People were not only buying gold, expensive saris, or booking railway tickets in cash, but were also using provisions of the Income-Tax Act to siphon off their unaccounted income after the government demonetised high value currency.
And this is the route which the latest amendments to the Income-Tax Act, passed by the Lok Sabha on Tuesday propose to check.
Finance Minister Arun Jaitley also highlighted this issue and said that the Taxation Laws (Second Amendment) Bill, 2016 was brought after it came to the government’s notice that some people were trying to illegally exchange the demonetised ₹1,000 and ₹500 currency notes.
Officials said the decision for the amendments were taken only recently after the impact of the November 8 demonetisation announcement was assessed.
“It was not something that was planned at the start. Our I-T systems will also be used to assess all high value and unexplained deposits in bank accounts during this period,” said an official.
The amendments seek to penalise unaccounted deposits in banks and also proposes a new voluntary disclosure and investment scheme, named Pradhan Mantri Garib Kalyan Yojana (PMGKY) 2016.
Showing higher business income or cash in hand in their tax returns for the current year seems to be one of the most popular routes that people with small businesses were using to convert their unaccounted income in defunct currency notes.
For example, one can simply file a higher business income in the return for the current year and pay 30 per cent tax on it, explained an expert.
A number of tax experts that BusinessLine spoke to said the attraction of using income tax provisions were that there were neither any obligations involved nor very high transaction costs.
“For those with small amounts of black money, the easy option has been to make small deposits of ₹1 lakh to ₹2 lakh in the accounts of their staff or relatives. It has little transaction cost, but involves seeking favours,” said a tax expert, who didn’t want to be named.
Another alternative has been the grey market where old black money remains unaccounted but is converted to new denomination notes. The transaction cost, however, varies between 30 per cent and 40 per cent of the funds involved.
“There have also been instances recently when people with black money have asked others to inform the tax department about it hoping for a search or seizure operation. This would give them an opportunity to declare the funds in defunct notes and convert it legally by just paying a small penalty and tax,” said an official.
PMGKY, which allows for black money to be turned into “white” and also allows the person to eventually use 50 per cent of the declared funds, is a good compromise solution.
“The money is anyway stashed away and not all of it is used. After the lock-in period of four years, the scheme will return 25 per cent of the funds to the person,” said an expert, adding that it will also cap the transaction costs in the grey market.