While the government has clarified and issued an advertisement stating that details of deposits of up to Rs2.5 lakh would not be shared with the tax department, one needs to keep in mind that this is not a blanket amnesty

The recent demonetisation of Rs500 and Rs1,000 notes by the government, and the consequent action of depositing such notes in bank accounts, has raised various issues as to the tax treatment of such deposits. There has been much debate as to whether the tax authorities would enquire into all such deposits, how would these be treated, whether penalty would be leviable, and others.

While the government has clarified and issued an advertisement stating that details of deposits of up to Rs2.5 lakh would not be shared with the tax department, one needs to keep in mind that this is not a blanket amnesty. It only means that people would not be receiving notices from the tax authorities only on account of the fact that they have deposited cash in their bank accounts up to Rs2.5 lakh.

Where, however, the return of the taxpayer is selected for scrutiny, such deposits, even if the amount is less than the limit of Rs2.5 lakh, would certainly have to stand the test of scrutiny. The taxpayer would need to justify that he had derived such cash out of his disclosed sources of income, in order to avoid being taxed in respect of such deposits.

Can a taxpayer, who has undisclosed cash, deposit his old currency notes in his bank account, offer such amount to tax in his income tax return for the current financial year, and not pay any penalty?

As the law currently stands, no penalty for concealment of income can be levied in such cases, since concealment of income can only be if such income is not included in the return of income, but is ultimately taxed. There are, however, certain risks associated with taking such an action.

For taxpayers carrying on a business or profession where receipts are in cash, this disclosure could have some adverse consequences. The first is that in scrutiny during assessment, the tax officer may doubt the correctness of the income declared, and may carry out further investigations to verify whether there is any further undisclosed income. Secondly, the high profitability in this year could result in a greater scrutiny of the tax returns in subsequent years, in which the profitability is not as high.

Another aspect that needs to be kept in mind is that under the Income Disclosure Scheme, which closed recently in September, the tax, penalty and cess payable was 45% of the income. However, the tax payable in respect of undisclosed deposits would be only 35.54%. This would mean that a person who has disclosed under the Income Disclosure Scheme is worse off than a person who has not so disclosed, and who is now forced to disclose by virtue of demonetisation.

One, therefore, needs to keep in mind the probable impact of possible amendments, which may be made to provide for a penalty in such cases of deposit of cash on demonetisation, which one hears rumours about.

One also reads news reports of certain businesses, such as jewellers and retailers, selling gold, jewellery or other goods, subsequent to demonetisation, against old currency notes.

Such businesses certainly run the risk of not being able to explain the source of the old currency notes. Since the old currency notes have not been legal tender after 8 November 2016, sales collections after that date cannot be recorded by such businesses.

Further, in case a business that is subject to tax audit receives sales proceeds of goods or services exceeding Rs2 lakh from a customer, it needs to not only obtain the permanent account number (PAN) of the purchaser, but also file a quarterly Annual Information Return with the income-tax department furnishing details of such cash transactions.

Attacking black money

Would demonetisation really result in eradication of black money? One needs to keep in mind that black money is not necessarily in the form of cash. Even a bank account in which income is deposited, but not disclosed to tax authorities, is black money.

A significant part of the black money in the Indian economy is parked in bank deposits, real estate and other assets, which remain unaffected by the demonetisation move.

What demonetisation has certainly done is caused a significant dent in the flow of black money, and shown tax evaders that the government is serious about cracking down on tax evasion. Generation of black money in the future would certainly get affected, given the now increased risk.

If one views the actions of the government over the past couple of years, one can discern the organised and calibrated approach that the government has followed in tackling various aspects of black money. This is certainly a far more effective strategy in tackling evasion than those that have been adopted in the past. Honest taxpayers now feel vindicated.

The government needs to be complimented on its actions from a taxpayer perspective (though implementation in form of distribution of new currency notes could perhaps have been better). Perhaps, one will now see the effective implementation of the recently amended Benami Transactions (Prohibition) Act, to attack black money held in the form of real estate and other assets.