Blog: On Black Money, The Government Has It All Wrong

Let's first get the semantics out of the way. Finance Minister Arun Jaitley has stated that the "Income Declaration Scheme" he introduced in the latest Budget to unearth black money is not an amnesty. In his own words - "It is not a VDIS (Voluntary Disclosure of Income Scheme) and it is not an amnesty. Inequality arises in amnesty, that on a certain income, you as an honest tax-payer have paid 30% and you come after 20 years and say that I would also pay 30%. This is not structured that way. You pay 30% tax and 7.5% surcharge, and another 7.5% penalty, which is 45%, ending up paying 1.5 times more. So, you are paying penalties for not paying tax in time."

Amnesty means granting an official pardon to people who are guilty of an offence. The Scheme falls squarely within the ambit of the definition and christening it as something else on the basis of tax rates differential is rather disingenuous and clever wordplay. An amnesty scheme by any other name would still be as morally corrosive.

Of course, one reason for the eagerness to distinguish it from its earlier avatars is to get round the Supreme Court ban. At the time of VDIS in 1997, a petition was filed in the Supreme Court by the All-India Federation of Tax Practitioners, stating that such a practice was discriminatory against those who paid their taxes regularly and dutifully. The government had to give an undertaking to the Supreme Court that the VDIS was the last of its kind, and it would not bring about such schemes in future. Any future scheme would need the approval of the Supreme Court.

Even the earlier scheme of this government, the "Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015", was called a "Compliance Window" and the government was at pains to explain why such a window was not an amnesty scheme. The A - word is clearly a pariah. And for very good reasons!

A disclosure scheme is an extraordinary measure meant for abnormal situations, such as after a war, or at a time of national crisis. Resorting to such a measure during normal times - and frequently - shakes the confidence of honest taxpayers in the capacity of the government to deal with law-breakers and invites contempt for its enforcement machinery. Disclosure schemes not only fail to achieve the intended purpose of unearthing black money, but have deleterious effect on the level of compliance among the taxpaying public and on the morale of the administration.

And yet, governments have been offering tax amnesties practically every ten years on the premise that citizens need to be given an opportunity to come back to the path of rectitude and contribute their mite to the grand adventure of nation building.

Now, let's see whether any monetary windfalls from these schemes have trumped the ethical argument.

The VDIS which was introduced in 1997 was very liberal. The tax rate was 30 % for individuals and 35% for corporates. There was neither penalty nor prosecution. I was in the tax department then and, along with several colleagues, found the scheme odious. It was an admission of the government's failure to ensure compliance with the laws of the land. It was unfair to honest tax-payers who had paid taxes at higher rates in previous years. We knew that, moving forward, the scheme would damage compliance levels, create an expectation of future amnesties, and leave a message that while the honest taxpayer would pay tax regularly, the dishonest would pay from VDS to VDS.

And that's what happened. Not content with the generous terms, and totally belying the trust reposed by the government on tax evaders to come clean - in fact, then Finance Minister P. Chidambaram had explained that high tax rates was one of the important reasons for tax evasion, and that given a chance, the people of India would come clean - there were several unscrupulous elements who took the scheme for a ride. The government collected a tax of only Rs 10,050 crores. The undeclared assets unearthed were minuscule compared to the black money sloshing around in the parallel market. And the harm it did to the officers' morale and the faith of the honest taxpayers was incalculable.

Even the earlier tax amnesty schemes from 1951 onwards - Voluntary Disclosure Schemes, National Defence Gold Bonds, Special Bearer Bonds, Indira Vikas Patras and so on, have signally failed to coax any significant amounts of black money out of the closet.

Similarly, the Foreign Black Money scheme of the present government failed spectacularly. Undisclosed foreign assets amounting to only Rs 3,770 crores were disclosed. This was pocket change compared to the estimates of black money parked abroad. According to a 2013 report by Global Financial Integrity, India ranked fourth in the developing world for illegal money transfers overseas, moving $440 billion between 2003 and 2012. Professor Arun Kumar, author of "The Black Economy in India", has estimated the stash of black money abroad at a staggering $2 trillion.

So what is the outlook for the latest scheme?

The eligibility criteria are so tight that the catchment area has become very limited. If notices have been issued, or a search or survey has been conducted and the time to issue notice has not expired, or information has been received from a foreign country, or cases are covered under various specified acts including the IPC, one cannot avail the scheme. Politicians and bureaucrats are ruled out. So who's left?

The prognosis doesn't look good. The Secretary, Department of Economic Affairs Shaktikanta Das in an interview has stated that the tax department has collected substantial information on unaccounted income and Rs. 20,000 crores has already been tracked. This translates to only Rs. 9,000 crores' tax which may come to the government coffers. Of course, the actual catch may be more, but, I fear, not too much.

Now, let's come to the other Budget proposal called the "Direct Tax Dispute Resolution Scheme". The intent is to reduce the huge backlog of cases, which is laudable, but the way proposed is flawed and inequitable.

Firstly, it only covers cases which are pending before the Commissioner (Appeals). Cases pending in the Tribunals and the Courts are not covered, irrespective of the fact that tax cases have clogged these institutions too. Perhaps, one reason why the government has chosen to limit the scheme to the first appeal is that, at the higher appellate stages, it is itself the biggest litigant.

Secondly, the exclusion list is extensive which limits the number of eligible assessees.

Thirdly, it appears that the government hasn't learnt any lessons from a similar scheme in 1998, called the "Kar Vivad Samadhan Scheme". It was a huge flop and could coax no more than Rs 2,000. I had addressed several trade associations in Mumbai urging them to avail the scheme but the response was lukewarm.

The reason is simple - why would any person who has, on facts and law, claimed a deduction which the tax department doesn't agree with, surrender his claim and pay tax, interest and 25% of the minimum penalty (for taxes more than Rs 10 lakhs)? Where the amounts are small, it's understandable that a person may not like to undertake the long, expensive and arduous trek to the final tax resolution, and say "To Hell with it, let's pay up and get on with life". But the others? Very unlikely.

Also, with high-pitched assessments being the flavor of the season for several years now (even though the tax department frowns on them), the most bizarre and baseless tax additions have been made across the length and breadth of the corporate world, national and international. It is precisely this approach which has vitiated the tax atmosphere in the country. Which company in its right mind would accept such brinkmanship and quietly pay the tax, interest and penalty?

The scheme also covers companies which have been at the receiving end of the infamous retrospective amendments made in 2012 - companies such as Vodafone and other marquee names. For them, the dispute could be pending at any forum, not necessarily with the Commissioner (Appeals). In their case, they would need to pay only the tax, and not the interest nor penalty. It will be interesting to see if these companies agree to pay the humongous tax bill, or fight it out! The latter, most likely.

The government's commitment to rooting out black money is indeed commendable. But these methods have never worked earlier, nor will work now. The message goes out to dishonest taxpayers that they need not fear that they will be penalized if they do not pay their taxes, since there will always be a second chance. And even if they are penalized, a jail term is out of the  question.

What? No jail term? Doesn't prosecution for tax evasion land you in jail? Isn't immunity from prosecution the biggest hand-out the government can offer in an amnesty scheme? Nobody has been jailed in India for tax evasion. Compare this to the 2601 tax-related incarcerations in 2014 in the US. So why is India different?

The reasons are eloquently mentioned by the C&AG (Comptroller and Auditor General) in its report dated February 14, 2014, wherein it has castigated the tax department for its woeful administration of prosecution matters. There were substantial delays ranging from 5 to 48 years in the launching of prosecution cases. The coordination and pursuance of cases was grossly inadequate as revealed by non-attendance/non-representation in court proceedings. No prosecution counsels had been appointed at various stations. Poor record maintenance and delay in production of evidences had led to acquittal of assessees. Appropriate officers had not been posted to handle prosecution cases.

Not that the extant laws are ineffective - far from it. But the half-hearted and routine approach by the tax department to prosecuting tax offenders, the broken down institution of public prosecutors, and a clogged justice delivery system all conspire to ensure that tax evasion pays. The justice delivery system needs to be comprehensively overhauled: fast-track courts, revamping the institution of public prosecutors, posting of efficient officers in the prosecution wing and improved co-ordination between all stakeholders, followed by iron-fisted consequences for tax rogues who still do not fall in line.

Once a credible deterrence is in place, and the fear of incarceration and consequent loss of liberty and social opprobrium looms large for the rogue taxpayer, then there would be no need for any tax amnesty schemes in the future. And that would be a very good thing for honest tax payers and the tax department alike.

(Ajay Mankotia is President, Corporate Planning and Operations, NDTV)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.