India currency demonetisation
Latest scheme allows tax evaders to pay 50% of their undeclared income as penalty to avoid prosecutionMukesh Gupta/Reuters

The Indian government has announced a fresh tax amnesty scheme that allows tax evaders to come clean in a major step following the demonetisation of high-value currency notes. The latest move will let errant taxpayers from prosecution if they pay 50% of their undisclosed income as penalty.

The proposed policy, dubbed as Pradhan Mantri Garib Kalyan Yojana, was unveiled by Finance Minister Arun Jaitley on Monday, 28 November, as part of the government's relentless measures to pump vast undeclared incomes into the mainstream economy.

However, according to the new bill, tax dodgers would face an 85% fine if caught by law enforcement agencies. The new proposal comes nearly three weeks after the Modi administration declared that Rs 500 (£6) and Rs 1,000 (£12) banknotes would no longer be legal tender. The move is seen as a crackdown on counterfeit currency notes and illegal money hoarders.

The 50% penalty includes a combination of levies, taxes and surcharge. Besides this, tax evaders will also have to deposit 25% of their undeclared money into an interest-free deposit scheme for four years. Nonetheless, this would give violators a way of legalising their undeclared income, known locally as "black money".

The government hopes the latest announcement would encourage tax evaders to come forward and disclose their assets, which would then be channeled towards welfare measures. "Since it offers clarity on how unaccounted cash will be taxed, it can help in cleaning up the cash economy. But you must follow it up with a drastic reduction in tax rates to improve compliance," Vishal Malhotra, a tax partner at Ernst & Young, told Reuters.

The proposal is likely to be cleared by Parliament as it was tabled in the Lok Sabha (lower house), where the ruling party holds a majority, as a Money Bill — a move that will not necessitate its passage in the Rajya Sabha (upper house), where the opposition has an upper hand.

A similar scheme was introduced by the Modi administration earlier, in which $9.8bn worth of undisclosed income was collected during a four-month window.