Tax enforcement - amnesty v amnesia

By S. Swaminathan

What should be a viable and at the same time an ethical strategy for recouping the legitimate tax revenues of the Government? When Mr. P. Chidambaram, the Finance Minister in the United Front Government, came up with The Voluntary Disclosure of Income and Wealth Scheme (VDIS for short) in February 1997, there was the predictable tussle between the pragmatists and the puritans.

Given a long era of tax evasion and accumulation of unaccounted income and wealth in the economy and also the demonstrated futility of official efforts to unearth such unaccounted money, it was not inconceivable that the U.F. Government in 1997 chose to launch an amnesty scheme in the form of the VDIS to shore up its revenues. It was not as if Mr. Chidambaram had authored an unprecedented moral aberration in the form of a tax amnesty. Right from 1951 through 1997, there had been as many as eight such schemes (including the Gold Bond Scheme in 1993) brought into the tax system.

Whether one chose to describe each such scheme as a triumph of dishonesty over tax compliance, the normal obligation of a citizen, or in any other disapproving fashion, the fact remained that the tax authorities had virtually conceded defeat at the hands of tax-evaders. Even if the question of tax evasion had a great deal to do with a combination of incompetence and venality on the part of the tax-gatherer, as much as it originated from basic dishonesty of the tax-payer, tax experts could not but concede that the maximum marginal rate of income taxation in India had been pegged at ``expropriatory'' levels until the early Nineties when economic reforms were launched. Mr. N.A. Palkhiwala's characterisation of India as ``the highest taxed nation in the world'' (in the Sixties) was not a hyperbole after all. Whatever could be brought up against a tax amnesty scheme, on moral grounds, had necessarily to be set against the additional revenue that could be garnered for any Government hard-pressed for resources.

VDIS - the outcome

Mr. Chidambaram's tax amnesty approach resulted in a disclosure of income amounting to Rs. 33,000 crores and an additional revenue yield of Rs. 10,050 crores - the highest yield for a tax amnesty scheme in India since Independence and at a globally reasonable tax rate of 30 per cent for the individual tax-payer. For State governments stricken with a near-bankruptcy condition, an extra allocation of Rs. 7,594 crores (from out of VDIS collections) could not have come as tainted money!

The VDIS 1997 provoked hectic moral censure from many quarters. The criticisms varied from the regret that tax-dodgers got away with their ``loot'' paying a 30 per cent tax on valuations of wealth which were gross under-estimates in relation to prices prevailing in 1997 to the chastisement that ``the amnesty mindset'' would only perpetuate tax evasion.

It is not that these strictures against the VDIS were misplaced or unwarranted. The problem was rather one of dealing with a systemic menace through a process of compromise in the larger interests of the public coffers.

The CAG verdict

The report of the Controller and Auditor General of India (CAG) on VDIS, 1997, tabled in Parliament last Saturday, is not an ethical evaluation of the scheme but a postmortem which reveals irregularities in implementation along with aspects of its outcome not wholly consistent with the expectations of the Government. That out of the 4.75 lakh declarants under the scheme, only about 77,000 were new assessees is not, however, evidence of failure of the scheme. But the revelation that a default in tax payment to the extent of around Rs.390 crores by declarants in the income category of ``Rs. 1 crore and above'', had occurred can by no means be regarded as a good chit for the tax-gatherer.

The CAG's indictment of the Income-tax Department for failure to ``promptly assess'' business houses and family groups ``in their normal collection efforts'' is of graver import than the point that several declarants under VDIS 1997 were people who had benefitted from earlier tax amnesty schemes. The scenario which the CAG verdict on VDIS 1997 seems to be projecting is one where possibly the Income-tax Department itself is becoming mentally conditioned to let the tax-dodgers remain in a state of rest until a new amnesty scheme comes along to stir the department up into collecting what it can through ``the carrot without the stick'' approach!

Should the VDIS be faulted for the fact that employees of multinational companies had made declarations under the scheme owing to the fact that the companies had failed to deduct tax at the source? Or for tax evasion by employees of public sector enterprises? Even as the CAG Report portrays the VDIS 1997 as a largely revenue-detrimental exercise, the nation cannot afford to live with a situation where unreported income and an ineffectual tax enforcement machinery seem to be reinforcing each other. Which is less unethical - amnesty or amnesia encouraged by a slovenly tax administration?

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