The Union government is planning to amend the Income Tax Act this week to bring in two crucial provisions related to demonetisation of high-value notes on November 8. One, those who have deposited their black money in banks (or will deposit henceforth), will be expected to pay an income tax of 50 per cent. Additionally, a quarter of such deposits would remain with the government for the next four years. Two, those who fail to disclose their black money even now, and are later caught by income tax (I-T) officers, will have to pay 60 per cent tax and 30 per cent penalty. Evidently, the hurried amendments are being effected to ensure that black money hoarders do not get away by laundering their money. It is noteworthy that since the announcement on November 8, Jan Dhan accounts have swelled by over Rs 20,000 crore. The irony is not lost on anyone — what was meant to improve financial inclusion among the poor and unbanked has turned out to be a boon for money launderers.
Another concern is that if the bulk of the black money is laundered back into the system, it will obviate any gains to the government from the Reserve Bank of India (RBI) — the central bank could possibly transfer gains to the government, in lieu of, and proportionate to the amount of, currency notes not returning to the system, as it reduces RBI’s liabilities. If so, it would upset the government’s plans to use the fiscal space so afforded for the “benefit of the poor”.
However, even though it is well intentioned, there are several reasons why this latest amendment would alarm policy observers and investors alike. For one, it further underscores the utter lack of planning on the part of the government before initiating a sudden dialysis of the Indian currency system — demonetisation seeks to swap 86 per cent of the old currency by value in one swoop. One could, justifiably, ask if the government had considered the rather obvious possibility that hoarders would exploit all avenues to launder money.
But the more serious issue is that the proposed amendments could dent India’s tax policy credibility. To begin with, the amendments will be retrospective in effect. The adverse impact on business sentiment due to retrospective tax policy changes hardly needs reiteration. The notion that all this is being done for the benefit of the poor would come as cold comfort in the final analysis. Secondly, it is a valid question to ask why a hoarder should be allowed yet another amnesty-like scheme just a couple of months after the Income Declaration Scheme ended. The finance ministry’s justification would be that these are not amnesty schemes since there is no tax reduction. But consider this: Section 271(1)(c) of the Income Tax Act, 1961, provides for a penalty of up to 300 per cent of the tax sought to be evaded. Section 276C provides that in a case where there is wilful tax evasion of an amount exceeding Rs 1 lakh, the tax evader is faced with rigorous imprisonment for a term up to seven years and a fine. If these provisions are sought to be revised by the new amendments, there is certainly an amnesty. Wasn’t the IDS declared by the prime minister as the last opportunity for hoarders to escape punishment?