The Narendra Modi government’s Income Declaration Scheme (IDS) 2016, at 45% tax, cess and penalty, all inclusive, is turning out to be less than a complete success.
Though the government has not put any figures to the amounts/values disclosed, and taxes obtained so far, almost at the end of the four-month period of its currency, this, citing confidentiality, unofficial sources put it at much less than the Rs 50,000 crore it had hoped to collect.
The government’s scare tactics, a departure from past more unctuous schemes, is backed by a recently passed and as yet untried draconian law against black money hoarders. It has clearly not impressed the moneybags. They have seen or heard of 10 such schemes already between 1951 and 1997, some of which offered better terms. This, despite the moral hazard of rewarding tax evaders. But then all voluntary disclosure schemes suffer from this infirmity. It boils down to: does the government want the money or not?
But most were failures still, with only one in 1985/86 yielding Rs 10,778 crore in taxes, and the VDIS scheme 1997, run by then Finance Minister P. Chidambaram, garnering Rs 33,000 crore. But then, VDIS 1997 charged only a flat 30% tax with no add-ons. In the 1997 scheme, and every other past scheme, the “voluntary” taxpayer that did come out of the shadows to “regularise” mostly his undeclared immovable property, got away as a practical via media and additional hidden incentive, with a massive undervaluation of assets.
It was that, or nothing, for the government. This, at even 50% of what they were actually market priced at/worth, and so, the tax paid thereby was also at half of the nominal percentage charged to tax. So in 1997, it was just 15%. Something like that may still be operative in 2016, but remember that the property market is in a slump at present and some owners may think this undervalues their property even for discounted taxation purposes. And there was no draconian new law before, or in 1997, to try out on the unimpressed. The still unimpressed in 2016, however, are told that much data has been allegedly mined on him and his doings to be unleashed once the amnesty period ends. How this will pan out remains to be experienced. But the whole thing does not sound very politic. To annoy masses of urban well-to-do is not desirable politically for a party such as the BJP.
As it stands, till 30 September, only days away now, no questions will be asked on source of funds as long as the 45% is paid.
For a while, the administering arm, the Central Board of Direct Taxes (CBDT), ensconced centre-stage in the Finance Ministry, was itself unclear about whether a person could actually pay the tax and penalties with black money. But when hardly anyone came forward, the CBDT clarified that the taxes could be paid using “unaccounted” cash. After the deadline, there are criminal prosecutions and jail sentences lying in wait, per the new laws. And yet, the rumour goes, IDS2016 will be hard pressed to even recover the money spent publicising it.
The reason that many people are still sitting on the fence is, due legal process will have to be followed. And in India, it will take a month of Sundays, with the eventual outcome including appeals which push back the final verdict for many years. For people protecting enormous ill-gotten or previously concealed wealth, a long period of ponderous litigation is just what the doctor ordered, for the lawyers.
A similar prior less than impressive show resulted when the government went trying to repatriate concealed and untaxed money of resident Indians stashed abroad. This, in order to redeem one of its most memorable election pledges. It attempted to look in bank accounts, tax havens, properties invested abroad, in Panama, the Bahamas, etc. But again, its conditions were such that hardly any catch resulted. The CBDT was confronted by a thicket, in places, a veritable tropical forest, of expensive to probe international and sovereign laws to deal with, holding companies, proxy directors, cross-holdings involving NRIs and people with other nationalities, extradition treaties, and so on.
It is no wonder that most Indian bribe-takers in defence deals are brazen, issuing public challenges for “proof” of their involvement. They know the Indian government cannot catch them with the best will in the world, at least not via due process and not through that tangled thicket abroad either. And we have no Abu Ghraib or Guantanamo for tax offenders, with en-suite water boards.
It is unclear however whom the latest scheme, IDS 2016, and the threats of retribution, after the expiry of the four-month amnesty period 1 June to 30 September, is designed to intimidate. And whom indeed it aims to please. Where does the politics of this particular policy lie?
Is it designed to impress the numerous but poor voters, who pay no tax either way? If so, it is not going to resonate with his voting bone. Taxes the rich pay, or don’t, are not very high on his priority list. And neither does it afford him malicious pleasure to see traders and businessmen, leaders, sundry grand people, many of whom are his employers and who may need to make cutbacks post-raid, harassed by a political system that largely runs itself on hard cash.
Large, threatening, print and TV advertisements that fly in the face of earlier promises of curbing “tax terrorism” have been ignored by the target audience. Presumably, so paltry is the yield, just days from when the scheme ends that the infamous raid parties have reportedly hit the chole-bature and jalebiwalas in Khao Gully in Mumbai. This, to try and meet their targets. A voluntary scheme, therefore, has been turned into a desperate hunt for revenue.
What will happen? Will recalcitrant people be targeted using the draconian black money law plus the money found under mattresses? Would any true aficionado of black homey be so foolhardy as to keep cash in known haunts? Will the black money laws become a weapon in the hands of the government, never mind how much tax money it produces?
But underlying this cumbersome and slow motion cops and robbers show is the undeniable fact of a too narrow taxation base in terms of individuals, numbering just some ten lakh. There are also some 10,000 listed public companies and perhaps ten times that number, private, smaller, small, outside the bourses. Not a lot for the essentially rent-seeking CBDT to go after, even if the foreign investors are roped in.
What is needed is to expand the tax base and lower the nominal tax rates. P. Chidambaram did this in his “dream budget” around the VDIS scheme, citing the tendency towards greater compliance at lower tax rates (the Laffer Curve). Since then, nobody has tried to push tax rates down and include, say, rich farmers. Will this government do so? If it does, it might collect more taxes and fewer brickbats.