Will govt hit pay dirt with tax compliance window?

The Black Money Act of 2015, which targeted undisclosed foreign income, did not live up to expectations, with just about ₹2,500 crore of tax collected from 638 disclosures. Despite the flak, the Centre has opened another compliance window in this Budget, targeted at domestic tax evaders.

This proposal could get a richer tax harvest for the Centre, if the performance of the Voluntary Disclosure of Income Scheme (VDIS), 1997 is any indication. The high tax rate and penalty could reduce potential collections though.

The VDIS, 1997, proposed by then Finance Minister P Chidambaram, applied to both domestic and foreign black money. It saw nearly 4.75 lakh tax payers declare ₹33,697 crore as undisclosed income and assets.

The tax netted was ₹9,729 crore (0.6 per cent of GDP that year). This was more than 12 times the ₹800 crore or so collected under five earlier tax amnesty schemes, between 1951 and 1985.

If the collections are at a similar level this year, experts feel that the amount raked in through the scheme can be around ₹80,000 crore.

If the actual collection in 2016-17 from the compliance scheme is even half this estimate, it will help the government in its efforts to keep the fiscal deficit to the targeted 3.5 per cent of GDP.

That’s because the estimated tax collections have not been included in the deficit calculations. Also, unlike VDIS 1997, where more than three-fourth of the proceeds were shared with States, the Centre will keep the money this time around.

The realisation that the Centre could track down domestic black money more effectively than that stashed abroad may nudge tax transgressors to come clean.

But like last year’s high tax rate of 60 per cent, the tax rate for this year’s scheme could dampen disclosures. Jaitley has said that tax at 45 per cent (comprising 30 per cent tax, 7.5 per cent surcharge and 7.5 per cent penalty) has to be paid on the amount disclosed. This is far higher than the prevailing tax rates.

Chidambaram’s VDIS of 1997 had enticed people to come clean with attractive tax rates — 35 per cent for companies and 30 per cent for others — without any penalty. That had been partly responsible for its success.

“The peak tax rate for individuals in FY 1996-97 was 50 per cent and was at 40 per cent or more in prior years when the tax would have been evaded. So, a lower rate on undisclosed income and assets and the fact that the scheme related to undisclosed income rather than disputed income resulted in the scheme’s wide participation,” says Tapati Ghose, Partner, Deloitte Haskins and Sells.

But VDIS 1997 was criticised for short-changing honest taxpayers and also earned the ire of the Supreme Court. This forced the government to give an undertaking that there would be no more such amnesty schemes.

So, it is not surprising that Jaitley has categorically stated that the compliance window this year is not an amnesty scheme. The imposition of penalty provides a get-around to the legal impediment.

Tax experts feel that even with the penalty cost, it makes a lot of sense for evaders to come clean.

Says Rakesh Nangia, Managing Partner at tax and advisory firm Nangia & Co: “The government is doing a lot to crack down on black money and tax evaders, using data analytics and other sophisticated tools.”

“The threat of the law coming down hard should be reason enough for evaders to fall in line, when there is a window of opportunity,” he adds.