Tax amnesty for stock market and its potential outcomes

The new national budget for FY21 has been put in place from July 1, 2020. The budget contains a tax amnesty package that has two components.

One, a flat 10 percent tax on the money invested in the stock market as well as on cash and other cash equivalents (Section 19AAAA and Table-3 of Section 19AAAAA).

The other component is a special variable tax rate on the money invested in the real estate sector on the basis of size and location of the immoveable asset (apartment, building and land: Table-1 and Table-2 of Section 19AAAAA).

This write-up will try to shed light on a few issues of the first component in light of the past experiences of similar packages. The first component of the amnesty package allows disclosure of (1) investments to be made in the stock market during the financial year 2020-21, and (2) cash, bank deposits, financial schemes and instruments, all kinds of deposits or saving deposits, savings instruments or certificates, and other financial investments simply by a written declaration in the prescribed form and payment of tax at a flat rate of 10 percent by the taxpayer.

Tax facility for investment in the stock market is subject to the condition of a lock-in period of one year. This type of incentive was also offered in the past, and the outcome either in terms of the number of declarants or the volume of investment was not encouraging.

The outcome this time can also be expected to be the same if appropriate measures are not taken in following them up. At present, a sizeable part of the investments made in the stock market continues to remain outside the tax net and enjoys undeclared amnesty, so to speak.

Most of the investors in the stock market, therefore, face a tax rate that virtually amounts to zero on the investment made in the past. Why, then, should the investors of FY2020-21 pay tax at 10 percent again with a lock-in period of one year?

The proposed policy can succeed only if strong enforcement measures can ensure that errant investors have to face a tax rate that is much higher than 10 percent. The stock market amnesty may fail to generate response for the lock-in conditionality reason as well.

Why should anybody really desiring to invest in the stock market declare direct investment there with the loss of financial freedom for a year? It suits them better if they first disclose cash declaration and then invest that money in the stock market. In that case, they can avoid the lock-in and the loss of freedom.

Regarding the disclosure of cash and other equivalent resources at a flat rate of 10 percent, there are apprehensions that this may backfire instead. The return filing season started on July 1, 2020, and ends on November 30 (if not extended under Section 184G).

These returns are legally bound to include and account for incomes arising within the last income year (FY2019-20) and tax payments thereon at normal rates, with the highest rate being 25 percent. Declarations under the package also start on the same day and continue up to June 30, 2021.

But any taxpayer having taxable income in 2019-20 from valid and legal sources that cannot be documentarily traced and proved otherwise will be encouraged to report such incomes under the new 10 percent rate package along with the black money instead of declaring them in normal course in the 2020-21 return and paying tax at normal, higher rates. That is, "white" money turns "black"!

It is only with rigorous auditing with reference to the books of accounts and taxpayers' banking records that such malfeasance can be detected. Given the absence of automation of the tax department and the rudimentary stage our tax auditing standards are at, the detection of any such attempt will be well-nigh impossible.

Ramendra Basak is a retired commissioner of taxes. He can be reached at ramenbasak@gmail.com.