 "Why govt is punching below its weight on tax evasion")
The last gentleman to walk into the income tax office on 30th September did so at close to midnight. He confessed he had waited throughout the evening, debating whether to come clean about his income or give it a pass. He didn't have to arrive at the office in person; he could have uploaded the details online. He just wanted to meet the officials and talk to them to make sure his declaration didn't leave anything unanswered.
If there was one reason why the Income Declaration Scheme, 2016, got so much- Rs 65,250 crore- and still underwhelmed, it is this. The Indian income tax department packs in enough punch to make tax absconders want to pay up; payees are, however, often, sure that this punch will not be put to good use.
Too many reports have surfaced over the past years about the lack of record-keeping in the tax department that lets tax evaders slip away, and about how the tax department is not able to mine the data warehouse it has built and that it pays lip service to modern concepts like large taxpayer units. Taken together, it reflects on a tax organisation that is yet to evolve into a professional body at par with those in developed economies.
Yet, if these are done, they can beat an amnesty scheme hollow. A seminal paper on tax amnesty issued by the International Monetary Fund (IMF) in 2008 says, "Improvements in tax administration are the essential ingredient in addressing the main problems that tax amnesties seek to address. Indeed, the most successful amnesty programmes rely on improving the tax administration's enforcement capacity."
Encouraging compliance
So, it is not about crafting an attractive tax rebate that will lead to greater compliance, but the day-to-day activities of the tax department. When those fall short, then like the gentleman who waited for hours outside the income tax office, people ponder on the benefits of coming clean or continue evading their taxes. In other words, when a tax officer or clerk takes hush money, he discourages compliance-he cuts the benefit any amnesty scheme can provide to the tax administration.
Thus, the online tax payment facility created by the income tax department over the past few years has had more salutary effect in cutting the generation of black money than any specific anti-tax evasion schemes. Yet, having created the data bank, the department this time sent out mailers to pay tax to only those who were already in the tax net. It eschewed the chance to bring in new tax payers. As a result, the number of people who paid the additional tax was about 65,000, compared with 330,000 in the last income disclosure scheme in 1997. The tax base has not widened; the department is punching below its weight.
It is in this context that one should weigh the numbers garnered by the income tax department this time. Ranked against the previous 12 disclosure or amnesty schemes, it has been impressive.
There has been comparison with the corpus Indonesia has collected of about $277 billion and Argentina of $ 80 billion through amnesty schemes this year. But these comparisons are not accurate. Jakarta has given a huge incentive to its tax evaders. In fact, a report by the Organisation for Economic Co-operation and Development on the scheme is scathing. A Bloomberg report, Jokowi amnesty favours tax cheats and punishes payers, OECD says, explains that the amnesty allows tax evaders to pay between just 2 per cent and 10 per cent in penalties, "or around a third of what they should".
Similarly, in Argentina, the tax amnesty followed the decision to float the national currency in December 2015. There was a massive black money market in the peso-dollar exchange rate till then. The scheme was a special circumstance that allowed people from all walks to come clean and begin life anew.
Not so generous
The Indian finance ministry has given no such generous offer. Those with black money will have to pay 45 per cent of their declared income as tax, surcharge and penalty. The highest income tax rate for non-corporate assesses is 32 per cent including surcharge. While some senior tax officials have averred that the scheme should have been made better - offer an even low tax threshold, it is obvious that such measures would have militated against the regular tax payers and the Supreme Court would have looked bleakly at it.
The Indian emphasis on disclosure of black money has, therefore, got more resonance with the conclusions made by international agencies like the IMF and the OECD. The global climate has turned decisively against the generation of unaccounted income and countries under the aegis of the OECD have begun a pushback against black money. The Indian government since 2014 has made unaccounted wealth one of its strongest area of action-it has already put the Mauritius route through which a lot of Indian money used to disappear and then reappear as foreign money, under the sunset clause. Similarly, governments abroad have begun to share information on suspicious and clandestine bank accounts.
A stop-gap arrangement?
Was the Indian finance ministry less-than-convinced about the efficacy of the scheme and put more store by the improvements in the day-to-day compliance window? According to Govinda Rao, professor emeritus (public finance), National Institute of Public Finance and Policy, the Indian special tax window has more to do with meeting tax shortfall than closing the black money route. He says this has been the case for earlier windows too. A study done for Business Standard shows that the higher collections under such schemes tend to come at the cost of regular collections at the end of the year.
But was there scope for a higher collection? For instance, even if one assumes that it is 10 per cent of the GDP, then the cumulative growth rate of the black economy could be equal to the GDP in ten years or a bit more. The collection of Rs 65,250 crore has been puny by comparison.
Yet, despite the popular imagination, black money rarely remains as cash. High denomination sums are ploughed into the real estate sector and in the stock market through round tripping. We have already seen the flight of capital from the Mauritius window as the new era of disclosures come in. Similarly, data from real estate companies like JLL India show there has been no spike in sales of residential properties in any of the major markets in India, in September.
Ashutosh Limaye, National Director (research), JLL, says: "Those with black money with investments in the sector, found it difficult to liquidate their investments in this market - sales of residential units have been flat across all geographies." They could not pay for their tax bills, even if they wanted to. This has been one of the key reasons why the numbers could not rise further.
India may have already tightened the screws on the generation of black money. Special windows can, therefore, go only so far.
MONEY FLOW
Rs 65,250 cr
Collection from the amnesty scheme 2016
65,000
People paid additional tax this year
330,000
People declared their income in the last income disclosure scheme in 1997
