Millennium Post

Skewed incentives?

“I propose a limited period Compliance Window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions by paying tax at 30 percent, and surcharge at 7.5 percent and penalty at 7.5 percent, which is a total of 45 percent of the undisclosed income,” Union Finance Minister Arun Jaitley had announced in his Budget speech earlier this year.

 As per the government’s tax amnesty scheme, people who have made money through “corrupt means” will not be allowed to take advantage of the disclosure window. But what's the difference between unaccounted money and the same made through corrupt means? Moreover, the government clarified that declarations made under the scheme will not be used against the declarants under the Income-Tax Act or Wealth Tax (now abolished). 

There will also be immunity from Benami Transactions (Prohibition) Act. Addressing the media during his six-day trip to Japan to invite investments, Jaitley said that people with undisclosed assets should use the limited period income declaration window if they want to sleep well.

 “Otherwise, the way the disclosures are becoming more and more public, they will run into serious trouble,” he said. Well, if the government does not follow it up with stern action against future tax dodgers, then those who have any undisclosed asset will be able to sleep well. When the tax amnesty scheme was first announced during the Centre’s last Budget, it received a lot of flak and rightly so. 

Such a proposal could essentially mean that those who declare black money within this compliance window will not be subject to any sort of prosecution by the government, besides getting a free pass from any enquiry under the Income Tax Act and Wealth Tax Act.

 In other words, the Centre's amnesty scheme distorts the average citizen’s incentive to file their income tax return in an honest and transparent manner. Experts contend that the only way such a scheme could work if the Centre’s threat of serious action against future defaulters is credible. “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully,” Jaitley had once said.

 But a black money amnesty scheme on these lines could lead to greater inequity. Besides a distortion to incentives, there is a legal angle to the matter. A similar amnesty scheme was launched in 1997 when P Chidambaram was the Finance Minister. 

Under its amnesty scheme, Rs 33,000 crore of undisclosed income was declared, on which the government had collected Rs 10,000 crore in tax. As per records available in the public domain, it is clear that there was outrage at what many perceived to be attempts at “legitimising” money laundering. It soon led to a case in the Supreme Court. Up against such scathing criticism of the policy, P Chidambaram and the then Union government had to commit to the court that there would not be any more tax amnesty schemes. How will Finance Minister Jaitley overcome these legal obstacles? 

The recent Economic Survey, which was tabled before Parliament earlier this year, was unequivocal in its suggestion that it was important for the government to increase the number of Indians who pay tax. “Controlling for the level of democracy, India’s ratio of taxpayers to voting age population is significantly less than that of comparable countries. 

This implies that while at present about 4 percent of citizens who vote pay taxes, the percentage should be about 23,” the Survey said. It went on to further point out that approximately 85 percent of the country is outside the tax net. In addition to hampering the government’s ability to raise revenue, such volumes of unpaid tax only point to the massive amount of black money present in our financial system. Tax amnesty schemes proposed by the likes of the current government could further incentivise tax dodgers not to disclose their incomes in an honest and transparent manner.
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