The Obsession With Amnesties

Recently, the prime minister, while speaking before a trade chamber in Madhya Pradesh said his government was looking at certain tax amnesty schemes for harnessing black or unaccounted incomes. Similar views were also expressed by Ashim Dasgupta, finance minister of West Bengal (also an economist) in a meeting with the prime minister, leaders of trade and industry, and economists on December 31, 1996. While there will be many who may applaud the governments efforts to bring the tax offenders into the tax payers net, such thinking indicates the inexperience of the present crop of Indian policy makers.

To be just, this is not the first time that a government has turned to amnesty schemes for revenues. Voluntary disclosure of incomes and wealth has been freely resorted to by the countrys finance ministers in the past 50 years with little success.

 

A scheme for chanelling black money into the mainstream was conceived by the Janata Dal in 1990. The finance minister, in his budget, made a case for introducing a time-bound scheme which would permit undeclared incomes and hidden wealth to be used for one or more social purposes, such as slum clearance, building houses for the lower and middle income groups and setting up of specified agro-based industries in rural/backward areas. The source of such investments would not be questioned. The provisions were to be enacted after a thorough debate in the Parliament. However, the scheme did not get an enthusiastic response.

In fact, past experience with such schemes has shown that:

They mopped up only the black money already generated to a very limited extent. These were not effective at all for checking the generation of black money.

These schemes were greatly misused and led to lot of capital being built up in the hands of ladies, minors or benamidars.

Such schemes have also been criticised by expert committees and commissions. According to the Wanchoo Committee (1971), disclosure scheme is an extraordinary measure for abnormal situations such as after a war or at a time of national crisis. Resorting to such a measure during normal times and that too, frequently, would shake the confidence of the honest tax payers in the capacity of the government to deal with the law breakers and would invite contempt for the enforcement machinery. The committee has further said, We are therefore strongly opposed to the idea of the introduction of any general scheme of disclosure either now or in the future.

Also, the Choksi Committee (1978), while stressing the need for not giving into errant tax payers, has emphasised the need to promote the confidence of the tax payers in the tax administration. According to this committee, A climate of mutual trust and fair-play should be fostered so as to make for better voluntary compliance with the tax laws on the part of the taxpayers... Periodic measures for unearthing accounted income through disclosure schemes and other concessions considerably pollute the atmosphere. The frequency and the periodic regularity of such measures generate a sense of frustration amidst the body of honest taxpayers. It may gradually lead to a general feeling that non-compliance of tax laws can be indulged in and the results periodically cleared through the disclosures schemes. The frustration would be greater because, despite the recommendations of the various committees against such disclosure schemes, the government has in the past introduced them from time to time. We would like to reiterate that such measures will tend to breed disrespect for the tax laws and their administration, which in turn will seriously affect the functioning of the laws based upon voluntary compliance. There is, therefore, need for a clear statement that such measures would no longer be repeated and the errant taxpayers would necessarily be dealt with in accordance with the due processes of law.

The 1985 study on the black economy by the National Institute of Public Finance and Policy has also denounced the voluntary disclosure schemes saying that such schemes ...by holding out hopes of repetition in the future...reduce whatever deterrent effect exists in the current provisions for penalty and prosecution. And the Public Accounts Committee of the Parliament in their 17th, 76th and 123rd reports have made critical remarks about such schemes.

Experts have unanimously condemned the use of such schemes. And their contention is also borne out by the fact that such schemes have also come a cropper as far as revenue collections are concerned. Honest taxpayers therefore have a right to ask the government to justify the repeated recourse to such demoralising measures, where apparently there are no plus points.

What is needed is a multi-pronged drive against tax evaders and black money holders. Those who indulge in such anti-social activities by circumventing tax and other laws and frittering away the scarce resources of the nation must be punished. The need of the time is a creditable structure of sanctions against non-compliance of their effective implementation not giving sops and carrots of amnesties. Also, it would be incongruous to enact penalty provisions by an ordinance and also prescribe amnesties for dishonest tax payers.

The solution to tax evasion lies in strict enforcement not in giving amnesties and voluntary disclosures. This is where the greatest gaps between policy goals and implementation achievements are created, leading to lesser number of taxpayers and lower collections. Tax laws which are not effectively enforced are not obeyed. A situation must be created where most taxpayers will voluntarily pay what they should not only because they believe they ought to but because they know that they have no better alternative. This situation can never be achieved, if there are frequent amnesties from the government indicating its weakness to deal with the tax evaders. Hence what is needed are strict enforcement measures. The enforcement mechanism is based on simple rational choice calculations. Taxpayers are induced to pay voluntarily by turning payment into a less painful practice than evasion. Very simply, if the tax evader knows that not paying up would mean being convicted and sentenced to serve time in prison, it would make him follow the laws. It has been seen that the fear of being pulled up in public and the risk of losing ones reputation, friends and privacy is often enough of a deterrent.

A tax regime can never be successful which gives taxpayers the hope that if they are caught, they can still make a deal with tax officers (example Chapter XIV B in the Indian IT Act.) This is the result of ignoring criminal aspect in taxation. The Philippine Tax Commission has said: The emphasis on tax enforcement had always been on the assessment and collection of taxes.The criminal aspect of tax violations had been overlooked, as long as violators paid the taxes assessed against them. Thus the Bureau had been unable to generate the deterrent effect of convictions for tax evasion.

The Massachusetts Department of Revenue in January 1983 enacted a Revenue Enforcement and Protection (REAP) programme. It was to bring about a series of changes and innovations in the Massachusetts tax law. The highlight of these was emphasis of the stick i.e. threat and reality of punishment. REAP made tax evasion a felony, not a misdemeanor, and increased fines, penalties, and interest rates. To make these tough new laws credible, the Department stepped up its enforcement efforts dramatically. Seizures, for example, increased 440 per cent between fiscal 1983 and fiscal 1986. Audit, compliance, and criminal investigation efforts also were substantially bolstered. Before REAP, no one had ever gone to jail in Massachusetts for state tax evasion. In the last two years, six jail terms were handed down and more were in pipeline. The courts also have imposed record fines for criminal tax evasion.

It is only such an approach that can check tax evasion and generate revenue not the armchair approach used by Indian politicians and policy makers of giving repeated amnesties against the advice of experts and past experience with collections. By continuing to do so, the government will only demoralise honest taxpayers and risk a loss of credibility for itself and the countrys tax laws.

The solution to tax evasion lies in strict enforcement not in amnesties and voluntary disclosures. This is where the greatest gaps between policy goals and implementation achievements are created.