Sunil Jain: Careful on that VDIS

If there's an amnesty scheme every ten years, people will avoid paying taxes

No one’s quite confirming it, but there’s a strong buzz that the Budget will announce an amnesty scheme for black money. This time though, it is primarily aimed at the black money stashed away in Swiss banks — the BJP’s target audience! According to some, the idea is to get these worthies to subscribe to eight/ten-year bonds which don’t pay any interest or just a nominal one, much the same way that the Kisan Vikas Patra schemes used to operate in the earlier days — the loss of interest is assumed to cover the tax that would have been paid on the undeclared incomes. Once this lock-in period is over, the government will return the original amount in dollars/pounds/whatever.

Presumably the fact that a declaration has been made will not be used as evidence of a crime. So, if there is a case against X, and X declares $100 mn of funds, this $100 mn will not be used as ‘proof’ that X committed a crime — the crime will have to be proved separately. If the government is looking to get the Rs 25,00,000 crore supposedly stashed overseas, there is little doubt it needs to give such assurances. Otherwise no one’s going to bring the money back. Despite all the buzz about how the OECD countries are breathing down the neck of the tax havens (see https://www.business-standard.com/356306/ for a fuller explanation), the money is not coming back unless there are some amnesties from prosecution attached. It can even be argued that such a scheme will allow the government to access very low-cost funds and, who knows, the government’s spinmeisters may even argue the amnesty-bonds are not part of the fiscal deficit — they did this with last year’s oil bonds.

That said, a few things need to be kept in mind. For one, this hurts honest taxpayers — if there’s an amnesty scheme almost every ten years, as there is, why even bother to pay taxes, especially since the amnesty also lowers tax rates dramatically. Two, knowing an amnesty is around the corner also ensures there is no fear among tax-thieves — indeed, in the celebrated Voluntary Disclosure of Income Scheme (VDIS) that P Chidambaram designed/presided over in 1997, various assessees filed their tax returns under it since the tax rates were so much lower!

Most of the distortions in Chidambaram’s VDIS 1997 were reported in the press at the time, but these were examined in detail and documented in a report by the Comptroller and Auditor General (see http://www.cag.gov.in/reports/d_taxes/2000_book2/chapter6.htm for a summary). For starters, unlike any other scheme, VDIS 1997 allowed tax-thieves to choose how they wanted to value their assets/incomes. It did this in a novel fashion. It allowed those declaring their assets in bullion to value this at the prices prevailing on April 1, 1987 if it was bought before this — for the rest, it was the cost of acquisition. So, tax-thieves could buy bullion in 1997 but say it was bought before 1987 — since gold prices rose 84 per cent and silver 53 per cent between April 1, 1987 and the date the scheme was announced, this allowed them to lower their tax liabilities by 40-50 per cent.

Tax officers made it even better. They allowed people to value their bullion at even earlier dates — according to the CAG, some declared their assets in the form of silver utensils supposedly bought as far back as 1933-34, there were 113 cases where gold was declared at 1961 prices; properties in Mumbai and Kolkata were declared as being worth Rs 5,530! The CAG documents various tax circulars asking taxmen not to probe declarations beyond a point; though the Act prohibited those accused in various scams from using the amnesty, 17 accused in the cobbler scam in Maharashtra and eight in the hawala scam were allowed to use the scheme. Around 25,000 people declared zero incomes in 1997-98 and chose to file under VDIS since the effective tax rates there could be as low as 2-3 per cent. According to the CAG, this led to an under-valuation of Rs 1,731 crore and a tax loss of Rs 519 crore. Under certain circumstances, this could go up to Rs 9,671 crore and Rs 2,901 crore, respectively.

So, even if the government goes ahead with an amnesty scheme it needs to ensure it doesn’t deteriorate into a pro-tax-thief scheme like VDIS 1997. Given the BJP’s or even the CPI(M)’s record in coming down on the government on issues that matter, though, it is extremely unlikely anyone will protest even if it does.