Remember The 200% Penalty On Black Money Promised By Finance Ministry, IT Officials Have No Clue How To Enforce It!

As India struggles with demonetisation, individuals and businesses are using old currency notes to settle debts while income tax officials are at a loss how to go about imposing 200% penalty ¡ªas announced by a senior finance ministry official ¡ª on such funds flowing into banks.

Yes Bank

Firms are clearing dues to suppliers, depositing cash in bank accounts to repay old loans, and buying memberships of clubs, spas and gyms; in all these cases (except bank loan repayments) their books would show that cash changed hands before Tuesday evening when demonetisation of Rs 500 and Rs 1000 bills was announced.

On the other hand, taxmen in several cities have told their superiors that there is no provision in the law to slap a penalty on such cash being deposited in banks, according to tax officials, tax practitioners and bankers ET spoke to.

¡°There can be a penalty on escaped income. But what do you do if someone deposits a crore with the bank, pays 33% tax, and discloses the amount of income in his tax return filed for the assessment year ¡¯17-18? Even if it¡¯s driven by demonetisation, this is technically voluntary declaration and shown as ¡®income from other source¡¯.

This has been discussed in our meetings over the past few days... To impose a penalty on this money, there has to be a retrospective amendment of the income tax law,¡± said a senior tax official. A 200% penalty would mean the entire declared amount going into the state coffer.

The questions troubling those with large, unexplained cash deposits are: Will the I-T office come after them if they are unable to spell out the fund source?

Even if I-T spares them, will the service tax and other indirect departments chase them? And finally, will the I-T office share the information with Enforcement Directorate which in turn can invoke the harsh anti-money laundering law? ¡°If the source of the fund relates to an admitted activity which is subject to levy of an indirect tax, then even if the I-T department accepts the source, there is always the possibility that other agencies may step in,¡± said senior chartered accountant Dilip Lakhani.

Suspicious Transaction Report

Indeed, the swelling bank deposits could pose a challenge for the I-T department. Several small and mid-sized businesses, traders and individual borrowers in the farm sector have deposited cash to resolve their non-performing loans and initiate one-time settlements.

¡°These are typically small borrowers with loan liability ranging from Rs 5-10 lakh to Rs 5-10 crore. We have also had an instance of an individual borrower depositing cash of Rs 20 crore to clear his dues,¡± said the CEO of a southern bank.

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¡°As part of our compliance, we are filing suspicious transaction report on such deposit beyond permissible limits,¡± said the compliance head of a Mumbai-based private sector bank.

It is not just banks witnessing inflows. ¡°Many companies have undertaken prepaid sales for a year; health centres, spas, and hotels have offered prepaid packages ¡ª all have been sold without discounts but using earlier currency notes. NGOs and trusts are receiving calls for anonymous donations. Some are in a dilemma whether to accept,¡± said Mitil Chokshi, senior partner at audit firm Chokshi & Chokshi.

Lens On Bullion Dealers

On Friday, income tax officials surveyed large bullion dealers to assess their respective cash in hand and make a note of the last bill number. This was done to stop the transfer of cash to bullion dealers that began since Tuesday evening. But it¡¯s impossible to keep a track of all establishments which are accepting cash.