To ensure that people who disclosed their assets under the recent income declaration scheme are not disadvantaged as compared with those depositing black money in banks now, the government plans to increase tax rates on such deposits and cash expenses.

"Many government officials have spoken of 200% penalty on black money but that may not be feasible under the current tax framework," a person close to the development said.

"Given this, there was a proposal that the government increase the tax rate by 15% to 25% for those who deposit black money in bank," the person said. This could take the effective tax rate for people who are unable to explain their source of income to 50% or 60%, depending on the final rates decided by the government.

This rate would only be applicable for large cash deposits in bank accounts or huge expenses incurred in cash since November 8 when old currency notes of Rs 500 and Rs 1,000 were demonetised, the person said.

There is a view in the government that the tax rate for black money depositors should at least be on a par or more than 45% tax rate applied to those who declared black money assets under the four-month income declaration scheme (IDS) that concluded in September.

"As it stands today anybody depositing their current year's income into the bank account may attract tax not exceeding 35% including cess and surcharge, wherever applicable. However, rate tax and penalty on the assets and cash declared under recently concluded IDS was 45% but under IDS tax payers could disclose assets pertaining to prior years too," said Paras Savla, partner at chartered accountant firm KPB & Associates.

The proposal to increase tax rate was brought forward by the Finance Ministry in a meeting held this week. This was after many tax officials told the government that they may not be able to slap penalties on people whose black money is deposited in banks.

"The additional tax would only be on a threshold of cash deposits so that genuine people who deposited their money are not harassed. This is only fair," said a tax official. The threshold is not yet decided.

The government can bring in the change in tax rate for black money either through an amendment in the Finance Bill next year, an ordinance, or a clarification, a person close to the development said.

The change is expected to happen only after December when the window to exchange or deposit old Rs 500 and Rs 1,000 currency notes closes.

According to tax experts, they may not be able to slap penalty on money deposited in bank because of a change in regulation. In the last Budget, the government distinguished between underreporting and misreporting. The tax official can decide and slap a tax of 50% for under reporting and 200% for misreporting.

However, the problem for tax officials is: if anyone deposits money in bank and pays normal tax (35%) on that for the current year, it cannot be treated as escaped income. This disclosure may only be treated as income from other sources and neither a penalty of 50% (for underreporting) nor misreporting (200%) may be applicable.

"Income tax may not slap a penalty on those depositing cash in bank account and claiming it to be current year's income as this is neither underreporting nor misreporting," said a senior tax lawyer who requested not to be named.

"While in some cases this could just be a smart presentation by the taxpayer, but the onus to prove otherwise would be on tax officer," the lawyer added.

Tax experts said even if the government were to slap 200% tax on such disclosures, it may create problems.

Ketan Dalal, senior tax partner at PwC, pointed out that the revenue secretary has clarified that small amounts of deposits would not be questioned but the government would be getting reports of cash deposited above Rs 2.5 lakh in an account.

"Obviously, the intent is that if the deposit is more than Rs 2.5 lakh, then prima facie, the presumption will be that there is a tax evasion, unless the depositor is able to explain the source. If not, then, in addition to the tax, the government's view seems to be that it would consider it to be misreporting of income and a penalty of 200% of the amount of tax involved would be levied," he said.

However, experts said, slapping 200% penalty as under the current two point scale may create problems as it could lead to litigations.