"To kill two birds with one stone." This is an idiom. The decision of the Government of India to demonetise the running currency for Rs. 500/- and Rs. 1000/- surpasses this idiom. The manner in which this decision has been taken and is being implemented is undoubtedly monumental. It just seeks to achieve not just two but many aims with this one decision. 

Besides lethally combating the fake currency menace, terror funding, drug racket funding, illegal arms racket funding, corrupt money and money laundering menace, purposive inflationary trends in certain sectors of economy such as real estate and gold and jewellery sectors etc., unavailability of good money leading to high interest rates etc., this measure also seeks to educate and motivate people for voluntary tax compliance without ignoring the need and necessity of enforcement with penal consequences for those who are recalcitrant and defiant. 

The Taxation Laws (Second Amendment) Act, 2016 vide Bill No. 299 of 2016 doubles up its role for education and motivation of people for voluntary tax compliance and also at the same time ensures enforcement with penal consequences for those who continue to be refractory and challenging. For these very simple reasons this is a welcome step. It alarms the defiant and assuages those, who though committed mistakes in the past, are now willing to join hands in nation building by being tax compliant and by pledging for good and clean business practices in the subsequent time. 

There are two distinct limbs of The Taxation Laws (Second Amendment) Act, 2016 vide Bill No. 299 of 2016. The second limb needs to be discussed first. It is the introduction of Chapter IXA in the Finance Act 2016 under the name of “Taxation and Investment regime” for Pradhan Mantri Garib Kalyan Yojna, 2016”. 

Under this scheme the Government has enticed those Tax payers who did not disclose their undisclosed income under the “The Income Declaration Scheme 2016” and found themselves saddled with undeclared cash following the demonetization of Rs.500 and Rs. 1000 old currency notes. 

The Pradhan Mantri Garib Kalyan Yojna, 2016 entitles a person to make a declaration in respect of any Income in the form of Cash or Deposit in any account maintained by him with a specified entity such as RBI, a Bank, a Post Office or any other entity a specified by the Government. Though no expenditure or allowance can be allowed against such income the declarant shall be entitled to pay tax at the rate of 30% on such income plus a cess called Pradhan Mantri Garib Kalyan Cess, at the rate of 33% of such tax and a penalty at the rate of 10%. This effectively makes the total payment towards tax liability at 49.9%. 

Though the scheme immunizes the declarant from treating the declaration as an evidence for any proceedings under any Act, meaning thereby that there is immunity from prosecution (a person with already initiated detention or prosecution is not entitled to opt for the scheme), the declarant shall have to opt for a deposit of not less than 25% of the undisclosed income in the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016 which will not bear any interest and cannot be withdrawn before the end of 4 years. 

This simply means that the declarant after paying the due tax on undisclosed income will be left with only 25% of the undisclosed cash deposited in Banks after the commencement of demonetization. This serves two purposes. 

Firstly, though an opportunity to come clean, the declarant shall be deprived of the unbridled use of the undisclosed cash as 75% of the same shall be in position of the Government either in the form of tax or in the form of deposit. 

Secondly, it will also restrict the oversupply of money in the market as a result of cash deposits in the Banks in the old currency following the demonetization. Over supply of money in the market may lead to inflation and therefore this scheme of the Government seeks to control any possible distortion in the market for this situation. 

Therefore, for the declarant to come clean under Pradhan Mantri Garib Kalyan Yojna, 2016 is both an opportunity to be tax compliant as well as a heavy price to be paid as a consequence thereof, for having been non-compliant so far. It is needless to say, however, that to avail the facilities under this Yojna the declarant has to come forward with his true and disclosures before the Tax Authorities voluntarily and on his own. 

Next comes the first limb, being discussed now. The Taxation Laws (Second Amendment) Vide Bill No-299 of 2016 deals with the consequences in terms of Tax and Penalty in those situations where a person does not avail the benefits of  Pradhan Mantri Garib Kalyan Yojna, 2016  voluntarily and his income comprises of an income u/s 68, 69, 69A, 69B, 69C or 69D whether declared in the return of income or Assessed by Assessing Officer for AY 2017-18. Such income shall be taxed at the rate of 60% besides the consequential interest penalty and prosecution. 

In addition to above, in a situation where a search is conducted u/s 132 of the Income Tax Act a person shall pay a tax of 30%, if during the course of the search the Assessee admits the undisclosed income and specifies the manner in which such income has been derived. 

If during the course of the search, if a person does not admit undisclosed income and does not specify the manner in which such an income is derived then he will have to pay tax at the rate of 60% besides the consequential interest and prosecution. 

The catch here is the requirement that mere admittance of undisclosed income is not sufficient for lower rate of tax at 30%. What is further required mandatorily is the manner in which such income has been derived. This may not be palatable in majority of the cases because of the illegal activities through which the cash income now deposited in banks etc., might have come. Therefore, most of the persons shall end up paying tax at the rate of 60% besides consequential interest penalty and prosecution. 

Apparently cases of cash deposits, post demonetization, in Bank Accounts etc. will attract heavier damages of losing the entire money and more by way of tax interest and penalty besides prosecution. This is a big deterrent for the non – compliant. It’s a good balance between encouraging tax compliance by giving opportunities and creating a deterrent atmosphere for tax dodgers by way of causing strong damages through apt laws and enforcement. 

It is significant to know that the demonetization this time is not all about replacement of old currency with the new currency. It is also about flushing out bad currency from the system and preventing them for unlawful uses and also correcting the tax non-compliance in the country. The scheme thus “Kills not just two birds but many birds with one stone”. 

The only thing the Government needs to be careful about now, is the precise implementation and follow up by the Government machineries in a very organized and defined way, without leading to any harassment of any kind to the genuine public. Government officials will have to be geared and monitored for the same.