Indonesia's black money scheme more successful than India's

But will this one-time windfall will lead to better tax compliance and a widening tax base?

Two similar tax amnesty schemes in two different nations and the outcome is nothing but similar. Around the same time in early 2016, both India and Indonesia introduced a tax amnesty scheme for all citizens who wished to declare their illegal income, pay tax on it and avoid prosecution.

Indonesia introduced its tax amnesty scheme and provided a window between July 1, 2016 and March 31, 2017 for all residents and expatriates to report their undeclared wealth. Reports from Jakarta suggest that as of date, $342 billion has been declared. Most of the wealth declared is from within the country. Around $77 billion was declared from overseas Indonesians –- including corporates and individuals. The amount of money repatriated stood at around $11 billion, more than half of it reported to have been from Singapore.

Indonesia had set itself a target around $400 billion under the declaration scheme. By the look of it, the country seems to have almost achieved it.

The Modi administration in India introduced the scheme in two phases. The Income Declaration Scheme-1 (IDS-1), announced in the 2016 budget saw almost $10 billion being declared by Indians at home and abroad. Post demonetisation, the government introduced the second phase of this scheme. It launched the Pradhan Mantri Garib Kalyan Yojana, under which those with undeclared wealth were asked to contribute to the welfare of the poor. Less than a week before the deadline was to expire, almost $1 billion was declared by Indians under the scheme. India’s declarations under its tax amnesty scheme are less than a third of what the Indonesians managed.

What explains the difference in declarations between the two nations? Indonesia’s amnesty scheme, by the look of it, was more attractive for those willing to declare their illegal wealth than India's.

Indonesia opened the window between July 1 2016 and March 31 2017. Indonesians outside the country who declared their wealth without repatriation within three months of the opening of the window could pay a tax rate of 4 per cent. Those declaring after three months but within six months were taxed at 6 per cent. Those utilising the last leg of the nine-month window were taxed at 10 per cent. Domestic declarants and those who repatriated their money were taxed at half the rate in the respective windows.

A Tale of Two Tax-hungry Nations
	Tax-GDP ratio	Tax-paying population	GDP	Population
Indonesia	17%	3%	$862 bn	258 mn
India	10.8%	1%	$2 trn	1.3 bn
Source: World Bank

The IDS-1 scheme in India, meanwhile, effectively taxed the declared illegal wealth at 45 per cent. This included the highest tax rate of 30 per cent plus a Krishi Kalyan cess of 25 per cent on the taxes payable plus a 25 per cent penalty on the taxes payable.

In the post-demonetisation scheme, the rates were effectively hiked to 50 per cent. This included 30 per cent tax on the income declared plus a 33 per cent surcharge on tax in addition to a 10 per cent penalty on the income declared. Twenty five per cent of the declared income would also have to be deposited in an interest free deposit scheme for four years.

Indonesia had meanwhile declared that expatriated offshore and onshore assets could not be transferred out of the country for three years.

Both India and Indonesia, despite these collections, still continue to have low tax-GDP ratios by OECD standards. Indonesia has a tax-GDP ratio of 10.8 per cent while India’s stood at around 17 per cent. Only 3.7 per cent of registered tax payers in Indonesia actually paid tax. India meanwhile faces a similar predicament.

Finance Minister Arun Jaitley in his budget speech put it eloquently: “Of the 76 lakh individual assesses who declare income above Rs 5 lakh, 56 lakh are in the salaried class. The number of people showing income more than Rs 50 lakh in the entire country is only 1.72 lakh. We can contrast this with the fact that in the last five years, more than 1.25 crore cars have been sold, and number of Indian citizens who flew abroad, either for business or tourism, is two crore in the year 2015. From all these figures we can conclude that we are largely a tax non-compliant society.”

Both Indonesia and India are not new to such schemes. Indonesia has tried such a scheme for the fourth time since 1964. India too had introduced a voluntary income disclosure scheme in 1997. While the effectiveness of these schemes in garnering a one-time windfall for nations is clear, the impact on ensuring better tax compliance and widening the tax base still remains unclear. With better global tax data sharing treaties like the US Foreign Account Tax Compliance Act (FATCA) now in place, both India and Indonesia will be hoping that their amnesty schemes go much further than they have in the past.