The Prime Minister’s grim message that the state will check “records since independence and spare no one” has sparked fears that the law could be changed to tax `unexplained’ cash.

Today, the law lacks the teeth to penalise those who fork out tax after parking a mountain of such cash as deposits with a bank.

Here, the rules of the game are simple: as long as such persons pay the maximum rate of income tax – of about 36% (including surcharge and cess) – they can keep the taxman at bay; even if they are unable to convince tax officials about the sudden loan or gift that is credited in their books of accounts, there is very little the tax office can do other than treating the amount as ‘income’ that would be taxed at the highest rate. It cannot slap a penalty.

All an assesse has to do to escape penalty is state that the amount has been received in the current financial year and tax has been paid on it. This business of taxing the unexplained is spelt out in section 115BBE of the Income Tax Act.

However, the burden of penalty falls on those whose income as stated in the tax return is less than the income assessed by the tax officer. This is described as misreporting or underreporting of income under Section 270A of the Act. But depositors of cash – particularly in the present environment where many are believed to have dumped their undeclared funds in bank accounts and many more planning to do – would be untouched by the penal provision of Section 270A. That’s because they would declare the amount as `income’ in this year’s IT return to make sure that income stated in the return does not exceed the number arrived by the assessing officer.

Thus, there is no way the IT department can invoke Section 270A to impose 200% penalty – as stated by a senior bureaucrat – on deposits of cash whose source the account holder is unable to explain. A government, seemingly obsessed to clamp down on black money and go ahead with a penalty, can do so only if Section115BBE of the Act is amended. Such an amendment could incorporate the provision that anyone taxed under this Section -- where the person cannot offer any satisfactory explanation of the cash source – would be asked to cough up penalty (and thus end up losing almost the entire pile of cash).

Will the government push through a change in the law? Will it antagonise a section of its vote bank? If so, how soon? And will it open the pandora’s box of a retrospective change to catch those who deposited cash since last Wednesday?

It has certainly struck the revenue authorities that there is a multitude of cash hoarders who did not come clean in earlier quasi-amnesty schemes (where the tax charged was 45%) and may now wriggle out by paying a lesser tax of 36%. But the timing of any such change in the statute would perhaps depend on the fallout of what till now has been the government’s biggest policy gamble.