Income Declaration Scheme - Analysis

India's tax to GDP ratio is one of the worst globally. Undeclared income has been ferreted away over the years and currently estimated to run into trillions of rupees. In this context, the following article seeks to analyse another bid to unlock this stash -- Income Declaration Scheme (IDS) 2016, (announced in the Union Budget).

The Govt of India has opened a window for those who have not declared their income correctly in earlier years, to come clean this year. While the IDS last year sought to tackle black money stashed overseas, this year’s scheme is limited to domestic income that has escaped tax.

The Government planned to collect a sizeable sum through this move; some estimates pegged the likely collection above ?50,000 crore. Yet, inspite of positive hopes, some believed that the rate of tax is too high to elicit good response. Others raised apprehensions regarding a clause that the assets declared should be taxed based on their current market value would hold back declarations. 

However, a massive haul - an income disclosure of Rs 65,250 crores is a laudable. To get 64,275 people and entity to declare undisclosed income in a country that does not have a culture of tax compliance is impressive. This works out to an average of little over Rs 1 crore per disclosure. In the entire country, as per 2012-13 data, only 14 Lakh Indians are in 30% slab. While, people with above Rs 1 crore income are even less. In view of that, to get 64,275 people seems to be a milestone achieved.

Since this sum had not been included in the Budget, it could go a long way towards helping garner funds for infrastructure and other essential spendsThe Govt would eventually collect Rs 29,362 crore- around 0.25% of GDP- in tax from this scheme, which would be used towards Public Welfare.

However such schemes are fraught with moral hazards. Such schemes are seen to be coercive and warped because they tell the honest taxpayer that someone else may not pay tax for years or launder money and get away with it by paying a minor penalty on undisclosed income at a later date.
But inspite of that, the current scheme is different from being an Tax Amnesty Scheme as witnessed in the past. This is because it has not been drafted to bring loss of revenue or to give hefty discounts on payable taxes.

For example, Under VDIS, 1997, if assets were shown as having been acquired before 1987, their value as on April 1, 1987, was considered, and a 30% taxes was imposed. The value of gold and silver had almost doubled in AY 1997 compared to April 1, 1987, and it was simple to take a valuation certificate from 1987 and pay what was in effect a 15% tax on it on March 31, 1997 — without any interest or penalties. The fair value of the declarations under the VDIS scheme would in fact, have been over Rs 60,000 crore, rather than the Rs 33,000 crore that was actually declared. The scheme attracted 4.75 lakh declarations, of which 3.09 lakh pertained to jewellery and other movable assets.
Whereas under current income declaration schemes, not amnesty schemes with 50% to 100% discount on the tax liability of the dishonest. They do carry reasonable discounts on interest and penalty, but taxes are payable at more than normal rates. An opportunity is given to taxpayers to escape prosecution, and they create a win-win situation for both them and the government — but the dishonest are not rewarded for their dishonesty.

Secondly, there are concerns regarding confidentiality of information on the declarations. With all the necessary details, the tax department can verify the declarant’s annual returns. However, if Revenue personnels randomly knock at the declarant’s door, it will only serve to erode the taxpayer’s confidence in the government.
Further apprehensions prevail that under the pressure of convincing applications and possible PILs, the information of the declarants/disclosures might be made public which is an undesirable consequence of this scheme.
A relatively lower number of declarations (644 declarations, with just Rs 2,428 crore) under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015, testifies the fear of celebrities or persons of repute who stayed away from such declarations, should their names emerge through a PIL in a court of law.

But in case of IDS, 2016 compliance of almost 65,000 entities depicts that it is definitely a beneficial scheme for the eligible tax payers to declare the income which was not offered to tax earlier and has turned out to be a success to a great extent.

Although, Under various tax reforms and better administrative mechanisms (ex GST), tax evasion has become difficult. Yet, even today, tax evasion is rife in sectors such as real estate, jewellery, and in the export-import business. It is also a fact that many enterprises are set up within households, there is often no distinction between a household and an enterprise.

Amidst such issues in fiscal system, a mechanism needs to be evolved in the finance ministry where the direct and indirect tax departments collaborate and share information on income declared and taxes paid.  
A combination of moderate tax rates, robust mechanisms to track business activity and capture income data and incentives for voluntary compliance, shall be a sustainable way to avoid the generation of black money.

By: Chandan Sharma