GOI launches PMGKY: 50% Tax on Unaccounted Cash Deposits in Bank post Demonetization

Govt. proposal to launch “Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY)”; Deposits of unaccounted cash/ black money in banks (post demonetization) to attract 50% tax; 25% may be withdrawn; 25%  to stay for 4 years as interest free deposit to be used for welfare of poor

GOI has presented an Income Tax amendment bill in the Parliament to introduce a new Scheme named as ‘PMGKY’ which provides for approx. 50% tax on deposits of unaccounted cash/ black money in bank accounts, post demonetization. Also it provides that 25% money may be withdrawn, however remaining 25% shall be kept as interest free deposit with lock in period of 4 years. However, a higher rate of tax at 80% including penalty could be imposed if assessees do not declare the unaccounted black money voluntarily by way of depositing cash in bank account before 30 Dec. 2016. It seems that GOI has given up the idea of levying peak rate of tax plus 200% penalty for any unexplained deposit above Rs 2.5 lakh during post demonetization period, probably due to lack of legal backing.

Surging cash deposits in Jan Dhan Yojana bank accounts, probably as part of money laundering, were creating trouble for Govt. as the consequence will go to those poor account holders those who normally maintain these accounts. Besides, demonetisation meant for eradicating black money and corruption will not be successful if the ill-gotten wealth made way into the system easily through benami deposits using channels like Jan Dhan bank accounts, etc. Now therefore the GOI has taken another move and has proceeded with heavily taxing those, who stashed huge black money.

Tax Rate of PMGKY is kept at slightly higher side than IDS 2016 (i.e. 45%) to avoid any regret in the mind of participants/ declarants under that Scheme. New proposals of approx 50% tax effectively comprises of 30% income tax, 10% penalty and 10% surcharge. The details of GOI’s proposal are as under:

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

STATEMENT OF OBJECTS AND REASONS

1. Evasion of taxes deprives the nation of critical resources which could enable the Government to undertake anti-poverty and development programmes. It also puts a disproportionate burden on the honest taxpayers who have to bear the brunt of higher taxes to make up for the revenue leakage. As a step forward to curb black money, bank notes of existing series of denomination of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) issued by the Reserve Bank of India have been ceased to be legal tender with effect from the 9th November, 2016.

2. Concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 could possibly be used for concealing black money. It is, therefore, important that the Government amends the Act to plug these loopholes as early as possible so as to prevent misuse of the provisions. The Taxation Laws (Second Amendment) Bill, 2016, proposes to make some changes in the Act to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision.

3. In the wake of declaring specified bank notes as not legal tender, there have been representations and suggestions from experts that instead of allowing people to find illegal ways of converting their black money into black again, the Government should give them an opportunity to pay taxes with heavy penalty and allow them to come clean so that not only the Government gets additional revenue for undertaking activities for the welfare of the poor but also the remaining part of the declared income legitimately comes into the formal economy. Thus, money coming from additional revenue as a result of the decision to ban Rs. 1000 and Rs. 500 notes can be utilised for welfare schemes for the poor.

4. Therefore, an alternative scheme namely, the ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016′ (PMGKY) is proposed to be provided in the Bill. The declarant under this regime shall be required to pay tax @ 30% of the undisclosed income and penalty @ 10% of the undisclosed income. Further, a surcharge to be called ‘Pradhan Mantri Garib Kalyan Cess’ @ 33% of tax is also proposed to be levied. In addition to tax surcharge and penalty, the declarant shall have to deposit 25% of undisclosed income in a Deposit Scheme to be notified by the Central Government in consultation with the Reserve Bank of India under the ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. This amount is proposed to be utilised for the programmes of irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc.; so that there is justice and equality.

5. The Bill seeks to achieve the above objectives.

FINANCIAL MEMORANDUM (PMGKY)

This Bill seeks to impose a higher rate of tax and levy of penalty in respect of certain incomes. It also provides for a scheme for payment of tax, penalty and surcharge on the undisclosed income and investment of certain amount of such income in the Pradhan Mantri Garib Kalyan Deposit Scheme. The Bill is proposed to be administered by the Central Board of Direct Taxes. Thus, no additional expenditure is contemplated on the enactment of the Bill.

MEMORANDUM REGARDING DELEGATED LEGISLATION (PMGKY)

1. Clause 5 of the Bill seeks to insert a new section 199G, in respect of the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016. The proposed section 199G provides that a declaration under section 199C shall be made by a person competent to verify the return of income under section 140 of the Income-tax Act, to the Principal Commissioner or the Commissioner notified in the Official Gazette for this purpose and shall be in such form and verified in such manner, as may be prescribed.

2. The matters in respect of which rules may be made or notifications may be issued in accordance with the provisions of the Bill are matters of procedure and detail and it is not practicable to provide for them in the Bill.

3. The delegation of legislative power is, therefore, of a normal character.

GOI’s Income Tax Amendment Bill on PMGKY dt. 26 Nov. 2016

Highlights of the Amendments proposed in the GOI’s PMGKY Bill

PARTICULARSEXISTING PROVISIONSPROPOSED PROVISIONS
General provision for penaltyPENALTY (Section 270A)

Under-reporting – @50% of tax

Misreporting – @200% of tax

(Under-reporting/ Misreporting income is normally difference between returned income and assessed income)

No changes proposed
Provisions for taxation & penalty of unexplained credit, investment, cash and other assetsTAX  (Section 115BBE)

Flat rate of tax @30% + surcharge + cess (No expense, deductions, set-off is allowed)

 

TAX  (Section 115BBE)

Flat rate of tax @60% + surcharge @25% of tax (i.e. 15% of such income). So total incidence of tax is 75% approx. (No expense, deductions, set-off is allowed)

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 75%.

Penalty for search  seizure casesPenalty (271AAB)

(i) 10% of income, if admitted, returned and taxes are paid

(ii) 20% of income, if not admitted but returned and taxes are paid

(iii) 60% of income in any other case

Penalty (271AAB)

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

(ii) 60% of income in any other case

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

(B)  Deposit

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

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