India Proposes Higher Tax Rates, Penalties to Plug Cash Ban Gaps

(Bloomberg) -- India’s government has proposed a higher income tax rate and a stringent penalty provision to plug loopholes in existing rules as it continues its campaign aimed at checking corruption and tax evasion.

The proposals, seeking to amend taxation laws, were presented to parliament by the Finance Minister Arun Jaitley on Monday. According to the legislation, those with unexplained wealth will be required to pay tax at 30 percent and a penalty at 10 percent of the undisclosed income, in addition to a surcharge of 33 percent of the tax amount.

From Nov. 9, Prime Minister Narendra Modi withdrew 500 ($7.5) and 1,000 rupee notes, taking out 86 percent of circulating currency. Following his sudden move, many have found illegal ways to convert the so-called black money into genuine wealth.

‘Ill-Gotten gains’

The government has tracked a surge of bank deposits, particularly in the zero-balance accounts of poor people that were established to encourage all Indians to use bank accounts and make finance more inclusive -- a key policy under Modi. But the surge has raised concerns that these accounts may have been used to launder ill-gotten money.

Modi on Sunday warned people not to play with the lives of the poor by depositing illegal money into their accounts. “Unfortunately, they are misusing the poor for this purpose by misleading, luring or tempting them by putting money into their accounts," Modi said in his radio program.

In addition to a tax surcharge and penalty, the taxpayer has to deposit 25 percent of their until now undisclosed income into a scheme in which the money collected will be held for four years and utilized for programs such as irrigation, housing, toilets, infrastructure, primary education and health.

Since the decision to invalidate high-value currency, people have been forced to stand in long queues to exchange worthless notes, while ATMs are running out of smaller bills. The government has been announcing new rules nearly every day in an attempt to mitigate peoples’ sufferings and plug loopholes in the system.

--With assistance from Abhijit Roy Chowdhury To contact the reporter on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net. To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, Jeanette Rodrigues