Vds The Past Experience

The present voluntary disclosure of income scheme (VDIS) is the fifth in the series of such schemes since 1951, and the seventh if we take into account the scheme of special bearer bonds in 1981 and the amnesty scheme of 1985.

Every time such a scheme is introduced, strong views are expressed both in support and against it. The support is based on economic or fiscal grounds. The opposition is on grounds of equity or ethical considerations. Let us see how far the past schemes have justified themselves on fiscal grounds.

According to the relevant exports of the Comptroller & Auditor General of India (CAG), the first three voluntary disclosure schemes (1951, 1965 no.1 and 1965 no.2) brought in a measly additional tax revenue of Rs 61.14 crore. The VDS introduced in 1975, however, got a better response with a larger number of cases (over 2,50,000) and yielded an additional revenue of Rs 249 crore. Even so, the total fiscal yield to the government from these four schemes was only about Rs 310 crore. The amnesty scheme of 1985 yielded a revenue gain of about Rs 460 crore comprising income tax of Rs 388 crore and wealth tax of about Rs 71 crore.

 

The special bearer bonds introduced by the government in 1981 as a part of its public debt brought in over Rs 960 crore. Although this was only a loan receipt for government, it was undoubtedly the most simple and successful of all schemes. (Under the scheme, bonds had a maturity period of 10 years and carried a simple interest of 2 per cent per annum against the prevailing coupon rate of 9 per cent compounded half-yearly on government securities of similar maturity.) The governments gain by way of saved interest amounted to over Rs 800 crore from these bonds. However, the lacuna of this scheme was that the money which surfaced in 1981 again disappeared because the bonds were encashable across the counter. Thus on economic or fiscal considerations, except the special bearer bonds, all other schemes cannot be deemed successful.

On the other hand, on equity or ethical considerations, all the schemes (except the bearer bonds) drew severe flak not only from expert committees and fiscal research institutions, but also from successive parliamentary committees and the CAG. The Public Accounts Committee (PAC) in its report in 1967-68 recommended strong administrative measures to arrest tax evasion rather than to allow malignancy of evasion and seek its cure by VDS. Again in 1978-79, the PAC expressed its dismay that whereas the problem of black money remained untackled, the government still relied on VDS which were of dubious value to revenue but had a distinct demoralising effect on the honest taxpayer. The CAGs review of the amnesty scheme (Report no. 7, 1990 -- Union government) brought out that whereas the additional revenue of Rs 459 crore secured by the government worked out to just 13 per cent and 0.9 per cent of income/wealth tax, the amount of interest/penalty waived aggregated over Rs 471 crore. The report brought out how these taxpayers had been able to convert their black money into white by paying a small amount of conscience money.

Thus in all the voluntary disclosure schemes so far, the ethical argument had clearly out-weighed the economic achievement. What will be the outcome of the present scheme is hard to say at the moment; particularly because of apprehensions and ambiguities still haunting it. Having taken the decision to launch the scheme and earmark the revenue for social/industrial infrastructure, the government would do well to remove the ambiguities and allay the apprehensions of potential declarants. More important, in the present context, is the question of ways to divert the outflowing stream of subterranean income into the mainstream of fruitful economic activity.

At present, we have a situation where, on the one hand, even on a conservative estimate, an equivalent of 10 to 20 per cent of GDP (the 1995-96 GDP estimates of about Rs 9,85,800 crore) finds its way into the parallel economy and is unavailable for any fruitful investment. It only distorts social and economic systems. On the other hand, there is a desperate need for massive investments in both social and economic infrastructure. The report of the Expert Group on the Commercialisation of Infrastructure Projects (Rakesh Mohan Committee) has brought out the magnitude of investments needed in the short and medium term in the infrastructure projects. The committee has projected a total requirement of Rs 40,00,000 crore to Rs 45,00,000 crore over the next five years for the infrastructure investment, which could rise to Rs 75,00,000 crore for the following five years, i.e, 2001-2, 2005-6. This magnitude of investment is clearly beyond the capacity of the government. The flow of FDI has been poor and domestic private investment in infrastructure even poorer. Larger FDI is itself dependent on a strong and efficient infrastructure. We are thus at a stage where within the system vast funds are being kept clandestinely; but at the same time critical sectors of economy are getting starved for want of investment. Given the experience and the efficiency of our tax administration, it is difficult to believe that funds of the magnitudes required will be forthcoming through this VDS or any other scheme of the same nature.

Time has, therefore, come for the government to shed its inhibitions and bring out schemes which will meet both the ethical and the economic argument. One of the ways for meeting the objective would be for the government to float earmarked infrastructure bonds (like power, telecom, road etc) with following broad features.

A 10-year bond should carry a coupon rate of 5 per cent and a 15- year bond a rate of 7 per cent, i.e, half the normal coupon rate.

Investments could be made without limit.

No questions to be asked about the source of investment.

Unlike bearer bonds, the infrastructure bonds should bear the name and permanent account number of the investor.

There should be a specified lock-in period.

The interest should be taxable; but bonds could be kept free from wealth tax, and;

The bonds should be on tap for a minimum of five years, i.e, they should be issued every year with a coupon rate which is 50 per cent of the normal government security rate.

Only when the government lifts the sluice gates of the concealed income reservoir sufficiently widely and for a longer period can it expect substantial results.

(A C Tiwari is former Deputy Comptroller & Auditor General of India)