A Flash Of White, Then Fade To Black

But what was the objective of introducing VDIS? Alas, the objective had never been stated by the policy makers. But, their various statements suggest that the objectives were one or more of the following three: (1) to collect revenue, (2) to widen the tax net, or (3) to tackle the problem of black money by harnessing it for productive purposes. Let us examine the schemes so-called success in terms of these objectives turn by turn.

To collect revenue: Here again, we were never told that if revenue collected through VDIS turned out to be, say, Rs 5,000 crores or more, it will be treated as a success. In the absence of any specific target, whatever may be actual collection, the official spokesmen can conveniently say that the amount was much higher than expected, and therefore VDIS was a success; and detractors can always conclude that the amount was paltry and therefore the scheme was a failure.

 

My view is that irrespective of how large the revenue collected was, the scheme cannot be possibly considered a success on this count. Let us take the figure of Rs 10,000 crores. This represents approximately Rs 33,000 crores of concealed incomes disclosed. Out of this 77.5 per cent (or about Rs 7,750 crores) is to be distributed among the states; and Rs 2,250 crores will be left for the centre. State governments can all be counted upon to use this one-time receipt as an excuse to finance increased revenue expenditure. The leakages inherent are too well-known to need elaboration here.

Consider next the centres share of Rs 2,250 crores. The Finance Minister (FM) promised in his Budget speech that this amount will be utilised towards financing the Basic Minimum Needs services programme and infrastructure needs. If only the FM had promised that every rupee from the VDIS collections will be used to retire a part of Rs 3,68,682 crores internal debt, and thus to reduce the interest burden of the national debt by about Rs 700 crores per year, he would have deserved all-round support. In that way, the dishonest black-money-wallahs would have at least helped indirectly to reduce the burden of honest tax payer.

But the FM has actually promised to increase government expenditure, which will have a multiplier effect in the future. Thus, in the absence of another VDIS, this increase will have to be financed by additional tax burden or additional borrowing year after year. The scheme is such that the larger the collections, the messier the fiscal problem will become.

To widen the tax net: In a meeting in Mumbai, the FM explicitly stated that he was not so much concerned with the amount collected under VDIS, than the widening of the tax net, as this would improve tax collection in future years. Out of the reported 4,60,000 VDIS declarants, can we really assume that many were filing any income tax returns for the first time? It is more likely that most of them had already been filing returns, but grossly under-reporting their real income. In this sense, VDIS will not widen the tax net, although it may probably deepen the existing tax net.

Moreover, for `widening the tax net, a low marginal tax rate is more relevant. If 30 per cent is considered low enough, that itself should do the trick. We do not need an awards-giving ceremony for past sins to achieve that purpose.

To harness black money for productive purposes: This is a large and complex subject. But, a few point need to be underscored.

n More than ten years ago, the government had commissioned a study by the National Institute of Public Finance & Policy (NIPFP) on various aspects of the black money problem. One of its findings was that black money amounted to around 18 to 21 per cent of GNP. Some analysts have felt that this estimate is too low, and the true figure could well be around 50 per cent, if not more. Has the percentage gone down or gone up from whatever level it was then? There has been no such subsequent study.

To give ample benefit of doubt to the authorities, let us proceed on two assumptions: First, that the NIPFP estimate is reasonable. Secondly, in view of many economic policy measures taken after 1991 (notably, lower tax rates, deregulation, more realistic exchange rates, gold imports, higher salaries to bureaucrats etc), the percentage has probably gone down to some extent and that black money generation currently is about 10 per cent of GNP. (I know, many serious thinkers will laugh at both these assumptions).

With GNP at about Rs 12,600 abja (or billion), the black money being generated would be Rs 1,26,000 crores per year. Assuming that Rs 33,000 crores of black money is disclosed under VDIS, this means that it will take the Indian economy barely three months to generate black money equivalent to the amount disclosed under the scheme.

n The VDIS disclosures are for concealments over past years; that is, VDIS will disclose black wealth being amassed out of black money incomes earned year after year in the past. The figure of total black wealth will be many times higher.

n It will be grossly incorrect to assume that black money earned is all lying idle. Not only does the system have its own effective laundries, but black money is very much in productive use. Also, some black money has to be kept black because there are numerous transactions where only black money will do. (You cant give bribes by cheques, and you cant declare bribes taken in your income tax return, howsoever low the marginal tax rate may be).

n The problem of black money has two facets: we must clear the dirty pool of accumulated black wealth, and, at the same time, stop the streams of black money that add to this pool. At best, VDIS is a cosmetic remedy aimed at reducing only the existing pool. But the problem can never be tackled unless the fresh streams are stopped, by removing the causes that generate black incomes (one of which is public expenditure itself, which VDIS has only served to perpetuate further).

The conclusion is thus inescapable that VDIS has not achieved, and cannot achieve, any of its own pronounced objectives. Each of these objectives are of course laudable. But there are far better instruments of economic policy available for achieving them. In that case, has VDIS at least achieved something else worth achieving? Here too, the answer is discouraging.

The tax evaders have had a field day. As if the rewards offered to them in the scheme were not seductive enough, the government went on issuing explanations and clarifications in such number and sweep that it became possible to get away by paying practically no tax at all. In fact, many are believed to have disclosed far in excess of the truly concealed incomes, so as to provide for the future!

Moreover, for jewellers, lawyers and tax consultants, VDIS became a lucrative industry, even as honest tax payers watched this shameless show with dismay, anger and helplessness. The governments concern for 100 per cent peace of mind for tax evaders was touching. But has the government shown even one-tenth the concern for the peace of mind of honest tax payers? The harassment meted out to them by the I T department is legion.

The economic and fiscal system should, at its best, reward the honest and the enterprising, while at the same time eliminate or punish the dishonest. But a system that demoralises the honest, and makes dishonesty a perpetually rewarding enterprise, is no good.

In effect, the best part of VDIS has been the officials assurance that this is the last of such schemes, and that it will not be repeated. I have my own doubts, of course. To by cynically frank, I am absolutely certain that another and yet more attractive scheme will one day be born under a somewhat similar garb. I am not looking forward to that day.

(The author is Consulting Economic Advisor at Centre for Economic Policy Advice, Mumbai)