The Narendra Modi government is celebrating what it believes to be its outstanding effort at unearthing black money. It will be pertinent, therefore, to understand if the government’s celebrations are only a reflection of irrational exuberance or these are like some of its past, slightly exaggerated claims.
The four-month-long Income Declaration Scheme, 2016 (IDS, 2016), ended on September 30, leading to as many as 64,257 declarations for a total unaccounted income of about Rs 65,250 crore. Under the scheme, these declarations would fetch additional tax revenue of about Rs 29,400 crore, half of which would accrue to the government this year and the remaining half during the next financial year.
Remember that Finance Minister Arun Jaitley had refused to call it an amnesty scheme, arguing that those who use this window would have to pay tax at the higher rate of 45 per cent. Though there is no amnesty, the scheme guarantees immunity against all existing tax laws, investigations and raids based on such disclosures. That is why, perhaps, the scheme got a decent response.
“I compliment all those who chose to be tax-compliant in IDS, 2016. This is a great contribution towards transparency and growth of the economy,” Modi had tweeted, a day after the scheme ended. The prime minister also complimented Jaitley and his team, including Revenue Secretary Hasmukh Adhia and Central Board of Direct Taxes chief Rani Nair.
But how big was the scheme’s success? Comparisons are a good way of measuring its performance. The last scheme similar to IDS, 2016, was announced in 1997 by the H D Deve Gowda government and the finance minister then was Palaniappan Chidambaram. The Voluntary Disclosure of Income Scheme, 1997 (VDIS, 1997), ran for a little over six months and assured both amnesty and immunity. Those who declared black money and unaccounted assets paid tax on them at the peak rate of 30 per cent for individuals and 35 per cent for other entities. They also enjoyed immunity against various laws aimed at preventing tax evasion and money laundering.
The government had collected a total additional tax of about Rs 10,000 crore from this scheme. An estimated 350,000 individuals had disclosed their unaccounted wealth of a little over Rs 30,000 crore.
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On the face of it, it would appear that the amount of black money disclosed and taxes collected on them in the 2016 scheme have gone up significantly over those under the 1997 scheme. But that would be a wrong yardstick for measuring the scheme’s performance.
As per cent of gross domestic product in 1997, the taxes collected under VDIS, 1997, amounted to 0.64 per cent. In 2016, the corresponding ratio works out to a much lower level of 0.2 per cent.
Look at it another way. Total taxes collected under VDIS, 1997, accounted for seven per cent of gross tax revenues in 1997-98, while the total taxes to be collected under IDS, 2016, would be only 1.8 per cent of gross tax revenues projected for 2016-17. The performance of the 2016 scheme is clearly far less impressive than the scheme that was run almost two decades ago.
Measured by yet another yardstick of the number of declarations made then and now, the performance in 2016 continues to look far worse than in 1997 — an estimated 350,000 in 1997 and 65,000 in 2016. The total number of individuals filing tax returns in 1997-98 was estimated at 12 million, while today it would be over 51 million.
The government would say the final figures on tax disclosures under IDS, 2016, are still being compiled and the picture might change somewhat. Also, it would argue that IDS, 2016, should be evaluated in the context of many other schemes launched in the last couple of years, the total impact of which is a seizure of over Rs 60,000 crore in undisclosed income. Hence, the government’s crackdown on black money has worked towards preventing black money generation and the need for declaring unaccounted wealth.
That argument is valid. But the dangers of exuberance in claiming success over a scheme like IDS, 2016, should not be ignored. Already, the government’s self-congratulatory messages have led to demands for another black money disclosure scheme, with a lower penal rate of tax. Conceding that could lead the government to a slippery path, penalising in turn honest taxpayers, creating a moral hazard and, worse, inducing taxpayers to become tax evaders by betting on the next tax immunity scheme to come clean. Instead of such schemes, the government would do well to focus on more substantive steps to curb black money as many of its other actions have made some headway.