Why you must take up the PM’s offer

The Centre has played both good cop and bad cop through the Taxation Laws (Second Amendment) Bill, 2016.

On the one hand, the Bill closes a loophole that might have allowed black money holders get away lightly under the old rulebook. So, those depositing black money in their bank accounts now face a much higher tax outgo than before.

On the other hand, the newly-introduced Pradhan Mantri Garib Kalyan Yojana (PMGKY), an amnesty scheme of sorts, encourages evaders to come clean by offering tax rates lower than the new proposals (but higher than rates in the earlier amenesty scheme).

Here’s why it makes sense for evaders to declare their holdings under the PMGKY window:

Soon after the Prime Minister’s November 8 announcement scrapping ₹500 and ₹1,000 notes, Revenue Secretary Hasmukh Adhia set the cat among the pigeons.

He said that cash deposits in banks above ₹2.5 lakh until December 30 that don’t match with income declared in tax returns will not only be taxed but will also attract penalty of 200 per cent of the tax.

This effectively meant that black money depositors with large hoards could lose all the money and more to the taxman. Plus there was the risk of prosecution. But tax experts quickly pointed out a loophole.

The deposits, they said, could be declared as the current year’s income in next year’s (AY 2017-18) tax return — so, a black money depositor could pay tax on this at 30 per cent plus surcharge plus cess under Section 115BBE (dealing with taxation of unexplained cash and other assets) and escape the penalty.

To set right this anomaly, the Taxation Laws (Second Amendment) Bill, 2016 increases the tax rate under Section 115BBE significantly to about 75 per cent (including surcharge).

Besides, the taxman can levy penalty under Section 271AAC at 10 per cent on the tax, taking the outgo up to about 85 per cent of the income.

With the threat of this stick, the government also dangled a carrot — the PMGKY.

Under this, on cash and bank deposits declared within a time window to be announced, you pay up 50 per cent (including tax, surcharge and penalty), deposit 25 per cent in an interest-free scheme for four years, and get to use the remaining 25 per cent.

The income declared could be of years earlier than 2016-17 too. You get immunity from many other laws except some such as Prevention of Money Laundering Act, Prevention of Corruption Act and Benami Property Transactions Act.

If you do not use the PMGKY window, but choose to declare the money in the tax return next year, your outgo will increase to about 75 per cent of the income as per the amended Section115BBE. Also, there will be no immunity from other laws.

If you do not even disclose the income in the tax return and the taxman finds, the penalty of 10 per cent kicks in and the outgo increases to about 85 per cent.

And if the taxman sniffs out the concealed income in the course of search, the penalty rises to 30-60 per cent of the tax, taking the outgo to above 100 per cent of the income.

Says Girish Vanvari, Partner and Head of Tax, KPMG in India, “This is a very balanced scheme which gives a fair opportunity to people to come out clean.

This should benefit all — as tax collections will go up, investments will be channelised into national priority projects and the assessee would still have money in his hands to use.

If the tax payable is 100 per cent or more, there is no incentive to come out clean and that would be unhealthy as assesses would explore other undesired means to deal with their illegitimate money.”

Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP agrees that rates under the PMGKY are less than the normal provisions but says that the objectives are different.

He says, “The government has reduced the taxes to incentivise the people to declare their undisclosed income as it also leads to many advantages for government as well, such as reduction in additional manpower and resources requirement, immediate tax cash flows and less litigation.”

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