Govt sees windfall with 60% tax on unaccounted cash

The centre expects a windfall in income tax with a 60 per cent tax on unaccounted portion of the surging deposits of demonetised Rs500 and Rs1,000 notes, after the window for depositing such cash closes on 30 December .

The union cabinet late on Thursday cleared a proposal to amend the Income Tax (I-T) Act to allow close to 60 per cent deduction on unaccounted deposits in banks above a threshold, said sources.

The decision was purportedly prompted by a surge in bank deposits since the 8 November announcement to demonetise Rs1,000 and Rs500 notes.

People have deposited over Rs5,44,000 crore in scrapped Rs500 and Rs 1,000 notes at different banks till 18 November, following demonetisation of the higher denomination currency.

The zero balance Jan Dhan accounts saw inflows of about 20,000 crore in the fortnight after the 8 November demonetization of high-value notes.

The amount deposited in this period is almost 50 per cent of the total deposits in these accounts in the two years since launch.

The government's move to tax the huge deposits of cash holdings by individuals is also aimed at preventing black money holders from circumventing existing I-T Act provisions.

As of Tuesday, banks had also parked Rs4,30,000 crore in reverse repo operations under the liquidity adjustment facility wherein RBI accepts money from banks by offering government securities as collateral.

RBI said on Monday the Indian banking system had collected deposits worth Rs5,.12,000 crore as of 18 November.

On Wednesday, attorney general Mukul Rohatgi told the Supreme Court that banks had received deposits worth Rs6,00,000 crore after Rs500 and Rs1,000 banknotes ceased to be legal tender.

At the current rate of expansion, the government expects deposits with banks to swell by about Rs15,00,000 crore in the 50-day window from 9 November to 30 December 2016.

The heavy flows of deposits would also upset the Reserve Bank of India's  balance sheet with its Rs7,00,000 crore worth of government securities coming under increasing pressure as banks continue to park their incremental deposits with the central bank.

The decision to alter the current provision of 30 per cent tax and 200 per cent penalty was taken due to fears that the rules could be circumvented by those who may deposit black money but pay tax in advance. In that case, imposing a penalty could become a vexed issue under the current I-T Act.

However, there was no official briefing on what transpired in the meeting as Parliament was in session.