Various Tax Amnesty Schemes of India

The Union Budget 2016-17 had launched a tax amnesty scheme called Income and Assets Declaration Scheme (IADS). As per this scheme, declarants of unaccounted income can legalize their possessions by paying a tax of 45% (30% tax, 7.5% surcharge and 7.5% penalty). With this they will be immune from prosecution under the IT Act, Benami Transactions (Prohibition) Act and Wealth Tax Act.

Tax amnesty schemes are tools used by the governments across the world to recover money from taxpayers. It provides a limited time opportunity for taxpayers to pay a defined amount of money in exchange for forgiveness of a tax liability without fear of prosecution.

Key Facts

• In India, tax amnesty schemes started soon after the independence. In 1951, first voluntary disclosure schemes were announced which paved way for the declaration of unaccounted funds without the fear of prosecution from tax laws. It was named as VDIS Tyagi Scheme.
• However, the Tyagi scheme managed to collect only 11 crore out of the disclosed 70 crore worth of income. The scheme failed because the taxpayers were suspicious about the assurances of immunity.
• In 1965, the government launched four amnesty schemes as it faced shortage of money due to Chinese invasion. The four schemes managed the disclosure of only Rs. 285 crores (approx.) worth of income.
• However, the scheme introduced in 1975 managed to garner Rs. 744 crore worth of unaccounted income.
• In 1997, the government launched Voluntary Disclosure of Income Scheme (VDIS) which allowed reluctant taxpayers to disclose their wealth and income by paying a higher rate of tax and gain reprieve. This scheme allowed taxpayers to declare their possessions at back-dated values. This provision was misused by the taxpayers to grossly undervalue their properties. It was a headache to tax authorities as out of 4.75 lakh declarations, 3.09 lakh declarations were related to jewellery and other movable items (silverware, utensils etc.) which were declared at ‘decade ago prices’. All in all the government managed to collect Rs. 9,729 crores of money which would have been much higher had the government framed more stringent rules. Despite this, the VIDS-97 is touted as the most successful of all tax amnesty schemes in India. If this is so, one can imagine the success of other similar schemes.
• In sum, it can be safely concluded that the government never met its objectives through tax amnesty schemes since independence.

Questions to Analyze

• What has been Supreme Court Stance on Tax amnesty schemes? What was government response to the Supreme Court directions?
• Since VIDS-97 failed and could not collect the expected amount, what changes have been made in new scheme to check such failures again?
• What may be the impediments for success this scheme?
• Why such schemes hardly get success?

What has been Supreme Court Stance on Tax amnesty schemes? What was government response to the Supreme Court directions?

Supreme Court had asked the government to refrain from offering such amnesty schemes. Why? Because such schemes would demoralize honest taxpayers and help tax evaders to get away from prosecution by merely paying a penalty. As a response to the Supreme Court directions, Government did not stop offering such schemes but only changed the name of the scheme by omitting the word “amnesty scheme” and putting “income disclosure scheme” in its place.

Since VIDS-97 failed and could not collect the expected amount, what changes have been made in new scheme to check such failures again?

This scheme is intended to allow voluntary disclosure of unaccounted assets and regulate cash dealings in a big way. Unlike VIDS 97, it has stricter provisions and disallows the habitual tax offenders and tax defaulters who are named in financial scams. The government also proposes to price the assets at prevailing market rates or at rates on a more recent date.

What may be the impediments for the success of this scheme?

Firstly, although the tax rate of 45% seems fair in view of the fact that marginal tax rate is nearly 35%, it may be considered high by the taxpayers. As tax amnesty schemes with higher tax rates have failed in the past, experts are skeptical about this scheme’s success as well. Secondly, lack of trust and fear of further scrutiny by tax officials is a major deterrent among the defaulters. They seem to lack faith in the immunity clauses. Defaulters fear once they disclose then they may permanently come under the scanner of tax officials. Thirdly, people in possession of huge black money have little incentive to reveal the source of income and disclose his/her wealth.

Why the schemes are not effective?

Defaulters disclose their wealth under amnesty schemes only when they see value in it and only when the scheme offers a highly concessional tax rate. They tend to disclose their incomes only if they see a good investment option such as investment in stocks and bonds, where the returns tends to be better rather than holding idle cash. For instance, during 1950s and 1960s, when the tax rates were higher (60%-70%), defaulters made use of amnesty schemes to split their assets among family members to avoid high marginal tax rates.

Points for Critical Analysis

Firstly, the government might be creating a moral hazard by such schemes. This would encourage even the honest taxpayers to wait for an amnesty scheme to declare their wealth. It is like rewarding dishonesty and punishing honesty.

Secondly, repeated amnesty schemes tend to bring down the compliance levels. It weakens the tax collection initiatives and burdens the tax authorities with extra load of work.

The government should initiate punitive measures and hunt down those defaulters who have not availed of amnesty schemes. They should not be repeatedly offered and if offered, the rules should be made water tight and defaulters should be followed up with strict punitive measures.

Experience of other countries

Although the countries like USA, Australia, Germany, Singapore and Belgium have made use of Tax amnesty schemes, they have become rare in the developed world now. Economically weaker countries like the Philippines, Russia and South Africa have met with varying degrees of success in offering such schemes.