A Scheme For Disaster

These days the finance ministry is agog with matters concerning Voluntary Disclosure Income Scheme (VDIS). The entire machinery is focusing on the scheme, conferring a bonanza to people who have been evading paying income tax so far. With similar sustained enthusiasm and efforts, more money by way of tax (than by VDIS) could be collected. But that requires political will to unnerve the evaders and punish them. The VDIS exercise is more pleasant and is expected to be successful, because it is formulated and announced on request from willing people from parallel economy. What a fall in standards! Instead of being punished and socially boycotted, people running the parallel economy are being invited to tell what they are willing to pay for disclosing their evaded incomes!

 

The VDIS which has been thrust upon the people by the government needs to be examined for its pros and cons.

The positive points are:

Tax rates of 30-35 per cent are the lowest ever announced so far for such schemes;

Easy implementation. The total disclosed income is to be taxed in the year of declaration without any problem of spread over;

Applies to all corporate or non-corporate, residents or non-residents;

Single window clearance from the office of the commissioner of income tax ensures easy disposal and confidentiality;

A long period of 10 months has been given to declarants to manage their affairs and decide whe-ther to declare or not to declare;

Valuation problems minimised.

However the cons outweigh the pros, such as:

The scheme is morally and ethically deplorable. It puts a premium on dishonesty. Besides, they have an adverse effect on voluntary compliance;

Honest tax payers are harshly discriminated against. On the income on which they paid taxes ranging from 60 to 40 per cent on due dates, their unscrupulous brethern are being let off merely by paying tax at 30 per cent. And even this 30 per cent is a misnomer in as much as such persons must have earned much more than the tax (paid by tax deferral which is using the taxes due to the government and not paid for earning more income).

They demoralise the taxing machinery and blunt its initiative to check tax evasion;

Affects the governments credibility. It sends the message evaders roost the goose and government is unable to check their pernicious activities;

The tax revenues generated in the past nearly 10 amnesty schemes have been meagre and do not justify such schemes even on revenue considerations.

The work of the tax department goes out of gear during the amnesty period and efforts to augment revenue get blunted.

A long time has been given for the scheme to be operative. Further, its announcement four months in advance has given a lot of people the opportunity to manipulate their affairs and pay the least amount of tax even while making declarations under VDIS. There is no justification for continuing the VDIS for 10 months at a stretch.

There are some factors inherent in the scheme which may affect its success. These are:

The immunity provided under VDIS is only vis-a-vis IT functionaries. The state departments are not precluded, in exercise of functions under their respective acts, to ask for information with regards the amount credited in the books after payment of tax under VDIS. No confidentiality has been provided for such entries. If assessees are found to have paid lesser excise, sales tax and stamp duty which comes out from the credit in accounts, they can be proceeded against under the respective acts. Many state governments may not provide the cooperation solicited by the finance minister while launching the scheme.

No reasons has been ascribed as to why immunity from penal provisions has not been given under Section 71 of the Gift Tax Act, while providing such immunity under the income tax, wealth tax, Fera and Companies Acts.

The declarations made in confidence could be called for by: (i) any officer employed in the execution of the Income-tax Act or the Wealth-tax Act, or (ii) any officer appointed by the Comptroller & Auditor General of India or the Board to audit the IT receipts or refunds.

In case of declarations by companies the following problems can arise: (i) If the amount is credited in the account books after declaration, then shareholders, auditors etc can make enquiries about these. The company may not be able to deny the information called for as a confidential shield prima facie, relates to declaration and not what is credited in the account books. Further, the credibility of the company making entries for such amounts in books may also go-down in the eyes of the shareholders, creditors, and the public who deal with it.(ii) In case a company is a declarant under the sch-eme and if under any law penalty is leviable or prosecution is liable to be launched on any officer of the company (which may include a director or an auditor or a company secretary) Section 71 provides no immunity to such an officer.

With full convertibility expected in the near future, there may not be much attraction for those to declare who have stacked concealed incomes in foreign countries.

Therefore, such measures may give some revenue, at a very heavy social, ethical and other costs, but cannot provide a solution to the ever increasing menace of tax evasion and black money.

The solution to tax-evasion lies in strict enforcement and not in giving amnesty and VDS. A situation should be created where taxpayers will voluntarily pay, not because they have to but because they know that they have no other choice. This situation can never be achieved, if there are frequent am-nesties from the government, indicating its weakness to deal with tax evaders. It is a pity that instead of tackling the problem straight, the government is resorting to convenient and short cut methods which destroy the tax culture and voluntary compliance desire. Such measures may give some revenue, at a very heavy social, ethical and other costs, but cannot provide a solution to the ever increasing menace of tax evasion and black money.