The Government must be heaving a sigh of relief at the outcome of the Income Declaration Scheme (IDS). Especially, after the unhappy experience last year from the undisclosed foreign income scheme.
The declaration of ₹65,250 crore under the Income Declaration Scheme 2016 will net the Government about ₹29,400 crore in taxes, half of it in fiscal 2017 and the rest in fiscal 2018. The bounty this time around is much higher than the ₹4,000-odd crore undisclosed foreign income declared under the Black Money Act 2015 that netted under ₹2,500 crore in taxes at 60 per cent tax rate.Lagging behind
But does this make the IDS a success story? Not quite. A BofA Merill Lynch Global Research report says that the IDS ended lower than expected. The tax collection of about ₹29,400 crore, the report says, is lower than the ₹87,000 crore it had expected based on the Voluntary Disclosure of Income Scheme 1997, that led to 1.9 per cent of GDP as disclosure and raised 0.6 per cent of GDP as taxes. In contrast, the disclosure under IDS 2016 is just about 0.45 per cent of GDP and the tax collected would be 0.2 per cent of GDP.
Reports suggest that most declarations under the IDS were involuntary — they came after the taxman’s heavy hand knocked on the doors of suspected evaders, through raids, searches and surveys, in the last few weeks of the scheme. Clearly, tax evaders in the country do not seem inclined to own up and come clean. This seems to be due to a combination of factors — high tax rates, the fear of being hounded despite the Government’s assurances of anonymity and immunity, a gamble that misdemeanours will remain undetected and unpunished, and a bet that there will be another chance.Sticky stock problem
Ergo: Despite the publicity blitzkrieg, the series of clarifications, and the Government showing uncharacteristic flexibility — for instance, in easing the valuation rules on undisclosed assets and extending the tax payment timeline — the IDS has made only a dent on the mountain of black money in the country. How big the mountain is depends on whom you ask. A report given to the Government more than two years back is said to have assessed the size of the black economy at ₹90 lakh crore — that’s about 60 per cent of the current GDP. A recent report by Ambit Capital Research has estimated the size of the black economy at ₹30 lakh crore. Various other projections float around. Estimates on black money are at best, guesstimates, given the nature and size of the problem.
To be fair, the Government, despite its avowed intention to crack down on this hoard, may see only limited success. Blame this on the ease with which black money could be converted into white in the past. Also, the main repositories of black money — real estate and gold — do not lend themselves to easy detection and disclosure. The ‘stock’ of black money, at least of vintage when paper ruled and a trail was almost non-existent, is tough to detect.Ebbing the flow
But where the Government can win, and is perhaps already seeing success, is in containing the ‘flow’ — the generation of new black money. The many steps over the past few years towards curbing cash transactions, making PAN disclosure mandatory and bringing high-value transactions under the tax scanner would have helped. Especially since they target gold and real estate.
Since January this year, PAN has become mandatory for all transactions involving purchase of goods or services exceeding ₹2 lakh — this includes jewellery and bullion purchases that earlier enjoyed a much higher limit of ₹5 lakh. Budget 2016 followed this up by levying tax at 1 per cent on cash payment for goods and services over ₹2 lakh while the existing limits on jewellery (₹5 lakh) and bullion (₹2 lakh) continue. Therefore, high-value cash transactions are now being reported to the tax authorities and entail an additional cost. Could this perhaps have contributed to the fall in gold imports this year?
Costly property deals have also been under the scanner. Budget 2013 made it mandatory for buyers to deduct tax at 1 per cent of the entire amount paid to the seller if the payment for property is ₹50 lakh or more. Sure, some would have registered below this threshold to escape the taxman’s gaze. But skipping the loop would have called for special evasion skills in the pricey metros where property values generally far exceed ₹50 lakh.
The fight against black money should get a shot in the arm once the Goods and Services Tax comes into force. Non-compliance with tax laws by suppliers will entail a cost down the chain through denial of tax credit; most businesses will find this unacceptable. Besides, with digital money likely to pick up pace thanks to initiatives such as Aadhaar-linked payments and the United Payment Interface, cashless transactions should get a boost. The Government’s renegotiation of tax treaties with countries such as Mauritius should also address the problem of round-tripping of funds from tax havens.
Importantly, unlike in the past, the Government is today armed with data analytics on high-value transactions and sophisticated technological tools that help it sniff out and chase black money. Just the knowledge that the powers-that-be are much better equipped than before will likely dissuade wannabe evaders. Many of the cases of involuntary disclosure under the IDS were likely tracked thanks to technology. This edge should get better with time.Step up the fight
A lot more needs to be done, though. The Government should consider implementing, with reasonable exceptions, the recommendations of the Justice MB Shah-led special investigation team on black money — a ban on cash transactions above ₹3 lakh and restricting cash holding with individuals to not more than ₹15 lakh.
Close coordination between authorities, the long-pending reform of electoral financing, and the political will to take on holy cows such as incomes of rich farmers will go a long way in addressing black money flow in the country. Regular alignment of circle rates for registering property with market rates should also help. As the movement towards a cashless economy picks up pace, the Government could consider doing away with high-value currency such as ₹1,000 notes. Finally, those who did not come clean must be brought to book. Signalling will be a potent weapon in the fight against black money.