PMGKY Scheme Last Resort To Come Clean Over Tax Issues

(1)  Background

Concerns have been raised that some of the existing provisions of the Income Tax Act can be possibly used for concealing black money, particularly in view of the existing provisions of section 115BBE read with section 270A of the Income Tax Act. To avoid unnecessary litigations and to collect tax at higher rates from persons who deposit black money in their bank accounts, the government has introduced Taxation Laws (Second Amendment) Bill 2016 which was passed in the Lok Sabha on November 29, 2016.

The government has also announced Pradhan Mantri Garib Kalyan Yojana 2016 (PMGKY) in the Taxation Laws (Second Amendment) Bill, 2016. As per this PMGKY, the black money deposited in banks or held in cash can be offered for taxation at 49.9% (i.e., 30% tax, 9.9% surcharge and 10% penalty).

(2)      Income declaration scheme PMGKY

(a)       Declaration

(i)       Any person can make declaration, whether resident or non-resident. The declaration can be filed even on behalf of deceased individuals and can be made by persons who have not filed Income Tax Return in the past. Thus, the benefits of this scheme can be taken by any individual, HUF, firm, AOP, company or any person whether resident or non-resident.

(ii)     Persons who are liable to be prosecuted under Prevention of Corruption Act, PMLA Act, NDPS Act and under Chapter  IX or chapter XVII of IPC 1860 cannot make a declaration under PMGKY. 

(b)    Nature of undisclosed income that can be declared

(i)     Undisclosed income in the form of cash (whether demonetised notes or legal tender) and deposited in account with bank/post office/RBI and other notified entities.

(ii)    The scheme is not applicable to any undisclosed foreign income and asset which is chargeable to tax under black money (undisclosed foreign income and asset) and Imposition of Tax Act 2015.

(c)    What is undisclosed income?

Any cash or deposit with specified entities are undisclosed income, under the scheme, to the extent the built-up of this wealth cannot be satisfactorily explained.

(d)  Which assessment year can declaration be made?

Declaration can be regarding undisclosed income for assessment year 2017-18 or prior assessment years

(e)   Rate of taxes, surcharge and penalty

Tax @ 30% of the declared undisclosed income which will be increased by 33% PMGK cess, i.e. 9.9% of the declared undisclosed income. 

Penalty @ 10% of the undisclosed income. 

The total payment to be made is @49.9% of the declared undisclosed income.

(f)        Procedure

(i)        Compute undisclosed income, cess and penalty @ 49.9% of the undisclosed income and pay.

(ii)       Compute the amount of deposit in PMGKY bonds @ 25% of the undisclosed income and make requisite deposit in PMGKY bonds.

(iii)     File declaration before the notified date with Principal Commissioner having jurisdiction with proof of payment of 49.9% tax and proof of deposit @ 25%.

(iv)      Declaration, payment and deposit all to be made before the notified date which is yet to be notified.

(3)    General

The Finance Minister recognised that the existing Income Tax Act does not permit Income Tax Department to levy any penalty on person who would convert large amount of black money through banking channels. Therefore, amendments to the Income Tax Act and the Finance Act have been passed. 

However, salaried persons or small income earners who were having high value old notes in their homes and who had put them aside out of their savings or cash withdrawals from bank, cannot be considered as holding their unaccounted black money. The government has promised that if a person deposits in his bank account an amount upto Rs 2.5 lakh, no inquiry will be made by the Income Tax Department.  It is, therefore, necessary for the government to issue a circular to the Income Tax Officer not to raise doubts if an assessee gives explanation that the amount upto Rs 2.5 lakh has been deposited out of his savings and cash in hand.

Any detection of black money by the Income Tax Authorities thereafter (other than search cases) would attract 83.25% tax. Therefore, persons holding unaccounted money in cash can take advantage of this scheme as tax rate is 49.9 per cent, with 25 per cent of the amount being blocked for four years in interest free bond.