The Income Declaration Scheme and Dispute Resolution Scheme, 2016, are not amnesty schemes or schemes to reward dishonest taxpayers. Even the disclosure of foreign assets scheme was not an amnesty scheme. These schemes extend an opportunity to come clean by paying more than the normal tax. They have not been drafted to bring loss of revenue or to give hefty discounts on payable taxes. To find out why they are not intended to reward dishonest taxpayers, we have to go into the details of previous amnesty schemes.
Between 1951 and 1997, 10 amnesty schemes were announced to declare unaccounted money, most of which were misused. Dishonest people who did not pay taxes declared undisclosed incomes and assets, and got away with paying lesser than normal taxes, with all immunities. Only two of these schemes were seen as successful: the income declared under amnesty circular 1985/86 was Rs 10,778 crore, and under VDIS, 1997, Rs 33,000 crore. But in reality, these successes were at the cost of revenue. The real value of the assets declared was double the value considered for tax purposes. Taxes were paid at less than 50% of the normal rate, with zero interest and penalties.
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. VDIS, 1997, was like an off-season sale of branded goods at 50% discount with a lifetime guarantee (immunity).
Another scheme was introduced through The Remittances of Foreign Exchange and Investment in Foreign Exchange Bond (Immunities & Exemption) Act, 1991. Under this scheme, income of about Rs 2,200 crore was declared, with zero taxes payable. To continue with the sale analogy above, this was like an off-season sale of branded goods at zero cost! Most of the declarants had received “gifts” from unknown persons — and it looked like a clear case of round-tripping of money — with 3% to 5% as the cost of the roundtripping of the amount received as “gift”. That was a time when foreign exchange was needed, and taxpayers got an opportunity to declare unaccounted money at nil cost, i.e., nil taxes.
The India Development Bonds, 1991, were also issued under this scheme. They had a tenure of 5 years with 9% tax-free interest and repatriation benefits. Subscribers enjoyed immunity from declaring the source of subscriptions, and resident Indians for receiving gifts of India Developments Bonds from subscribers. There was nil tax payable on gifts of these bonds, and non-residents gave them like foreign exchange remittances to non-relative residents. This too was possibly nothing but round-tripping at around 4% cost and zero taxes payable.
This is how it worked:
An investor putting in $ 1,00,000 in India Development Bonds received as gift in 1991, invested, at the exchange rate of 25.79 prevalent then, Rs 25,79,000. $ 1,00,000 @ 9% per annum interest at six months compounding rate, would have become $ 1,55,296 at the time of maturity after 5 years. This, at the 1997 exchange rate of 39.15, would be 60,79,875 in Rupee terms. Thus, not only did the investor save 30% tax on Rs 25,79,000 in 1991, in 1997, he got an interest of Rs 35 lakh without any tax liability. What a reward this scheme gave to dishonest taxpayers! This one, in our sale analogy, was like buy one at zero cost, and get another free!
The current schemes
They are 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. Under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015, 644 declarations of undisclosed foreign income and assets were received, and just Rs 2,428 crore was collected in taxes. Ninety per cent of the collection came from 5% of declarations. This scheme was not as successful as expected — the reason was that no discount was given on the original tax rate, but the tax rate was 60% instead of the normal 30%. The other reason for fewer declarations could have been that the scheme was not available for illegal money parked abroad. Perhaps celebrities or persons of repute stayed away for fear of their reputation, should their names emerge through a PIL in a court of law. But in my view, this scheme was successful compared to the 1991 scheme — because the tax rate was 60%, i.e., double the normal tax payable, compared to the zero rate payable under the earlier scheme.
The Income Declaration Scheme of 2016 is also just that. The tax payable is 45%, i.e., 15% more than the normal tax rate of 30%. This includes a penalty of 7.5% and surcharge of 7.5%. Opportunity is given at a little extra cost to avoid further interest, penalty or prosecution under the Income Tax Act, 1961, and the Benami Transaction (Prohibition) Act, 1988. This scheme may bring smaller declarations, considering the tax rate of 45%, and the fact that the fair market value of declared assets shall be taken as on June 1, 2016. There is no room to manipulate and pay less tax like in VDIS, 1997.
The other scheme is Direct Tax Dispute Resolution Scheme, 2016. The tax payable is the whole of the disputed tax in cases where the disputed tax amount does not exceed Rs 10 lakh, and interest up to the date of assessment. In other cases, it is the whole of the disputed tax, plus 25% of minimum penalty leviable and interest on the disputed tax until the date of assessment. In cases of pending appeals against penalty, 25% of minimum penalties applicable are payable.
The scheme is available only for appeals pending with the Commissioner of Income Tax, and the purpose of the scheme is to reduce the pending litigation with the appellate authority. The benefit under this scheme is to pay 25% of the minimum penalty only up to the date of assessment and not up to the date on which the appeal is decided and given effect. There is no reprieve for honest taxpayers in this scheme. Those against whom wrong assessment orders have been passed must continue with litigation.
Given this background, and the fact that the present schemes, while refusing to reward the dishonest, extend an opportunity to come clean by paying more than the normal tax, cannot be seen as being “unsuccessful”, even if fewer declarations are received. No big discount is given on taxes payable, and there is no room for manipulation.