Windfall Gains On Vdis Jewellery Declarations

There is a scam in the making in the recently announced Voluntary Disclosure of Income Scheme (VDIS), with speculators valuing recently bought jewellery at 1989-90 prices in order to book tax-free speculative gains.

Such manipulation, according to tax experts, has been made possible on account the bullion price differentials between then and now and the timing of the announcement of the VDIS scheme. An assessee buying jewellery at current rates (around Rs 4,300 per 10 gm) can declare it at peak 1989 prices, supported either by a valuation report or a signed affidavit. Both are easy to obtain. The government has already publicised immunity to assessee for declarations made under the scheme.

 

Tax experts point out that the beauty of the scheme lies in the fact that establishment of date of purchase of jewellery is difficult, hence few declarants face the prospect of being caught. Besides, no declarations under the scheme are expected to be backed by bills, since by definition concealed wealth has to be the result of black transactions.

The expertssaid the scheme is being exploited by speculators. From the tax point of view, jewellery disclosed under VDIS would attract 30 per cent tax. Along with the tax concession, the assessee is promised immunity from penal action for information arising from the disclosure.

If the gold prices rise even if they do not soar to previous peaks the assessee can sell the jewellery and book losses. Under the Income Tax Act, losses booked can be offset against other capital gains during that financial year or can be carried forward for seven years. This means that there is a flexibility attached to the date of sale of the jewellery.

Additionally, if the domestic bullion prices soar, legitimate speculative gains stand to be made tax free, since on paper, the gains would arise on account of jewellery bought in 1989 and sold at a future date. Tax experts attribute the spurt in domestic gold prices, at a time when international gold prices are falling, partially to VDIS. With the withdrawal of this scheme next year, the domestic demand for gold is expected to fall to normal levels.

The Central Board of Direct Taxes requires some proof of purchase for declarations made under the VDIS. However, it recently clarified that an affidavit specifying the year of purchase of jewellery would constitute evidence for purposes of VDIS. It further added that in case the jewellery has been valued for some purpose, a copy of the valuation report mentioning the date of valuation would also be treated as some evidence of the year of purchase.

Tax consultants say the scheme should be heralded not for the revenue receipt potential but for the losses that the government stands to suffer. The scheme has been opposed by income tax department officials who feel that it will signal the wrong message to honest tax payers and make tax implementation difficult in future.

Besides, they argue that it is not worth promising immunity to dishonest tax payers when the potential yield from the scheme is expected to be no more than 5 per cent of the total income tax collected annually. So many concessions for such a low yield are not worth it, the officials said. Although VDIS receipts have not been built into the 1997-98 budget, the department has targeted around Rs 4,800 crore as revenue receipts from the scheme.

The Federation of All India Tax Practitioners Association recently filed a public interest litigation before the Mumbai High Court contesting the VDIS scheme as being discriminatory to honest taxpayers. The court however dismissed the petition a fortnight ago on the grounds that the scheme was in order.