What the Media Did Not Tell You About the Black Money Scheme Part 2

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Note: This piece is similar to the one I wrote yesterday. It’s just a much better way of expressing the same thing. Ideally, this is the piece I should have written yesterday. But sometimes one does end up taking a longer route to arrive at the same destination.

Human beings have a habit of looking at absolute values and ignoring the denominator. Economists refer to this tendency as the denominator neglect.

The denominator neglect has been at full show in case of the Income Declaration Scheme which came to a close on September 30, 2016. The scheme had been in operation since June 1,2016. It offered people who had black money within the country to declare it to the government, pay a tax of 45 per cent on it and become a part of the system.

Black money or unaccounted or hidden wealth, is essentially income that has been earned over the years, but on which taxes have not been paid.

The government of India got declarations of Rs 65,250 crore of black money under the scheme This money will be taxed at the rate of 45 per cent. It means collections of Rs 29,362 crore for the government.

The scheme has been declared to be a huge success by the government as well as the media. The government press release announcing the black money declarations said that there has been “a tremendous response from the general public, especially in the last two months”.

The media led by The Times of India went to town saying that the collections had been three times bigger than the collections of the Voluntary Disclosure of Income Scheme(VDIS) of 1997, the last black money declaration scheme that the government had launched.

The total amount of black money declared in VDIS 1997 had stood at Rs 33,000 crore. The corporates had to pay a tax of 35 per cent on the black money declared whereas others (primarily individuals) had to pay a tax of 30 per cent. This led to a collection of around Rs 10,000 crore for the government.

The collections in the Income Declaration Scheme of 2016 are expected to be Rs29,362 crore or around Rs 30,000 crore. This is three times bigger than the 1997 number or so the media seems to have concluded.

The trouble is this is wrong. What the media hasn’t taken into account is the denominator or the size of the Indian economy, which has grown significantly bigger in the last two decades. The nominal gross domestic product(GDP) at current prices, a measure of the size of the economy, in 1996-1997 (the financial year before the VDIS 1997 scheme) was Rs 13.02 lakh crore. The total tax collected by the government in VDIS 1997 amounted to around Rs 10,000 crore. This was 0.77 per cent of the GDP.

The nominal GDP at current prices in 2015-2016 (the financial year before the Income Declaration Scheme of 2016) was Rs 135.76 lakh crore. This is 10.4 times more than the GDP in 1996-1997. Hence, the size of the economy is 10.4 times bigger, though the tax collected has grown only three times.

The tax the government expects to collect from the Income Declaration Scheme of 2016, is Rs 29,362 crore. This amounts to 0.22 per cent of the 2015-2016 GDP.

This is significantly lower than the tax collected in VDIS 1997. The media obviously did not take the size of the Indian economy into account before going to town about the success of the scheme. The denominator neglect was at play.

One reason for lower collections in the 2016 scheme lies in the fact that the rate of tax to be paid is 45 per cent. In the VDIS of 1997, it was 30 per cent or 35 per cent. Of course, more people are likely to declare black money at a lower rate of tax. But even after taking this into account, the difference between 0.77 per cent of the GDP and 0.22 per cent of the GDP, is fairly significant.

In fact, if the idea was to ignore the size of the Indian economy, then the media could have come up with an even better result. Instead of taking the VDIS of 1997 and saying that the tax collected in the Income Declaration Scheme of 2016, will be three times bigger, it could have taken the Voluntary Disclosure Scheme of 1975.

The total black money disclosure in case of this scheme was Rs 738 crore and the total tax collected stood at Rs 241 crore. The total tax expected to be collected under the Income Declaration Scheme of 2016 is Rs 29,362 crore, which is 122 times bigger.

The point being that even though the government has managed to collect some reasonable amount of tax under the Income Declaration Scheme of 2016, it is nowhere as significant as it is being made out to be.

Postscript: The Business Standard reports only 15% of black money declarants came in on their own. If the remaining 85% were forced to declare black money, why is there the need for amnesty schemes like the Income Declaration Scheme?

This also tells us that the IT department knows who the black money wallahs are. Business Standard reports that the IT department sent letters to 7 lakh possible evaders asking them to avail of the Income Disclosure Scheme. Why is there a need for amnesty schemes to do something like this? Why can’t such things be done during the normal course of things?

Of course, this is the benefit of hindsight. But there are lessons to be learnt here.

The column originally appeared in Vivek Kaul’s Diary on October 4, 2016

What the Media Did Not Tell You About the Black Money Scheme

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The Income Declaration Scheme(IDS) which ended on September 30, 2016, led to the declaration of Rs 65,250 crore of black money. Black money is essentially money which has been earned but on which taxes have not been paid.

The declarations will be taxed at the rate of 45 per cent and hence, are likely to net the government Rs 29,362.5 crore, over the next year. Half of this amount will have to be paid during the course of this financial year by March 31, 2017. This basically means that the government will get Rs 14,681.25 crore, in this financial year. The remaining amount has to be paid by September 30, 2017.

The media, as usual, has gone on an overdrive, highlighting the success of the scheme. One comparison that has been made is with the Voluntary Disclosure of Income Scheme(VDIS) of 1997, the last black money declaration scheme offered by the government.

The October 2, 2016, Mumbai edition of The Times of India ran a graphic around this on its front page (given the number of advertisements that appear before the front page these days, one can hardly call the front page a front page these days). This graphic essentially said that the Income Declaration Scheme of 2016 has been 3 times bigger than VDIS of 1997. The logic for this is very straightforward. The total amount of black money declared under the VDIS 1997 was around Rs 33,000 crore. The tax collected on this at the rate of 30 per cent amounted to around Rs 10,000 crore.

The tax to be collected in the Income Declaration Scheme is three times at close to Rs 30,000 crorer. An editorial in The Economic Times published on October 3, 2016, states: “This is three times as much as the revenue garnered from the amnesty scheme of 1997.”

The trouble with this analysis is that it is very simplistic. The Indian economy now is significantly bigger than what it was in 1997-1998. The nominal GDP (a measure of the size of the economy) was 9.4 times bigger in 2015-2016 in comparison to 1997-1998. But, the total amount black money declared is only 2 times more (Rs 65,250 crore now in comparison to Rs 33,000 crore then). The tax collected is likely to be three times bigger.

Shouldn’t these basic factors be taken into account before declaring that tax collections are likely to be three times bigger? Also, the total number of declarants of black money in 2016 are 64,275. As per this Outlook story, the total number of declarants of black money in 1997 were 4.7 lakh.

The number of declarants in 2016 are way fewer than 1997, primarily because the black money declarations are now being taxed at 45 per cent against 30 per cent earlier. If the tax on the black money had been fixed at 30 per cent, the total number of declarants would have been more.

The trouble is that once we take all these factors into account, then the situation no longer remains simplistic. And once the situation is not simplistic, straightforward headlines which newspapers specialise in become difficult.  After taking all these factors into account, it is not so straightforward to say that the tax collected is three bigger.

Another factor that the media missed out on is the rise of the services sector as a part of the overall economy. The share of the services sector in the GDP has risen from 47.5 per cent in 1997-1998 to 59.93 per cent in 2013-2014.

As Arun Kumar points out in The Black Economy in India: “The services sector lends itself to black income generation since a) valuation of activity is difficult and b) it has a large component of the unorganised sector in it.”  Hence, it is safe to say that the total amount of black money as a share in the economy has risen over the last two decades.

Once these factors are taken into account, the Income Declaration Scheme no longer seems like the success it is being made out to be. Although it must be said that the government’s effort to tap into domestic black money has been much more successful than its effort to tap into black money that has left the shores of this country.

Last year the government had launched a black money window for foreign assets. Taking advantage of the compliance window, 644 declarants declared assets and income of Rs 4,164 crore in total. This meant that the government was able to collect around Rs 2,498.4 crore (60 per cent of Rs 4,164 crore) as tax revenues.

In comparison to this the Income Declaration Scheme for domestic black money has definitely been a success, but in the overall scheme of things, it is clearly not the success that it being made out to be.

Also, one danger that remains with all income declaration schemes is that they make the individuals who pay tax on time, year on year, look like idiots. Such schemes essentially tell people that as long as you are willing to pay a small penalty in the years to come, you can postpone the payment of taxes by paying a small penalty.

The Comptroller and Auditor General looked into the declarations that were made under the 1997 scheme and made some interesting observations. As it said: “The track record of declarants showed a clear scenario where they were found to have taken advantage of earlier Amnesty Schemes too…The Scheme was not in the interests of revenue and in fact it provided one more opportunity to dishonest assesses to pay tax at a preferred rate and then retire to the old habit of concealing income.”[i]

But for governments the black money amnesty schemes are an access to easy money, instead of making the more difficult decisions like shutting down loss-making companies (which to its credit the Modi government has started to push now).

To conclude, the real success of the scheme will be in the data that it will end up collecting. It needs to be made sure that the 64,275 individuals who have declared black money under the scheme, continue to pay tax in the years to come. That will be the real success of the scheme.

Hopefully, it is also the last of such schemes and in the years to come the government uses more and more information technology on expenditure data, in order to identify those who have black money and get them to cough up their share of taxes and fines. In the long-term, the only way of getting people to pay taxes is to get them to respect the system and at the same time ensure that the income tax laws are made simpler.

Postscript: If you want to read about black money issue in detail, subscribe to The Vivek Kaul Letter.

[i]A.Kumar, The Black Economy in India, Penguin Books India, 1999

The column was originally published on October 3, 2016, in Vivek Kaul’s Diary