What Are The Tax Implications For Unaccounted Cash Deposits?
The government plans to bring in amendments to the Income Tax Act, 1961 (Act) to tax unexplained cash deposits, a finance ministry official told reporters in an informal briefing on Friday.
As per this official, two amendments are likely to be tabled in the parliament next week.
One, voluntarily disclosed under-reported income for the year will be taxed at 50 percent. Of the remaining amount, 25 percent will be locked in for a period of 4 years. Effectively, only 25 percent of the deposit will be available for the assessee to use. The effective tax rate in this case will be around 62%.
Two, cash deposits that represent misreported income (income that evaded taxes) will be taxed at 60 percent and a 30 percent penalty (effective tax rate of 78%) will be levied after amendments to the Act or the current tax rate of 30 percent and 200 percent penalty would continue.
Section 270A of the Act prescribes penalty for under-reporting and misreporting of income.
If there is an adjustment to a taxpayer’s income, it is considered as under-reporting on which a 35 percent tax and a 50 percent penalty is imposed, while isreporting is like tax evasion on which a 35 percent tax and a 200 percent penalty is imposed, explained Ketan Dalal, Managing Partner-West at PwC India.
Dalal pointed out that the unaccounted cash deposited in banks as a result of demonetization may not fit the definition of under-reported or misreported income and that could be one reason why the government is proposing amendments to the Act.
“I think this will be a completely different dispensation and a new charging Section will be brought in. Today, as far as tax implication goes, someone depositing unaccounted cash has nothing to compare it with; except the normal tax rate of 35 percent. This is because the government is not going to put these unaccounted deposits in the basket of under-reported income because it is for benign adjustments. And as far as the mis-reporting category is concerned, the effective tax rate comes to more than 100 percent; so unaccounted cash can’t be put there either.
Ketan Dalal, Managing Partner-West, PwC India
The second proposal, which involves a 60 percent tax and 30 percent penalty, is likely to be an alternative option and not another amendment, Dalal said.
“It sounds to me that 50 and 25 is one possible number with effective tax rate of 62 percent; 60 and 30 is another option that the government might be looking at in which case the effective tax rate will be 78 percent which is quite high.
Ketan Dalal, Managing Partner-West, PwC India
I don’t think they will come up with two different sets of numbers because unaccounted cash is unaccounted cash, Dalal added.
