Demonetization Tax Zinger - Will Inspector Raj Return?

arun's picture

The jury is well and truly out on whether the demonetization decision of the Govt. will pay off, both from an economic & political point of view. Well, this blog post is to discuss the tax aspect of this Govt.  gambit.

On Nov.9, exactly 24 hours after the Prime Minister announced the decision on national TV, the Finance Ministry, which by then surely had got wind of several innovative ideas floating around, tweeted that all cash deposits above Rs. 2.5 lacs would be scrutinized; that in case of deposits above Rs. 10 lacs where there is a mismatch  with tax returns, it will be taxed and 200% penalty levied considering it to be tax evasion; further jewelers would be watched closely and their sales would be matched with the cash deposits.

There is enough controversy already on whether the Govt. can indeed levy such a penalty and under what circumstances.  I had a word with a retired Income tax Chief Commissioner who told me that it is going to be a cesspool of litigation! When I asked him why, his reply – when you declare cash deposits as your current year income the IT Department will most likely take a stand that it is not income of current year but “concealed” income of previous years on which penalty is leviable. Here is where the controversies will unfold. No amount  of clarification/circulars etc. will bring any relief to anyone because we are entering an area which is subjective, where both the taxpayers and tax department will argue that the burden of proof is on the other and finally every case will have unique facts as a consequence of which the tax officer will have lots of discretion.

The CBDT/tax department has over the  past few years been trying to consciously move to risk based scrutiny of cases. The Central Action Plan of the CBDT for FY 16-17 talks of 5.8 million “non-filers”.  During Income Declaration Scheme, the CBDT sent out a communique to its officers wherein it claimed that the Board would issue 7 lakh letters on the basis of 90 lakh high value transactions it was tracking, of which 14 lakh did not have quote PAN (http://www.taxsutra.com/news/15956/CBDT-Follows-through-on-warning-to-shoot-missives-seeking-info-on-14-lakh-transactions )!!! Has this been followed through to its logical conclusion? Does the IT Department actually have the resources to even go after the identified 5.8 million non-filers and these 14 lakh high value transactions? On top of it you are likely to have millions of cash deposits above rs. 50,000/2.5 lacs. Where is the tax department machinery to scrutinize these deposits?

I spoke to another top tax officer … asked him a question that has been bothering me for a week now .. isn’t this demonetization decision an open admission of the extent of domestic black money and if yes, then naturally is it not an indictment of the Income tax department which is tasked with ensuring that the tax evaders do not escape the long arm of the law? The officer had a straight reply – currently only the Investigation wing is tracking and trying to uncover the tax evasion cases and the machinery therein too is woefully inadequate. He said that the entire tax department needs to work as one unit to track tax evasion!  The ball here is in CBDT’s court. 

Finally, here is a personal anecdote… I went to a bank branch 48 hours ago to withdraw some cash. While I was interacting with the concerned bank official, in walked a middle aged person from the lower strata and asked an innocent question to the banker – I have rs. 75,000 lifetime cash savings , i have never paid tax (because his annual income would be in the range of 2 lacs )… if I deposit this cash, will I receive a notice from the tax department? The banker’s reply – ask your CA.. of course he did not have one. I butted in and re-assured the person that you  would not receive a notice and if you do,  I will help you out. The citizens  are spooked and many are wondering – will Inspector Raj be unleashed on the common man? As one MP put it in Rajya Sabha yesterday, are we cleaning the pond to catch  a crocodile knowing fully well that the crocodile can survive on land  as well? The jury, as I said in the  beginning is out… 

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