Tax authorities' amnesty schemes have failed miserably

In 1997, the government launched a tax amnesty scheme that allowed well, reluctant taxpayers to declare their wealth and income, pay a higher rate of tax and gain a reprieve.
The so-cal led Voluntary Disclosure of Income Scheme (VDIS) posed an unusual challenge for the taxman. Apart from assessing cash holdings, income tax officials had to wade through hoards of utensils, silverware and jewellery declared as “priced possessions” by taxpayers.

The scheme attracted over 4.75 lakh declarations of which 3.09 lakh pertained to jewellery and other movable chattels. VDIS of 1997 allowed ‘declarants’ to disclose their possession at back-dated values. Tax defaulters took advantage of this clause by grossly undervaluing their property. Jewellery and real estate were declared at ‘decade-ago’ prices, causing a sharp drop in their taxable incomes.


The government realised taxes worth `9,729 crore, but it was a fraction of the parallel economy prevalent in the country then. Tax collections could have been much higher had the government framed more stringent rules around VDIS - 97, according to tax experts.

Even so, VDIS-97 is billed as the most successful of all tax amnesty schemes in India. If this scheme is regarded the best, one can imagine the success of other similar schemes launched by tax authorities. Suffice it to say all amnesty schemes launched in India since independence have failed to meet the objectives of the government.

Despite their limitations, tax amnesty schemes — an opportunity for taxpayers to pay a defined amount in exchange for pardon of a tax liability relating to a previous tax period without fear of criminal prosecution — are a favourite tool of governments to recover money from taxpayers.


Never mind governments aren’t allowed to launch such schemes. The Supreme Court, immediately after VDIS 97, asked the government to stop offering ‘amnesty schemes’, as such schemes demoralise honest taxpayers and gives tax evaders an opportunity to get away by paying a penalty.

As it often happens in such instances, subsequent governments played on the nomenclature and started offering income disclosure schemes without using the word ‘amnesty schemes’.

The latest budget too has one such scheme. Only, it is loosely called Income and Assets Declaration Scheme (IADS). Under this scheme, people with undisclosed income can legalise their money (or possessions acquired using unaccounted money) by paying a tax of 45% (30% tax, a surcharge of 7.5% and penalty of 7.5%). ‘Declarants’ using this route would be immune from prosecution under the IT Act, Benami Transactions (Prohibition) Act and Wealth Tax Act.

A senior tax official in the Mumbai circle says the objective of IADS is to allow people disclose their ‘under-stored’ assets. “Income is only incidental. By bringing unaccounted assets into books, we’ll be able to regulate cash dealings in a big way.” Industry bodies have lauded the decision.

At first glance, the government seems to have imbibed a few lessons from VDIS -97 and launched a stricter scheme. ET on March 7 reported that government will not allow habitual tax offenders to misuse IADS. The scheme will also not provide immunity to tax defaulters named in financial scams. Sources in the IT department say the government may also ask declarants to price their assets at current market value or ‘price as on a more recent date.’ The scheme will only be notified (with guidelines) after the Act is passed in Parliament.

But tax experts and economists are sceptical about its success. The prime factor that may work against IDS is the 45% tax that tax dodgers will have to pay on declared income, experts opine. “The rate of 45% seems fair, considering the fact that marginal tax rate is nearly 35%, but from the tax-payers’ perspective, it may seem high,” says Ketan Dalal, managing partner at PwC. “Several tax amnesty schemes in the previous years have not succeeded due to high rates.”

The 11 prominent tax amnesty schemes since independence all suffered from this problem. That’s not all. Too Steep for Our Taste The tax department has also not been able to instil faith among defaulters to reveal their unaccounted wealth and come clean. Fear of further scrutiny by tax officials is another deterrent. “Defaulters do not have much faith in the immunity clauses. They feel, if they disclose their ill-gotten wealth, they would permanently be under the tax officials’ scanner,” reasons Madan Sabnavis, chief economist at CARE Ratings. “Also, if a person has lot of black money, there’s little incentive for him to reveal his source of income.”

That apart, by announcing a series of tax amnesty schemes, the government is creating a ‘moral hazard’, where even honest taxpayers would be intuitively encouraged to wait for an amnesty scheme to declare their income. Tax amnesty schemes, according to Sabnavis, is like rewarding the tax evader’s dishonesty.

SS Khan, former member of Central Board of Direct Taxes (CBDT), says repeated amnesties bring down compliance levels, create expectation of future amnesties and leave a message that while the honest taxpayer pays tax regularly, the dishonest pays from one amnesty scheme to the next one. Tax department officials say relaxation of rules and ‘step-down’ from pre-set parameters weaken tax collection initiatives drastically. Still, such schemes return in some form or the other. Why? One reason is influential industrialists and industry associations lobby for such schemes at regular intervals. Industry bodies are said to push for changes in ‘amnesty rules’ to suit their patrons.

Indeed, governments have been launching tax amnesty schemes since the early days of independence. The first voluntary disclosure scheme was announced in 1951, wherein assessees were allowed to declare their unaccounted funds without attracting any penalty or prosecution under tax laws of that time. This drive managed to collect taxes of just `11 crore (on `70 crore worth of income declared) as tax evaders were not confident about the assurances of immunity.

In 1965, there were four major amnesty schemes. The government was short of money in the wake of the Chinese invasion. For a sizeable haul through amnesty schemes, the government had to wait another 10 years. In 1975, it managed to book `744 crore worth of unaccounted money (see Tax Amnesty Schemes...).

“A taxpayer will participate in an amnesty scheme if it offers a highly concessional tax rate compared to when he made the decision to evade,” writes Arindam Dasgupta and Dilip Mookherjee in related study published in 1998. “He may also want to bring his money to the books if he sees better economic prospects (like a good investment option where he can earn better returns). Thirdly, greater chances of detection may drive him to declare ill-gotten wealth,” surmises Dasgupta and Mookherjee in their treatise studying amnesty schemes between 1965 and 1993.

That is an apt explanation of the mixed success of tax amnesty schemes. Defaulters use amnesty schemes only when they see value in it. In the 50s and 60s, when tax rates ranged between 60% and 70%, tax evaders used amnesty schemes to split their assets (with family members) to under-pass high marginal tax rates. In the mid-80s, defaulters (especially businessmen) disclosed their actual wealth (or part of actual wealth) to create ‘equity bases’ for their businesses. This helped them to secure more business and funding lines. Bullish financial markets also encourage defaulters to declare their unaccounted wealth as investments in stocks, bonds and real estate would give better returns that holding idle cash.

VDIS 97 attracted declarations worth `33,697 crore and tax realisations of nearly `10,000 crore. This, according to former CBDT member Khan, was just 0.79% of the GDP that year. The amnesty scheme of 1985 brought out 4.63% of the GDP.

Khan says almost all the amnesty schemes have been a failure. “The government must initiate punitive follow-ups after opening such schemes. Defaulters who have not availed of amnesty benefits should be hunted down and punished.”

“Even the current scheme may fail if there’s no higher incentive for defaulters to declare their wealth,” says Devendra Kumar Pant, chief economist at India Ratings & Research. “This problem will exist as long as we’re a cash economy.” Tax amnesty schemes are rare in the developed world but countries like USA, Australia, Germany, Singapore and Belgium have tried it on different occasions. Economically weaker countries like the Philippines, Russia and South Africa have offered income disclosure schemes to their people with varying degrees of success. Tax amnesty schemes can only be worthwhile if the rules are water-tight. They should not be recurring in nature, but when they are offered to the public, they should be followed up with strict punitive action.