This is the boldest move by any government in recent times. Both the old 500 Rs and 1000 Rs notes have been “probabilistically devalued” meaning that anyone holding large number of notes, the value just has been significantly lowered by approximately 10 to 20% overnight. If you now try to deposit the cash, the money is devalued so in other words you were just taxed up to 90%. This is all claimed to attack the underground economy or black money and corruption.
To understand this bold attempt, let us assume that the ECM €100 and €500 notes are demonetized overnight. The government can ensure that this money is deposited or converted in banks and thus it then becomes your obligation to prove you paid your taxes. They will compare the sum with an individual’s income tax obligations.
The other tax India has imposed is highly dangerous and is known as the wealth tax, but that was abolished, and replaced with a new tax on wealthy individuals. Broadly speaking, the wealth tax was determined by your nationality, residential status and location of the asset. If you were an Indian national and resident as per Indian tax laws, you would have to pay wealth tax in India, even on global assets. With the new regulations coming by September 2017 whereby the G20 nations will be sharing information, any assets you have offshore will be reported back to your home country anyway. If you did not report mere ownership of assets, that generates fines, seizure, and taxes, the G20 regulations may fill the gap.
The intent of the law was to wealth tax assets that do not generate an income. What you would have on deposit in a bank would be exempt since that generates interest, which is taxable. However, in case of some assets that do not generate income such as gold, jewelry, watches, a second property that you own, you will have to pay a wealth tax. You could avoid the wealth tax by generating an income from it, meaning by renting it out for at least 300 days in a financial year.
The repercussions of not filing wealth tax return or filing an incorrect return was harsh. The provisions of regular assessment that apply to income tax also applied to wealth tax. Interest at 1% per month is payable for failure to pay wealth tax on due date. There were also provisions to impose a penalty and/or prosecute an individual for not filing wealth tax returns. Therefore, under this approach, any tangible asset became taxable just to possess it on an annual basis.
The wealth tax was replaced by an additional 2% surcharge on income for individuals and a 7% tax on business.