Voluntary Disclosure of Income Schemes (VDIS) are hardly unconventional in India governments have repeatedly resorted to these schemes as shortcuts to quickly collect unaccounted-for money. Between 1951 and 1997, ten such schemes were implemented, although the only one that resulted in noteworthy collections was the one in 1997, with a collection of Rs. 30,000 crore. At a tax rate of 30 per cent for individuals and 35 per cent for corporates, the government’s piggy bank was richer by Rs. 9500 crore.
These schemes were always met with harsh criticism and the derision of many, including a Comptroller and Auditor General who wrote a scathing report about the gaping holes in such schemes. The much-aggrieved All-India Federation of Tax Practitioners filed a petition with the Supreme Court in 1997, and the government was forbidden from undertaking such schemes in future without prior Court approval.
However, the BJP managed to find, or create, a loophole, by vehemently denying that the 2016 VDIS falls under the definition of an ‘amnesty’ scheme. As per the 2016 VDIS, tax evaders can come clean by paying tax at 45 per cent on previously undisclosed income and avoid further penalties and prosecution under various acts – truthfully, not all that different from past tax amnesty schemes. It should be of some comfort to compliant citizens that the 2016 scheme requires defaulters to pay taxes higher than at the prevailing rate, which was not the case with the 1997 scheme.
This is the BJP’s second shot at playing cops-and-robbers with errant taxpayers. In 2015, a similar window was opened to disclose black money stashed overseas but this went largely ignored, with only around Rs. 4000 crore worth of declarations made.
The 2016 VDIS, however, was a success. According to the government, around Rs. 65,000 crore of undisclosed assets have been declared, yielding over Rs. 30,000 crore in taxes. While speculation has been rife about who paid how much, the government has maintained that it will not disclose state-wise or trade-wise information and that the identities of the declarants will be kept confidential.
This did not discourage the media and there was a flurry of news reports claiming that the highest amount declared came from Hyderabad and that the single largest declarant was a Hyderabadi businessman who disclosed Rs. 10,000 crore. Apparently, roadside eateries in Mumbai declared Rs. 50 crore in cash. Tax authorities swooped down on close to 200 eateries in and around Mumbai over the last few weeks of the scheme.
While tax amnesty schemes have been implemented worldwide, they are notorious for their unpredictable degrees of success. They are considered a stopgap, lazy solution and their effectiveness in tackling tax evasion is questionable. There is no right answer to the over arching question of whether these schemes are morally and socially ethical. Not only do they demoralise honest taxpayers, they can also be viewed as a sign of government’s incompetence in properly enforcing its tax laws.
Experts believe that such schemes are too lenient an approach when instead the government should be taking strict action against tax evaders who, once threatened, would fall in line out of fear of incarceration. By offering them an opportunity to get away unscathed despite flouting rules, governments could be encouraging evasion. By making evasion forgivable and even legitimate, they might be reducing voluntary compliances. Statistics corroborate this worry by confirming that, in developing countries, amnesties tend to diminish the chances of implementing a successful tax programme. However, one cannot completely disregard the benefits of an instant revenue bonanza, as well as the repatriation of funds that would have otherwise remained elusive. In a country where only around 3 per cent of the population pays taxes, this is big money and money that
India unquestionably needs. These schemes also supply the government with a list of citizens who ought to be closely monitored. To prove long-term efficacy, it is imperative to immediately follow it up with structural reform.
The carrot-or-stick dilemma will forever remain the subject of debate. What is clear is that the implementation of tax amnesty should not be a quick fix that is adopted at will, but instead a brief prelude before stringent regulations with severe consequences are brought into force.