Government dispels concerns over taxation of jewellery
DECEMBER 05, 2016
By Saraswathi Kasturirangan & Vijay Bharech
ERRANT taxpayers have been provided another opportunity to come clean via the Pradhan Mantri Garib Kalyan Yojana, 2016(PMGKY). This scheme envisages the disclosure of income in the form of deposits with specified entities during the period to be notified with taxes and penalty amounting to around 50%. The scheme also mandates the deposit of 25% of such undisclosed income in a 4 year interest free deposit scheme.
Continuing its crusade against black money, the Government has also proposed to enhance the applicable taxrate on unexplained credits/investments/money/expenditure, etc. from 30%to 60%. With an increased surcharge of 25% on such tax and 3% education cess, the total tax would amount to 77.25%. Where such income is not offered in the tax return and is determined by tax authorities, an additional penalty at 10% of taxes due (i.e. 6% of undisclosed income) would be levied bringing the total to 83.25% of undisclosed income. Detection based on search would attract significantly high penaltiesviz30% of undisclosed income where the income is admitted, returned and taxes are paid during search and 60% in other circumstances.
A snapshot of the various scenarios is provided below
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Scenario
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Implication
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Comments
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Disclose under PMGKY
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Tax and penalty cost – 50%
Mandatory deposit of 25% of undisclosed income in 4 year interest free deposits
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Disclosure only in respect of deposits made with specified entities viz RBI, Schedule banks etc.
Disclosure of assets such as Bullion, Jewellery etc not possible under this route.
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Disclose as part of 2016-17 tax return
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Tax cost – 77.25%
No penalty applicable
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Disclosure of income invested in non-cash assets may be possible only under this route.
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Not disclosed by taxpayer, but determined by tax authorities
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Tax cost – 77.25%
Penalty – 6%
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Applicable to non-search cases e.g. determination during scrutiny assessment
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Determined by tax officer during search
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Tax cost – 77.25 %
Penalty – 30% -60%
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Would also cover jewellery and bullion purchased out of undisclosed income / income where the source cannot be substantiated and detected during search
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Disclosure under the PMGKY scheme is only available in respect of cash deposited with specified entities. Undisclosed investments in other forms such as bullion, jewellery etc are not covered. Presumably, this has led to a speculation that all jewellery held would be subject to increased taxes and penalties. In order to dispel such concerns, the Government has clarified that no new provision has been introduced regarding taxability of jewellery.
The clarification emphasizes that jewellery/gold purchased out of disclosed or exempted income (e.g. agricultural income, reasonable household savings) or that which is legally inherited is not chargeable to tax. The enhanced tax rates and stringent penalties are applicable only to unexplained credits/investments/money/expenditure, etc. The intention is to severely penalise tax evaders who attempt to pass off their undisclosed income as business income or income from other sources in the return of income and this is detected by the tax officer.
The Government has also clarified that during searches no seizure of jewellery and ornaments shall be made to the extent of 500 grams per married lady, 250 grams per unmarried lady and 100 grams per male member of the family. It is important to note that this is merely a reiteration of existing instructions which have been prevalent since 1994. The instructions also provide an authority to the authorised officer to exclude a larger quantity of jewellery and ornaments from seizure based on the family status and the custom and practices of the community to which the family belongs. Such exclusions need to be reported to the Director of Income-tax/Commissioner authorising the search at the time of furnishing the search report. Further, a detailed inventory of the jewellery and ornaments found must be prepared to be used for assessment purposes in all cases of search.
With effect from FY 2015-16, individuals with taxable income exceeding Rs 50 lakhs are required to disclose specified assets and liabilities, including jewellery held as on 31 March 2016 as part of the tax return. Till 2014-15, jewellery was subject to wealth tax and a wealth tax return was required to be filed by individuals owning wealth beyond the prescribed thresholds . Individuals having complied with these requirements should have no concerns. Individuals owning jewellery and other assets which have been purchased out of disclosed income have nothing to worry as legitimate holding of jewellery up to any extent is fully protected.
Where the jewellery is purchased out of undisclosed income, the tax officer may impose stringent penalties during search and seizure, which may range from 30 to 60 percent, over and above the tax rate of 77.25%.
Taxpayers who are able to substantiate legitimate source of income for the cash deposits made or jewellery and other assets held will not be impacted.
Other taxpayers are encouraged to voluntarily disclose income either via the PMGKY or through the tax returns to come clean and pay taxes.
(Ms. Saraswathi Kasturirangan is Partner; and Mr. Vijay Bharech is Manager with Deloitte Haskins and Sells LLP and the views expressed are strictly personal.)
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