When the demonetisation of Rs1,000 and Rs 500 notes was announced by Prime Minister Narendra Modi on November 8, 2016, the expectation was that about Rs 350,000 – 400,000 lakh crore out of a total Rs 15,44,000 lakh crore (embedded in these notes) would not come to banks. This was taken to mean tremendous success of this policy decision. On the one hand this would tantamount to sternest punishment to hoarders of black money (via junking all of their illegal wealth – accumulated over the years – to a worthless piece of paper) and on the other this would give a bonanza to the Reserve Bank of India by way of extinguishing its liabilities to the extent of amount not returned. Eventually, the money will flow into the coffers of the Union Government – being the owner of the apex bank. Now that almost all cash held in these currency notes has come to banks, critics have flayed the policy decision as a monumental failure. But it would be premature to jump the gun.
Simply because a hoarder has man-aged to deposit his black cash in a bank after the Indian Government’s demonetisation decision, it does not automatically become white. The depositor will be required to explain the source of his/her cash. Any amount that remains “unexplained” will be treated as black and dealt with sternly as per provisions of the Income Tax Act.
There was a “loophole” in the extant provisions of the Act. This would have allowed hoarders to declare their black money as a “windfall” income in the current financial year (2016-17) and get away by paying the normal tax at the rate of 30%. A big rush to put undisclosed funds in bank accounts initially was, in fact, prompted by this. Finance Minister Arun Jaitley got an amendment passed to plug the loophole.
Under the amended Act, persons who opt for the Pradhan Mantri Garib Kalyan Yojana (PMGKY) will pay 50% plus another 25% of their undisclosed money. Their money will be blocked for four years and no interest will be paid to them. Those who do not join the PMGKY but declare their “undisclosed income” in their tax returns, will part with 85% of their black money. And, those who don’t declare their black money in their returns and are caught by the I-T Department during search and seizure, will have to shell out even more which could even exceed 100%.
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