Amended tax laws are as poorly conceptualised as demonetisation – and may even be unconstitutional

The Taxation Laws (Second Amendment) Bill, 2016, passed by the Lok Sabha on Tuesday with no debate, increases the penalty on those with undeclared income but also provides for the second amnesty scheme for them this year. This is something of a climbdown by a government that had, just three weeks ago, demonetised Rs 500 and Rs 1,000 notes ostensibly to crack down on the black money economy and promised stern action against those who hoard unaccounted-for cash.

The amendment Bill, which was tabled in the Lok Sabha on Monday, increases the tax on “unexplained income” from the present flat rate of 30% (plus surcharge and cess) to 60%( plus surcharge and cess) under the Income Tax Act. If such undisclosed income comes to light in a raid, it will attract a penalty of 30%, in addition to the tax payable, if the person admits to the undisclosed income and returns it. If the person does not cooperate during the raid, the penalty is increased to 60%. Theoretically, undisclosed income, under the proposed amendments, can be taxed up to 90% (plus surcharge and cess). This comes just months after the previous Income Declaration Scheme, which ended on September 30, gave people a four-month window to declare their undisclosed income and pay a 45% tax and penalty, with no questions asked.

This is the stick. The carrot, however, lies in Chapter IX-A, inserted into the Finance Act 2016, which introduces the “Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016”. This is essentially an amnesty scheme for undisclosed income. Under this “regime”, if those with undisclosed income come forward to declare it, they need to pay just about 50% of it to the Government (30% tax + 10% surcharge + 10% penalty) in exchange for immunity from further income tax proceedings on this income.

In addition to this, the declarant is also mandatorily required to deposit 25% of the undisclosed income in the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016 – an interest-free deposit with a lock-in period of four years.

The legality of this move, however, is doubtful.

What the Constitution says

Article 266 of the Constitution of India mandates that all taxes and other revenue of the Government of India must go the Consolidated Fund of India, and likewise, all the revenue of the state governments should go to the Consolidated Fund of the State. With regard to income tax specifically, revenue raised by the Union government is to be shared with the state governments based on the formula and method prescribed by the Finance Commission in accordance with Article 270.

By ordaining that those who voluntarily declare their hitherto-undisclosed incomes should pay 25% of that money to the Pradhan Mantri Garib Kalyan Yojana, the Bill effectively imposes an income tax which is not payable to the Consolidated Fund of India but to a specified scheme whose use and ultimate purpose are still unclear. Nor is this money allocated to the states in accordance with Article 270. In effect, the Centre has imposed an income tax that it will refuse to share with the states as it is required to under the Constitution.

A new tax

But can the payment to the Pradhan Mantri Garib Kalyan Yojana be called a tax?

The legal definition of a tax was well established by the Supreme Court in the 1950s. It is therefore no longer disputed that the two distinguishing features of a tax are that it is compulsory and there is no quid pro quo in the payment. A compulsory deposit with the Pradhan Mantri Garib Kalyan Yojana , on which the depositor does not even receive an interest and is locked in for a period of four years, is quite clearly a tax, (albeit refundable after four years, if so required) that is being levied on the person who makes a voluntary disclosure about undisclosed income. Given that no specific purpose is mentioned for the Pradhan Mantri Garib Kalyan Yojana in the Bill, it cannot even be considered a cess. It is therefore a tax that the Central Government seeks to levy, contrary to the Constitutional scheme for collecting taxes.

As with the ever-increasing use of cesses by the Central Government, this scheme suggests that the Central Government does not seriously believe in cooperative federalism, where the Centre and state work together. Because, unlike taxes, the Centre is not required by the Constitution to share the proceeds from a cess to government. However, the Centre has used some of these, such as the Swachh Bharat Cess and the Primary Education Cess, to direct programmes and spending in areas which are within the domain of the state under the Constitution, such as public health, sanitation and education. The Pradhan Mantri Garib Kalyan Yojana seems to be yet another move to undermine the powers and autonomy of states guaranteed under the Constitution.

For all the blatant disrespect of Parliamentary procedure and the Constitution in passing this Bill, as far as black money amnesty schemes go, it is hard to see this one (which makes the declarant pay 75% of the money disclosed up front, if you take the 25% deposit in the Pradhan Mantri Garib Kalyan Yojana into account) as being particularly attractive to the tax evader. Far from providing any real incentive to come forward and declare the money, it is likely to make those with black money sit back and take their chances with an income tax raid, using the time to find better ways to hide or launder their stash. As with the demonetisation of Rs 500 and Rs 1,000 notes, this Bill too does not seem to have been entirely thought through, and is of doubtful legality in the margins.