The amendments to the Income Tax law passed by the Lok Sabha now offer those with unaccounted cash a last shot at amnesty. They can pay half their cash as tax and deposit a quarter into a new Pradhan Mantri Garib Kalyan Yojana. Those who fail to do this voluntarily for bank deposits made since November 8 would end up retaining about 15 per cent of the total amount if they cannot establish a legitimate source for the funds. There is a Robinhood-esque edge to the PMGKY approach, directly linking the war on black money to welfare of the poor. Essentially an extension of the recent Income Disclosure Scheme that cleaned up about Rs.65,000 crore of undeclared income by levying 45 per cent tax, the December 30 deadline for bank deposits in demonetised notes gives a more purposeful push to the effort to clean out all the cash in the grey economy. The scheme for disclosing foreign assets last year had yielded just about Rs.2,400 crore in taxes, so a tougher approach was perhaps necessary to instil real fear among habitual tax evaders. Since the demonetisation of currency notes worth an estimated Rs.14.18 lakh crore, nearly Rs.8.45 lakh crore has been brought back into the system. If the proportion of notes deposited or exchanged is in line with their circulation prior to November 8, about Rs.2.56 lakh crore in Rs.1,000 notes and Rs.3.17 lakh crore worth of Rs.500 notes (that can be spent on exempted categories till December 15) is still out there.
Many clever ploys have been attempted to subvert this drive and convert black money into white: hiring people to exchange currency; tapping cash-in-hand entries of firms to launder illicit cash; pumping funds into bank accounts for the poor; purchasing goods in bulk where old notes are still allowed; even tipping off the taxman to conduct search-and-seizure operations on one’s own premises to avail of a provision that allows individuals to pay a mere 10 per cent penalty on such income if they admit to it. The government is trying to close the door on such ingenuity, and the latest tax law changes should be seen in this context. By early January, it will be clear how much money has been mopped up by the demonetisation operation. There is, however, no doubt that this tax manoeuvre is a neater way of gaining fiscal headroom than extinguishing the Reserve Bank of India’s liabilities to the extent of unreturned old Rs.500 and Rs.1,000 notes, and turning that into a special dividend to the exchequer.
