The Indian government has signalled it is taking further action to tackle the country’s black economy with the introduction of a new and tougher declaration scheme for hidden income, following on from the decision to withdraw high value bank notes
The latest scheme, Pradhan Mantri Garib Kalyan Yojana (PMGKY) 2016 is designed to encourage people to come clean and declare their unaccounted wealth. It is similar to an earlier income declaration scheme (IDS) which offered a four-month window to make declarations until 30 September 2016 and asked individuals to make the payment for tax and penalty in three instalments by September 30, 2017, with the first instalment of 25% tax due in November 2016.
That programme resulted in the declaration of Rs652.5bn (£7.75bn) in unaccounted money, about 0.5% of GDP. The World Bank in July 2010 estimated the size of India’s shadow economy at 20.7% of the GDP in 2007.
However, under PMGKY the tax rate is much higher at around 50% and a quarter of the declared income will be locked in by the government for four years.
After depositing the money, a person will have to pay 30% tax on income, 33% surcharge on tax, and a 10% penalty on income, amounting to nearly 50% of the income declared under the scheme. In addition, 25% of the amount declared will be held for four years, with no interest to be paid on it.
PMGKY 2016 started on 17 December and will remain open until 31 March next year. Declarations will be kept confidential and no one who registers will be prosecuted. However, anyone who does not take advantage of the scheme and is later found to have undeclared income will face a penalty of up to 85% plus the possibility of legal action. Not declaring undisclosed cash or deposits in banks under the scheme now but showing it as income in the tax return form would attract a total of 77.25% in taxes and penalty.
The undeclared tax scheme is part of Indian prime minister PM Narendra Modi’s push to crackdown on corruption, unaccounted money and counterfeit currency. This has included the withdrawal of all Rs500 and Rs1,000 bank notes, which ceased to be legal tender on 8 November. People were given 50 days to switch the roughly 23.2bn high-denomination notes in circulation. They were required to deposit them in their bank accounts or exchange them at some banks and post offices by 30 December.
The tax authorities will get reports on cash deposits in cases where it exceeds Rs250,000 in a bank account. The total amount deposited between November 10 and December 30 will be matched against income disclosures. In the event of a mismatch, the authorities can demand payment of tax plus a penalty of 200%.
The Reserve Bank is introducing newly designed Rs500 and Rs2,000 notes, but the switch over has been marked by very lengthy queues at post offices and ATMs. At one point the India air force was brought in to fly supplies of the new notes to remote areas.
