Proposed Taxation Law (Second Amendment to Finance Act, 2016) - An Analysis of taxes while accounting the unaccounted- A simple step by step computation

1. 28 November 2016

2. 1
Background
Ever since the onset of demonetization scheme by the Government of India, many accounting and
tax professionals have tried to gauge the impact of taxes on the unaccounted economy. Many felt
that the current Income-tax Act is self sufficient to address the penal provisions in case of
surfacing of black money and many thought otherwise.
However, within 20 days of demonetization, the entire argument was put to rest and intent made
crystal clear by the Government’s proposal of Second Amendment Bill to the Finance Act, 2016
and introduction of Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKY)
We have analyzed the proposed amendment to Finance Bill and have summarized the impact for
ease of understanding. The literature below encapsulates various scenarios and highlights the tax
impact on various alternatives on the unaccounted money/ income.
What changes in Income-tax Act, 1961?
Amendment to Section 115BBE and insertion of penalty provision under Section 271AAC and
271AAB:
If any undisclosed income (Section 68, 69, 69A, 69B, 69C, 69D) cannot be explained, then tax is
payable @ 60% whether such amount is disclosed in Return of Income or subsequently assessed
by the Income-tax Officer.
In addition, Surcharge @25% of tax i.e. 15% effective rate on income will be payable as advance
tax.
No penalty if income voluntarily disclosed. However penalty of 10% of tax plus surcharge if income
not offered in Return of Income and tax officer is not satisfied by the explanation of source. No
recourse to penalty under Section 270A (under-reporting or misreporting) under such situations.
After assent of bill, in course of search under Section 132, shall pay additional penalty @ 30% /
60% of undisclosed income as per amended 271AAB, subject to conditions.
Scenario 1: When undisclosed income is
disclosed in Return of Income
A. Tax levied u/s 115BBE 60%
B. Surcharge @25% 15%
C. Penalty u/s 271AAC (10%) Nil
Total tax outflow 75%
Scenario 2: When undisclosed income is
not disclosed in Return of income
A. Tax levied u/s 115BBE 60%
B. Surcharge @25% 15%
C. Penalty u/s 271AAC (10%) 7.5%
Total tax outflow 82.5%

3. 2
Only option to avoid all above 4 scenarios (Quasi – IDS) – PMGKY, 2016
In the wake of declassifying bank notes as legal tender, Government has proposed to introduce
alternative scheme namely, ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan
Yojana, 2016' (PMGKY). Applicability from Financial Year 2015-16 or Assessment Year 2016-17 once
final scheme will be notified.
Tax impact in the scheme:
 Income means undisclosed income of taxpayer that can be declared as cash or deposit with
specified entity (defined as RBI, Banks including co-operative banks, Post office)
 Taxpayer to deposit 25% or more as interest free deposit for 4 years with Government
 Money will be refunded interest free after 4 years, on fulfillment of to be prescribed conditions
 Amount deposited is proposed to be utilized for the programmes of irrigation, housing, toilets,
infrastructure, primary education, primary health, livelihood, etc. to ensure justice and equality
 Taxpayer is required to pay entire tax, surcharge and penalty with the Government before
making the declaration
Scenario 3: When undisclosed income is
subject matter of search under Sec 132
(taxpayer admits undisclosed income)
A. Tax levied u/s 115BBE 60%
B. Surcharge @25% 15%
C. Penalty u/s 271AAB 30%
Total tax outflow 105%
Scenario 4: When undisclosed income is
subject matter of search under Sec 132
(taxpayer does not admit undisclosed
income)
A. Tax levied u/s 115BBE 60%
B. Surcharge @25% 15%
C. Penalty u/s 271AAB 60%
Total tax outflow 135%
Scenario 5: Under PMGKY, 2016
A. Tax levied on Income u/s 199D of Finance Act 30%
B. Surcharge @33% u/s 199D of Finance Act 9.9%
C. Penalty u/s 199E of Finance Act 10%
Total tax outflow 49.9%

4. 4
CA. Akshay Kenkre
Director
TransPrice Solutions LLP
Mobile : + 91 9819245424
Email : akshaykenkre@transprice.in
info@transprice.in