Mr Jaitley, the New Black Money Scheme is Nothing but an Amnesty Scheme

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

In the budget speech finance minister Arun Jaitley made on February 29, 2016, he proposed: “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.”

So, if you have black money, and are willing to pay 15% extra to the government, over and above the top tax rate, the laws of the land won’t apply to you. As Jaitley further said in his speech: “There will be no scrutiny or enquiry regarding income declared in these declarations under the Income Tax Act or the Wealth Tax Act and the declarants will have immunity from prosecution. Immunity from Benami Transaction (Prohibition) Act, 1988 is also proposed subject to certain conditions.”

In an interview to the national broadcaster Doordarshan, Jailtey later said: “It’s not a VDIS (Voluntary Disclosure of Income Scheme) and it is not an amnesty.” Like a good lawyer, he did not specify what the scheme really is.

So what does the word amnesty mean? I looked for and managed to find my fifteen-year-old The Compact Oxford Reference Dictionary. The dictionary lists out two meanings for the word amnesty. Here are the two meanings: a) an official pardon for people convicted of political offences. b) a period during which people admitting to particular offences are not prosecuted (the italics are mine).

As Jaitley said during his budget speech: “We plan to open the window under this Income Disclosure Scheme from 1st June to 30th September, 2016 with an option to pay amount due within two months of declaration.”

Hence, anyone admitting to having black money during this period and paying the tax, the surcharge and penalty on it, will not be prosecuted under the laws of the land and will have immunity. This is precisely the Oxford Reference Dictionary’s meaning for amnesty – a period during which people admitting to particular offences are not prosecuted. 

So, even if Mr Jaitley does not want to call the government’s black money amnesty scheme, an amnesty scheme, it is nothing but an amnesty scheme. If you are willing to declare your black money, pay 30% tax and 15% extra on it, the law of the land will not apply on you.

Now compare this to advance tax which needs to be paid by the non-salaried income tax payers several times during the course of a year. As per Section 234C of the Income Tax Act, if advance tax is not paid on time, a fine of 1% per month needs to be paid on the total amount of tax outstanding. Hence, the government is basically treating everyone who has black money and has not paid tax on it, a little worse than someone who has not paid advance tax for a year.

Also, it is interesting that this time around the government wants those who have black money to pay only 15% extra and get immunity. In May 2015, the Parliament had passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Act. After the passage of this Act, the government offered a compliance window.

This window allowed those with undisclosed foreign assets and income(or foreign black money) to declare them, pay a tax of 30% and a penalty of 30%. The window was closed on September 30, 2015.

Taking advantage of the compliance window 638 declarants declared assets and income of Rs 4,147 crore in total. This meant that the government was able to collect around Rs 2,488 crore (60% of Rs 4,147 crore) as tax revenues.

For all the hype and hoopla that happened, the actual collection was basically very small. Did this failure lead to the government just asking for 15% extra this time around, instead of 30%, as was the case last year?

Further, is there a distinction being made between foreign black money and domestic black money? The domestic black money stays within the country and has some utility. It is spent on consumer goods and real estate. Hence, the money enters the domestic financial system and is income for many individuals.

So, even though tax is not paid on this money, it does have its utility. The same cannot be said about black money that has left the country. And is that why the government is handling those declaring black money in the next financial year, with kids gloves?

The one good thing that Jaitley has done is that he has not assumed the total amount of money he expects the government to earn through the black money amnesty scheme, as a part of the government income for the next financial year.

Guess there is no way to possibly estimate this. The last time the government launched such a scheme was in 1997. The scheme ran between July 1, 1997 and December 31, 1997. The scheme allowed individuals with black money to come out in the open and pay a tax of 30% on their black money. In case of others i.e. corporates and firms, a tax of 35% had to paid.

The government ended up collecting Rs 9,584 crore from around 4.75 lakh declarants. Nevertheless, the scheme was different from the one that will be launched in June this year, given that back then the black money wallahs did not have to pay any fine. This time around there is a 15% fine. Also, the response to the amnesty scheme on foreign black money launched last year, had had a thanda response.

Given these ifs and buts, it’s a good thing that the government has not made any assumptions about the total amount of money they expect to earn through this route. But this hasn’t stopped the stock market wallahs from trying to come up with a number.

Akash Prakash of Amansa Capital expects the government to earn Rs 50,000 crore through this route. He doesn’t explain how he came up with the number. The thing is that the government hasn’t gotten around to putting a number to the money it expects to earn is primarily because there is no way a reasonable estimate can be made.

In that scenario how did Mr Prakash come up with a Rs 50,000 crore number? Or like other fund managers was he just being optimistic for the sake of being optimistic? That as we know is a favourite pastime of the fund managers.

The column originally appeared on Vivek Kaul’s Diary on March 15, 2016

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