Is Budget 2012 about to legalise petty bribe income?

Did Pranab Mukherjee introduce a black money/small bribes amnesty scheme by the backdoor without calling it one?

The underwhelming headline news is that the finance minister will introduce a white paper on the subject, but there is a small sting in his long perorations on black money.

Giving a long list of things he intends to do to “deter the generation and use of unaccounted money”, he says in the end that he will tax “unexplained income” at 30 percent regardless of the tax slab one belongs do.

This does not mean it is an amnesty scheme, but when he says he will tax “unexplained money, credits, investments, expenditures, etc at the highest rates of 30 percent irrespective of the slab of income”, does this mean there will be no further penal action?[caption id=“attachment_247305” align=“alignleft” width=“380” caption=“The other income. Image courtesy Flickr”]  [/caption]

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To be sure, we can call this an amnesty scheme only if the receiver of such unexplained credits is given immunity from prosecution. The budget documents don’t elaborate on this statement of the FM.

The explanatory memorandum to the budget says this provision is being made because even though section 68 of the Income Tax Act says that unexplained money can be taxed, the courts have said that the onus of proof need not be entirely with the assessee.

The finance minister clearly wants to change that.

The finance minister also wants to ensure that unexplained money-even if it is received by people who are below the tax bracket-is taxed. Says the memorandum: “Under the existing provisions of the Income-Tax Act, certain unexplained amounts are deemed as income under section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and are subject to tax as per the tax rate applicable to the assessee. In case of individuals, HUF, etc, no tax is levied up to the basic exemption limit. Therefore, in these cases, no tax can be levied on these deemed income if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate.”

Now, of course they can be taxed at the top rate.

But can this provision be termed a kind of perpetual amnesty scheme?

There are two reasons to raise this question. One, in the recent case of some Swiss account holders of HSBC Bank-obtained from a list handed over to India by the French authorities-the taxman has been busy recovering his dues rather than prosecuting the holders of Swiss accounts for their illegal accounts ( read here ). Is the new provision about to legalise this?

Moreover, official circles-including Kaushik Basu, Chief Economic Advisor-have been suggesting the legalisation of small bribes.

As _Firstpost_ reported some time ago, Basu wrote a paper titled ‘Why, for a class of bribes, the act of giving a bribe should be treated as legal’.

We noted: Basu’s case is that by tilting the law in favour of the (involuntary) bribe giver, he (or she) will be more willing to report the bribe, thus making it difficult of the bribe-giver to wriggle out of the situation. He said: “Harassment bribery is widespread in India and it plays a large role in breeding inefficiency and has a corrosive effect on civil society. The central message of this paper is that we should declare the act of giving a bribe in all such cases as legitimate activity. In other words, the giver of a harassment bribe should have full immunity from any punitive action by the state.”

He argues that this “will cause a sharp decline in the incidence of bribery. The reasoning is that once the law is altered in this manner, after the act of bribery is committed, the interests of the bribe giver and the bribe taker will be at divergence. The bribe giver will be willing to cooperate in getting the bribe taker caught. Knowing that this will happen, the bribe taker will be deterred from taking a bribe”.

The provision to tax petty unexplained income for people below the top tax bracket will enable the government to tax petty bribes without really going after them.

Is this what the 2002-03 budget is trying to do without saying so?