Finance Minister Arun Jaitley announced a new undisclosed income declaration scheme in the Lok Sabha on Monday.
The government's latest scheme to bring undisclosed income to the books, unveiled in the lower house of the Parliament on Monday, could let it mop up enough funds to recapitalise public sector banks (PSBs) without cutting back on public capex and on the full payout of the 7th Pay Commission.
According to a report by Bank of America Merrill Lynch (BofAML), "the additional tax revenue should enable him (Finance Minister Arun Jaitley) to recapitalise PSU banks without cutting public investment or delaying full payout of the 7th Pay Commission award."
Finance Minister Arun Jaitley, amid relentless chaos in the Lok Sabha over demonetization, proposed the Income Tax Amendment Bill in the Lok Sabha on Monday, where it has a majority. The bill has been sent to the President for approval and the government expects to move it forward within the week.
The new bill proposes a levy of 30% income tax, a penalty of 10%, and a cess of 10% under the newly-introduced Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, on undisclosed income that would come in as bank deposits by turning in the now-decommissioned Rs 500 and Rs 1,000 notes. Under the scheme, 25% of the undeclared income will also have to be locked in for a four-year zero-interest term, the government said.
While this may seem stringent, the alternative would be worse. The government has proposed a heftier penalty for those who choose not to disclose their income despite the new window. In the future, "the Ministry of Finance proposes to tax black money unearthed at 75%-85%. Under-reporting and misreporting will continue to attract 50% and 200% tax rate," the report by India Economist Indranil Sengupta, said.
According to him, from his new window, the Finance Minister would be able "to raise an additional Rs 1000-plus billion (approximately Rs 10 lakh crore) or 0.7% of GDP by imposing 50% penalty on black money deposits."
"The additional tax revenue should allow the FM to recapitalise PSU banks ($27 billion in FY17-19 BofAMLe) without cutting public capex or delaying full implementation of the 7th Pay Commission.
The BofA-ML report estimates that the recapitalisation exercise of PSU banks would cost an estimated $27 billion (approximately Rs 1.76 lakh crore) from FY17 to FY19. The government, in the FY17 Union Budget, had allocated Rs 25,000 crore for the capitalisation of public sector banks in the current financial year under the umbrella scheme “Indradhanush”. Out of this, Rs 22,915 crore was infused into 13 public sector banks in July. The plan also proposed infusions of Rs 10,000 crore each in 2017-18 and 2018-19.
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