Mr Jaitley, You Just Made Every Honest Tax Payer Feel Like An Idiot

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010The finance minister Arun Jaitley presented his third budget today. It was expected that Jaitley would take steps towards improving the number of Indians who pay tax. But that doesn’t seem to have happened, instead he has proposed to launch an amnesty scheme for those who have black money within the country.

The point to increase the number of Indians who pay tax was an important part of the Economic Survey which was tabled before the Parliament on Friday i.e. February 26, 2016. As the Economic Survey points out: “Controlling for the level of democracy, India’s ratio of taxpayers to voting age population is significantly less than that of comparable countries. This implies that while at present about 4 per cent of citizens who vote pay taxes, the percentage should be about 23.”

The Survey further points out that around 85% of the country is outside the tax net. One clear impact of this is that the government is not able to raise enough taxes as it could. The other impact of not enough people paying tax to the government, is that a huge amount of black money builds up in the Indian financial system. The prime minister Narendra Modi had talked a lot about getting the black money that has left the Indian shores back to India, in the run up to the Lok Sabha elections of 2014.

After coming to power, the government did try and launch a scheme to get people to declare their overseas black money and pay a tax as well as a fine on it.

On this “declared” black money, the government planned to charge a tax of 30 per cent and a penalty of 30 per cent. During the compliance period offered by the government, 638 declarants declared assets and income amounting to Rs 4,147 crore. The amount collected was very low, given the huge amount of black money within the country. What this told us clearly is that the government’s plan to uncover black money was a complete damp squib.

The point is that it is next to impossible to get back black money that has left the shores of this country. It could have found its way into any of the around seventy tax havens, all across the world. Even the United States has not succeeded on this front.

Despite this, the Modi government continues to be obsessed with the idea of getting back black money from abroad.  As Jaitley said during the course of his speech: “Our Government is fully committed to remove black money from the economy. Having given one opportunity for evaded income to be declared once, we would then like to focus all our resources for bringing people with black money to books.”

Further, Jaitley also proposed an amnesty scheme for people who have black money within the country. As he said: “I propose a limited period Compliance Window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income.”

Those who declare black money within this compliance window will not face any scrutiny or enquiry under the Income Tax Act or the Wealth Tax Act. They will also have immunity from any prosecution as well.

There are a few points that need to be raised here. First and foremost, the question is how will Jaitley and company get around the Supreme Court on this. The last time such a scheme was launched was in 1997, when P Chidambaram was the finance minister of India. This led to a declaration of Rs 33,000 crore of undisclosed income on which the government collected Rs 10,000 crore tax.

Nevertheless, this led to a lot of outrage and the government had to commit to the court (essentially Chidambaram and the then revenue secretary NK Singh) that there wouldn’t be any amnesty scheme in the future. The question is how will the government get around this?

Also, any amnesty scheme makes the people who honestly pay their taxes look like fools. It tells them they would have been better off not paying taxes. In fact, in his last budget speech in February 2015, the finance minister Jaitley had said: “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully.”

Doesn’t a black money amnesty scheme lead to greater inequity now, Mr Jaitley? 

Further, in June 2015, the union cabinet launched the “Housing for All by 2022” scheme. If the government is serious about this, it needs to some better thinking on how to stop the generation of domestic black money. Jaitley’s budget clearly missed out on that front.

In the past, the Modi government has also opposed the idea of bringing political parties under the ambit of the Right to Information Act. This is not surprising given that it is black money that continues to finance the election costs of the political parties of this country.  It needs to be said that any other political party in power would have possibly done the same.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on February 29, 2016