The Hindu Business Line : Budget: Will there be an amnesty scheme?

While there must be every attempt to check tax evasion, there must, equally, be every attempt to stop whimsical taxation. The proposal for a blanket amnesty scheme to tap black money will be both arbitrary and whimsical.

"There is a growing tendency on the part of the Government to spend time catching the financial sprat while the mackerel swims free in the ocean."

— Justice Harman in Moorhouse Vs. Dooland, 36 TC 1 at 7

ARE we going to see the introduction the 12th Amnesty Scheme in the Budget that will be presented later this month? There are indications that such a scheme may be introduced. The immediate need for enormous funds can easily be attributed to the devastation caused by the December tsunami.

According to the Rakesh Mohan Committee, an estimated Rs 2.5 lakh crore will be required in the next 10 years for building infrastructure. The omnipresent black money is an alluring permanent temptation for the Finance Minister to tap it. So Mr P. Chidambaram may launch a black-money-unearthing scheme, though it may not be a repeat of the VDIS of 1997.

The Government had assured the highest court in the land that there will be no repeat of such a scheme. This time around, it is likely to be an infrastructure bond or a Tsunami Rehabilitation Bond with investors told that no questions will be asked. The bonds may be non-transferable with a low rate of interest. Mr Chidambaram considers the VDIS a success, though researchers in the realm of fiscal policy may demur.

The rationale

Few studies have been done in India about the success or failure of the 11 amnesty schemes that were operated from 1951 to 1977, though successive committees on tax reforms have come down heavily on such an approach on the ground that it affected the honest tax payer and only encouraged proliferation of black-money in the hope of a "scheme".

In a study, the ICRIER chief, Dr Arvind Virmani, has shown that though tax amnesties increased revenue in the `scheme' year, they had a negative effect on the overall collections in subsequent years.

A drastic cut in marginal rates would bring people permanently into the tax net through voluntary compliance and an amnesty at that stage would provide the new entrants an opportunity to start on a clean slate. When the average marginal rates have been creeping up, the introduction of an amnesty scheme would have the opposite effect and may not succeed.

Tax rates

The advisor to the Finance Minister (Mr Parthasarathy Shome) points out that corporate tax rates in India continue to remain high at 35 per cent compared with 19-30 per cent in the UK, 30 per cent in Australia and 25 per cent in Brazil. In addition to the tax, corporates have to pay a 2.5 per cent surcharge and another 2 per cent on education cess, thus pushing up the aggregate tax rate to about 36.6 per cent.

In the past seven years, the rate has remained constant with upward adjustments for surcharge and cess. During the same period, Brazil halved the rate to 25 per cent and Singapore and Hong Kong lowered theirs.

Every time there is a discussion on the corporate rate structure in India there is this argument about fiscal incentives built into the Act.

Mr Shome points out that there are 207 incentives provided under the Income-Tax Act and these account for giant corporations not being in the tax net leading to the introduction of MAT and MAAT. The problem of revamping the tax code by removing exemptions and reducing the tax rate has proved intractable despite several committees and commissions. Every tax break has the consequence of working out to be an amnesty, as for example the current proposal to extend tax benefits for amalgamation of broking outfits to strengthen the capital market, as advocated by SEBI. Such amalgamation could result in dubious losses being allowed after merger and lead to abuse and misuse.

The real corporate tax rate in India on the average may be just 26 per cent. Barring hardcore believers in the Laffer Curve theory, nobody is convinced that a mere reduction in the tax rate will result in reduction in the generation of black-money or an improvement in the tax-GDP ratio.

Tax rates have something to do with the ability of income earners to contribute to the running of the government.

Many years back, jurist Nani Palkhivala had pointed out that if the income and the wealth tax returns of some of the wealthiest men in India were made public, the nation would see for itself how illusory the hopes of the authors of the new pattern of taxation have been.

The billionaire club

A financial daily has, in its annual supplement on the billionaire club, observed that the combined net worth of the richest of the rich rose by 43 per cent to Rs1,85,800 crore. The salary and perks of managers who earned more than Rs 1 crore per annum, still not belonging to the promoter group, tripled in 2004.

Several decades ago, a proposal was mooted for publishing the income and wealth declared and assessed by billionaires but the proposal was shot down for obvious reasons. Nobody need be shocked if it turns out that many of these billionaires with wealth exceeding more than Rs 1,000 crore may not be paying any wealth tax at all since the shares they control are considered business assets and exempt from tax.

It would be enlightening if the government provided the data on tax payments by these billionaires. That may be an eye-opener to the public to understand the efficiency of the resource raising ability of the government. Tax evasion is reprehensible; to quote Palkhivala once again, it is social injustice by the evader to his fellow citizens. Tax evasion aggravates arbitrary taxation and arbitrary taxation aggravates taxation. To break the vicious circle, while there must be every attempt to check evasion, there must, equally, be every attempt to stop whimsical taxation.

The proposal for a blanket amnesty scheme to tap black money will be both arbitrary and whimsical. It will only result in the transfer of resources from the honest rich to the dishonest rich. Is this what the government wants?

In the pre-Budget consultations, the Finance Minister had invited various groups but not the "Aam aadmi" (common man) by whom the government swears.

Thiruvalluvar declared 2,000 years ago :

Allal pattu atradhu azhutha kanneer andrae

selvaththai thudaikkum padai

(The sweat and tears of the suffering humanity will be the army that will destroy wealth.)

(T. C. A. Ramanujam is a former Chief Commissioner of Income-Tax, and T. C. A. Sangeetha is a Chennai-based advocate.)

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