Tax consequences of depositing cash into bank account
The recent demonetization of Rs.500 and Rs.1000 currency has created waves across the country. The decision was like a sudden bolt from the blue. When it was announced on 8th night at 8.30 p.m. or so, no one would have comprehended the depth and enormity of the measure vis a vis the possible fallout of the decision. With 6 days after the announcement some of the general conclusions or expressions of the commoner / intellectuals are as under:
(i) It would reduce the money circulation by Rs.3 lakh crores which would be a gain or profit to the Government. This could be used to cover fiscal deficit.
(ii) The hoarders (mostly said to be politicians) will not be able to use the old currency (estimated at 20% of the total money circulation) and thus they would become mere papers. The tendency to hoard currency would not be there for at least, the next few years.
(iii) When there is sudden reduction in money circulation, people would reduce or avoid extravagant expenses / acquisitions and would use money only for the needs than for their pleasures and desires. It could in turn cripple high end businesses such as automobile, foreign travel, real estate and construction sectors.
(iv) This experience would make people to keep their money in bank account so that any repeat of such demonetization will not discomfort them again.
(v) The poor daily wage earners are left with no choice but they may be forced to accept the old currency since they are at the mercy of the employer who may have lots of such old currencies. In fact, it is happening in some places such as construction workers, daily wage labourers etc. However, this kind of practice can continue only upto the d-day i.e. 30.12.2016.
(vi) Currency- GDP ratio of our nation at 12% reflects high dependence on hard cash and this might force a temporary slump in economy due to demonetization.
(vii) Demonetization of currencies (Rs.500 and Rs.1000) which comprise more than 85% of the total currency circulation would lead to some temporary collateral damages and till the new currencies replace them to the extent it is exchanged, the economic activity would remain sluggish.
Announcements on Income-tax implication
On 8th night the Hon'ble Prime Minister declared that there would be no limit in depositing the old currencies. This statement prima facie would have made any taxpayer to assume that the accounted cash on hand is eligible for deposit without any hassles. However, the announcement on the next day by the Finance Minister and other officials of the Revenue Department stating that the deposits upto Rs.2.50 lakhs will not be checked and amounts deposited in excess thereto would be probed by the Income-tax department has upset many genuine taxpayers.
Taxpayers who have disclosed cash balance at the end of the last fiscal i.e. 31st March, 2016 could deposit their cash balance in hand as on 8th instant in their bank account. The announcement that any deposit above Rs.2.5 lakhs however would invite verification by the Income-tax department might create a fear psychosis among the taxpayers. The other blunt statement that penalty @ 200% would be levied in the case of such deposits not being accounted might create further damage to the regular taxpayers confidence.
The Prime Minister's statement that honest taxpayers would not be harassed needs to be looked into in the backdrop of the above statements of verifying the income-tax returns filed vis a vis the possibility of imposing penalty.
Allaying the fear
It would not be farfetched if the Government allays the fear of the regular taxpayers by giving specific assurance as regards the verification and the possibility of penalty levy. For example, a taxpayer declaring income above Rs.30 lakhs in every assessment year consistently, with natural instinct to hold cash like any other Indian, may have cash balance which he is eligible to deposit into his bank account. But the statement bullying them that it would be verified and could be exposed to penalty, given the departmental officials attitude and skill sets, would not encourage him to deposit the entire cash balance into his bank account.
It is well known fact that litigation in income-tax law is common in India and even for legitimate genuine transactions, taxpayers undergo the ordeal for completing their tax assessments.
Income tax provisions
Taxpayers maintaining books of account on day to day basis may not feel the heat of demonetization since the genuine books of account and the cash balance thereon could be deposited into their bank account. However, the attitude to maintain books of account on day to day basis is very poor across the country and in spite of the taxpayers declaring huge income for tax assessment, the books of account are so weak that they do not dare to claim their books as proper and correct.
Majority of the personal income-tax payers admit income based on the future projected investment needs besides meeting their eligibility criteria for loan lending by financial institutions and banks. Based on the future investment requirements the incomes are either jacked up or understated besides the willingness at that point of time to cough out money towards income tax.
Section 69A of the Income-tax Act deals with taxation of 'unexplained money'. As per this section where in any financial year the taxpayer is found to be owner of any unexplained money which is not recorded in the books of account and he offers no explanation about the nature and source of acquisition of the money, the tax authority may deem such amount to be the income of the taxpayer of such financial year and tax it at a flat rate of 30%.
Now, amounts deposited in the bank account if not reflected in the books of account, but voluntarily offered as income by the taxpayer by citing section 69A could be subjected to tax at 30% as per section 115BBE. However, this could also prompt the tax authorities to probe the preceding years' books of account and pick holes for levy of penalty.
Distinction between depositors
Distinction between a taxpayer having legitimate cash on hand and another taxpayer who offers cash on hand as income on voluntary basis needs to be maintained.
A regular taxpayer having paid tax has done no crime except holding cash with himself. If such cash is deposited based on the preceding years admitted income and other parameters, the government has to assure him of the relief from verification. This could be achieved by online confirmation of the deposit with details of income in the preceding specified number of assessment years. If such simplified confirmation is put in place, many taxpayers who hold cash i.e. accounted cash would be relieved of the dilemma of the tax consequence of depositing such money in to their bank account.
On the other hand, a taxpayer who deposits money into bank account and gives admission of such money as income on voluntary basis subjecting it to tax under section 115BBE should not be spared for the reason that the taxpayer has not availed such benefit which was available under the Income Declaration Scheme (IDS). If such depositor is spared then the declarants under the IDS would get prejudiced since they have to pay tax at 45% as against this depositor who will pay tax only at 30%.
Conclusion
At this juncture of the demonetization of currencies and the option for depositing such currency into the bank account, the professionals have a responsible role to play. It would not be out of place if all the finance professionals play their role in the interest of the nation to uproot black money besides eradicating corruption by giving proper and timely advice as per the letter and spirit of law.
The decision too demonetize is a courageous one which requires full backing of every responsible citizen for ensuring that India remains prosperous even in his posterity. However, on the part of the Government, words of assurance to the genuine taxpayers must be given instead of bland statements which could only send incorrect signals to them.
Source : Artical By V.K.Subramani on Taxmann.com
