Reiterating Prime Minister Narendra Modi’s commitment to remove black money from the economy, Finance Minister Arun Jaitley announced a voluntary disclosure of income scheme in the Union Budget 2016-17 on Monday for unearthing undisclosed income.
It may be an opportunity for those who didn’t disclose their income and pay tax to voluntarily come forward and compensate, but the experts on black money and taxation are apprehensive about the success rate of the scheme meant to bring out undisclosed income in the mainstream.
Let's take the foreign assets’ declaration scheme announced in Budget 2015-16. While the present one is meant for the domestic taxpayers, the last year’s scheme, which was for foreign assets, failed to bear desirable result apparently due to high tax rate and penalty (60 percent).
The voluntary scheme:
The FM in his budget speech on Monday proposed a limited period compliance window for domestic taxpayers to declare undisclosed income and clear their past tax transgressions. As per the scheme, the tax rate is 30 percent, surcharge 7.5 percent and penalty 7.5 percent, which is a total of 45 percent of the undisclosed income. The surcharge levied at 7.5 percent of undisclosed income will be called ‘Krishi Kalyan surcharge’ which will be used for agriculture and rural economy. A window of four months has been given—from 1 June to 30 September — with an option to pay amount due within two months of declaration.
There will be no scrutiny or inquiry under the Income Tax Act or the Wealth Tax Act. The declarants will have immunity from prosecution. Immunity from Benami Transaction (Prohibition) Act, 1988 is also proposed subject to certain conditions.
Jaitley said once this opportunity for evaded income to be declared was given, the government would further focus on bringing people with black money to book.
Will it work?
Experts strongly feel that given the amnesty nature of the scheme announced on Monday, the success rate might be low as many who evaded disclosing their incomes and didn’t pay taxes in the first place are not going to respond to this call either.
“Though it has not been called an amnesty scheme, this income disclosure scheme is amnesty by nature, because the government — except collecting 45 percent tax (with surcharge and penalty) — is lenient towards tax evaders," said economist Arun Kumar. "The same people may not respond to pay 45 percent tax, as it’ll be convenient for them not to pay at all. Why should they pay, if they can get away with it?”
Prior to Monday's announcement, earlier successive governments had introduced six Voluntary Disclosure of Income Schemes (VDIS) till 1997 to bring undisclosed income or black money into the mainstream. The Supreme Court in 1997 took an undertaking from the government that no ‘amnesty scheme’ should be announced, as it demoralises honest taxpayers and gives tax evaders an opportunity to get away by paying a penalty.
“The foreign assets declaration scheme announced in the last budget didn’t do well due to high tax rate of 60 percent," said Riaz Thingna, director, Grant Thornton Advisory. Last time the government had said that it wouldn’t come up with any kind of amnesty scheme because earlier, whenever the amnesty schemes were announced by any name, they attracted lot of criticism. Because people felt that they benefitted dishonest taxpayers and simultaneously demoralised honest taxpayers. It’s a tough call for the government, as large chunk of money is in a parallel economy.”
Subrat Das, executive director, Centre for Budget and Governance Accountability, also sees the scheme not yielding much in terms of declarations.
"Instead of focusing on bringing back black money, the focus of the government should be on curbing the generation of black money by checking trade misinvoicing. This can be done by greater coordination between the trade and customs authorities of different countries," he suggests.
Chartered accountant Abhishek Aneja said, “Last year’s scheme didn’t do well because in case of black money stashed abroad, the money is normally routed through a planned strategy and is channelled from different jurisdictions through the trusts and companies registered or incorporated outside India. In such a case it becomes difficult for the tax authorities to identify the tax evaders and impose the liability on them. But it is not so difficult in case of undisclosed money in India, which is much easier to track by the government. So, the scheme announced in this budget may help the government to bring undisclosed income in the mainstream.”
Probably going by the success of the 1997 VDIS and the Voluntary Compliance Encouragement Scheme (VCES) pertaining to Service Tax announced by the UPA government in 2013, the Modi government seems optimistic with this scheme.
While, the government had received more than Rs 9,000 crore from 1997 VDIS scheme, VCES reportedly yielded Rs 7,700 crore from service tax defaulters.
“This disclosure scheme is different from the previous VDIS," said Revenue Secretary Hasmukh Adhia. "The most popular scheme announced in 1997 yielded more than Rs 9,000 crore to government exchequer. This scheme will do well and the government has projected 18 percent growth in personal income tax."
Carrot and Stick approach
Herve Falciani, the French-Italian whistleblower and the person behind the ‘Lagarde list’ that revealed the identity of 2000 potential tax evaders, suggested the Indian government adopt a tough approach when dealing with tax evaders.
“Large sums of money worth lakhs of crores is illegally flowing out of India and stashed abroad. In some countries, some of the banks are operating like brokers and respective government are safeguarding the banks due to financial interests. If India doesn’t work hard to stop the flow of money, it would be devastating. Tough measures are needed,” Falciani had remarked.
“Unless the government comes down heavily with tough measures, it’s very difficult to tackle tax evaders and black money issue. A lenient approach in the form of amnesty scheme gives a message that the government is ‘pro-business’ and doesn’t want to act tough. This demoralises honest taxpayers,” added Kumar.
“This scheme is good, but government has to adopt a carrot-and-stick approach. A mere scheme is not enough, unless stringent measures are taken against tax evaders,” added Thingna.
Referring to the success of VCES, Aneja added, “In the case of VCES, the government later cracked whip on tax evaders by giving arrest powers to its officers. This yielded result. The scheme will add to the revenues of the government and help many taxpayers who have missed out in declaring their taxable income due to any reason or have failed to submit their return of income for any year. However, stringent measures are required to stop the practice of non-payment of taxes”.