As a strong follow up of the demonetization drive, government has launched a penalizing tax scheme for black income holders. The new scheme puts 50% tax on disclosing black money kept at bank accounts after the demonetization date. For those who are not ready to disclose black money should pay a high rate of 85%.
The new government step is not confined to imposition of high tax rates. More than that, it contains several measures including a cess on black money that will be used to finance poverty eradication programmes. The cess will be used to support Pradhan Mantri Garib Kalyan Yojana which is a half-implemented anti-poverty programme launched in April 2015.
Similarly, 25% of the revealed black income will be invested in interest free bonds with a four-year lock-in period to fund development programmes. Finance Minister Arun Jaitely announced amendment of the Income Tax Act to accommodate the detailed provisions of the government step.
Already an income disclosure scheme was just concluded on September 30 this year that unearthed a moderate figure around Rs 60000 crore.
The present move is a well-designed one with reasonably high tax on black money. Given the ‘caught’ nature of the undisclosed income stuck in the form of bank deposits, government can comfortably chase black money. This will also raise compliance and considerable tax revenue can be obtained.
It is very difficult to have even a fair estimation about the possible tax revenue out of the demonetization deposits. The total value of RS 500 and Rs 1000 notes withdrawn was nearly Rs 12 lakh crore. According to AG Mukul Rastogi, Rs 6 lakh crore (or trillion) deposits were added into the banking system due to demonetization. If all the 12 lakh crore notes are deposited, the black income may fall around 1 to 1.5 lakh crore according to experts.
As black money is unrevealed money, the amount from such a deposit is difficult to estimate. If the black income is around Rs 1 lakh crore, the government may get a gain of Rs 55000 crores in tax reveneus. This revenue may give some relief for the government in the coming years as slow tax revenue from demonetization exercise is on the card.
More than anything, the administrative difficulty and legal battles for extracting the tax revenue from the deposits may take several years.