxes have actually increased under the bigger government run by PM Modi; black money is openly used in fighting elections and there are no signs of this being curbed as yet.
What is also unclear is the economic fallout of demonetisation. The short-term impact is likely to be hugely negative. There will be a massive shrinkage in consumption for obvious reasons and that will have a ripple effect all round. It is unclear what the medium-term impact will be. People will continue to generate black money and, scared of hoarding, will spend it. In that case, consumption will not be affected.
The only thing clear is that the government emerges a big winner. A big government will get bigger, thanks to the windfall gain it will make in the form of notes not returned. The Rs 500 and Rs 1,000 notes that are not deposited in banks by the end of December will extinguish RBI’s liability, and it can declare a big dividend to the government. That will allow PM Modi to kick-start his bullet train project.
The writer is the editor of www.moneylife.in
Twitter: @Moneylifers
Twitter: @Moneylifers
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