India: Modi Government’s Black Money Amnesty Scheme A Failure – Analysis


By Sandeep Bamzai*

Amnesty schemes are morally corrosive, there is absolutely no dispute on that basic premise. Simply because they provide an unfair advantage to people who dodge the bullet on taxes. And this is gun barrel straight, no questions asked. Hapless tax payers would argue that they do the right thing by paying their taxes and despite the stiff penalty, an amnesty scheme allows ingenious tax dodgers to get away with blue murder. But this is only part of the argument against an amnesty scheme, the other more compelling reason is that more often than not it is a failure in India given the size of the parallel economy.

Like the the black cash overseas stash amnesty scheme which ended at midnight on Wednesday. It has garnered a paltry Rs 3770 crore declared by 638 individuals and entities. A 90 day window which opened on July 1 with draconian penalty provisions has pretty much been laughed away by black money hoarders. The Government must obviously be stunned with the results given that it was tom tomming dramatic returns with half page advertisements in mass circulated dailies. In fact, at the presser on Thursday morning saw glum faces as the scheme has been an unmitigated disaster and a proverbial slap in the government’s face.

Prime Minister Narender Modi in his second Independence Day speech on August 15 had said Rs 6,500 crore of undisclosed income had already come through the compliance window, then. The window had started on July 1, and by August 15, it was only half way through. Under the scheme, those coming forward had to pay a total of 60% tax, which included 30% penalty. The tax and penalty on the income declared under the window has to be paid by December 31. The harsh penal provisions for those not declaring black money and other assets overseas included a 10 year jail term and even that has not scared the hoarders. A penalty of 120% and a jail term extending up to 10 years under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 hasn’t acted as a catalyst. The Government has egg on its face.

Even the government’s assurance, that information would be kept confidential in terms of Section 138 of the I-T Act did not see people coming forward. In panic, on September 28, just two days before the compliance window was to shut, a CBDT clarification also did not help. The clarification stated that those declaring illegal overseas assets would not face any penalty or prosecution under Foreign Exchange Management Act (FEMA) and four other laws – Income-Tax Act, Wealth Tax Act, Companies Act and Customs Act. The last domestic VDIS scheme was launched 18 years ago after which the Govt gave a commitment to the Supreme Court that it would never bring any tax amnesty scheme to bear in the country. Central Board of Direct Taxes launched on June 18, 1997 the Voluntary Disclosure of Income Scheme (VDIS) which provided income-tax defaulters an opportunity to disclose their income at the prevailing tax rates under the umbrella protection of immunity from major laws relating to economic offences. The tax payable on the disclosed income was 30% in the case of individuals and 35% in the case of other declarants, viz, corporates and firms and Rs 10,000 crore was raised at the time. A Public Interest Litigation was filed in the Supreme Court arguing that schemes like VDIS penalised honest tax payers and at the same time encouraged tax evaders. The government then had to give an undertaking to the Supreme Court that the VDIS was the last of its kind, and the government would not bring any such schemes in the future.

But in the 2013 budget, a desperate UPA announced an amnesty scheme for service tax offenders, termed Service Tax Voluntary Compliance Encouragement Scheme. The scheme was in effect till December 2013 and fetched the government around Rs 6000 crore. Finance Minister Chidambaram had later said the government will not be able to announce any more amnesty schemes for the next 20 years, due to various factors, including curbs imposed by the Supreme Court. “Such schemes cannot be announced every year. There is a Supreme Court judgement on VDIS which actually ties up our hands in announcing a scheme on the lines of VDIS,” Chidambaram was quoted as saying by the PTI.

Last October, a top brokerage had said that unearthing capital flight of black money abroad by Indians could be in the vicinity of $30 to 35 billion which would help shore up foreign exchange reserves. What we have got instead in just a tad over $500 million leaving blue sky between what the government thought it would garner and actual reality. The flop scheme is a huge setback for a Government which was committed to bringing back black money. What is worrisome is that other nations have succeeded while India has failed abysmally in this exercise. Brokerage Macquarie in a note last year had said that globally, voluntary disclosure seemed to be the most popular mechanism with countries such as the US, UK, Australia and many others introducing VDS in some form or the other pointing out that the US and Italy netted 3.6 billion euros and 5.6 billion euros respectively between 2009 and 2011 through tax amnesty schemes.

The black money hoarders have cocked a snook at the government and while the revenue department and CBDT may now go after defaulters, the horse has bolted and long gone. Even the 638 declarants, I am sure must be small fish who out of fear have come forward. The big fish remain outside the ambit of the dragnet. I wonder what the Supreme Court will have to say now.

*The writer is a Visiting Fellow at Observer Research Foundation, Delhi

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

Leave a Reply

Your email address will not be published. Required fields are marked *