What Price A Dream Budget

The 1997 Finance Bill is now an Act with minor changes. It has some good features for which the finance minister needs to be complimented. However, it has many highly debatable provisions. These relate to the voluntary disclosure scheme (VDS), bringing down the maximum marginal rates to 30-35 per cent and the refusal to exempt dividends from UTI and mutual funds.

The VDS has been justified on the ground that the country has a long history of non-compliance with tax laws. Hence, there is a need to introduce a culture of compliance. It will ensure this by giving one chance to everyone to come clean on board. Defaulters have been induced to come to the tax net by giving them a maximum rate of 30 per cent because the cost of managing the black money was estimated to be only 18 to 28 per cent when the tax rate was very high... So instead of a private party taking this money, the government has itself decided to grab this income by offering a rate of 30 per cent for conversion of black money into white.

 

Much has been said and written about the adverse effects of VDS. But it has failed to convince the finance minister of the pernicious impact of such schemes.

In this context, I cannot resist the temptation to quote K Srinivasan, (a former CBDT member) from an article written in 1996 and published in Taxman under the caption Disclosure itch. He wrote:

Tax amnesties are a tacit admission of the administrations failure. In effect, they amount to punishment of the honest taxpayers. We have had too many of them in one generation. There can be no two opinions on the fact that they are not merely repugnant to public policy but also ineffective as a long-term solution to the problem of tax evasion. Top bracket taxpayers have always treated VDS with cynical indifference in the past, and for most of the middle level assessees the schemes have become routine rituals... Some taxpayers have availed of each disclosure scheme with touching regularity in the past, but the department cannot obviously be reduced to the position of a permanent confessional for a few penitent assessees with periodical stirrings of conscience. The tax raised through concessions to tainted money in the past has been illicit income, and wealth that have been brought into the mainstream of the economy through such schemes would also appear negligible in comparison with the estimates of

unaccounted income and wealth made by economists from time to time. In these circumstances, one wonders whether the game is worth the candle. However, it has been pointed out that history has a way of repeating itself and that the cyclical itch for disclosures is in the air again... If a fresh VDS is announced it may not be the first one... On the contrary, it may become part of long-term policy of the government borne out by experience, though not declared as such. It will be idle to expect errant taxpayers to take the law seriously in such an event, for they may prefer to persist in habitual evasion for the present and wait for the next disclosure scheme for salving their conscience.

Unfortunately, one more VDS has been clamped on the nation, ignoring the demoralising effects and failures of previous ones. To evoke a response from the present scheme, it has been said that behind the velvet glove, there is a firm fist. Similar statements were made in the past, but the fist never struck anyone!

More importantly, such schemes do not check the generation of black money, which is a flow not a fund. Black money without any governmental impediments or fear flows into socially harmful activities. The Finance Act contains no proposals for checking its growth.

On the lowering of tax rates, it has been said that Indias tax rates should be competitive at Asian levels and encourage savings and capital formulation for investment. However, many countries have higher tax rates and their growth has not been affected in any way. For example, in Japan the corporate tax is about 45 per cent and capital gains tax is 37.5 per cent. Further, it is not merely the tax rate that induces inbound investment. The other factors that are taken into account are (i) basis of taxing income from foreign source (ii) credit for foreign taxes (iii) tax consequences of ultimate distribution of foreign source income (iv) treatment of income and losses (v) transfer pricing mechanism (vi) regulatory issues (vii) stability of the government. Therefore, these aspects need to be given more attention rather than just reducing tax rates.

Non-exemption of dividend income from the UTI and mutual funds has been justified on the ground that the majority of incomes from these undertakings comprise capital gains and interest and very little comes from dividend (merely 8 per cent in the case of UTI). Hence, dividend income, if taken to its logical conclusion, would require breaking up of dividends received into capital gains, tax exempt and other income in unit holders hands for taxing these on that basis, making UTI and mutual funds mere conduits for unit holders. Obviously, the reason given for not exempting dividends from such income is unconvincing and is against the concept of neutrality in a tax system.

Thus it can be said that unjust tax proposals benefiting the richer sections of the population and tax delinquents have been unanimously approved by the UF government. It is amusing to find that some peoples representatives first approve the unfair proposals by withdrawing their objections and then say that these would be taken to the people for their approval or disapproval!

Much has been said and written about the adverse effects of VDS. But it has failed to convince the finance minister of the pernicious impact of such schemes.