In 1997, in the days before P Chidambaram presented his famous dream budget, one of the proposals under discussion in North Block, which houses the Ministry of Finance, was a tax amnesty scheme. Once a decision was taken to cut direct tax rates sharply to 10%, 20% and 30%, replacing the earlier rates of 15%, 30% and 40%, it was felt that an opportunity should be provided to those who had evaded taxes, perhaps because of high rates, to come clean. There was also a debate on slashing the peak rate of Customs duty. Going against the advice of some senior officials worried about the revenue implications of such a move, the Minister decided to lower it from 50% to 40%.
The idea of launching a tax amnesty scheme was helped by the fact that the National Development Council (NDC) had already suggested that the government should think of a scheme to harness black money for productive purposes. That is how the Voluntary Disclosure of Income Scheme, or VDIS, was conceived. Prime Minister H D Deve Gowda backed the proposal, and Chidambaram went on to say in his Budget speech that he had balanced economic and ethical arguments, and reckoned that the time was opportune to launch such a scheme.
Under the VDIS, irrespective of the year or nature or source of funds, the amount disclosed, either as cash, securities or assets, whether in India or abroad, was to be charged at the highest tax rate. But at 30% tax at acquisition value, many were drawn to the scheme. Under Revenue Secretary N K Singh, the scheme was marketed widely across states. The sweetners were interest and penalty waivers (unlike the 30% tax and 30% penalty in the one-time compliance window scheme which closed on September 30 this year) and immunity from action under Income-Tax, wealth tax and the Foreign Exchange Regulation Act, or FERA — the law whose recast Chidambaram announced in the same Budget.
77.5% of the proceeds from the VDIS was to accrue to state governments whose cooperation Chidambaram had sought; the share of the central government was earmarked for financing the basic minimum services programme, and building infrastructure. The roadshows and marketing spearheaded by the savvy Singh worked — the government netted Rs 10,000 crore in taxes alone, which meant that the mobilisation was substantially higher, putting in the shade five other amnesty schemes launched earlier. Plenty of jewellery was deposited too. Stories floated around of the rich and the powerful — including politicians — having taken advantage of the scheme.
But there was outrage too at what many perceived to be attempts to “legitimise” money laundering, leading to a case in the Supreme Court. Up against criticism, Singh and the government had to commit to the court that there would not be any more tax amnesty schemes.
Chidambaram had said at that time that high tax rates was one of the important reasons for tax evasion. In 1997, the government’s figures showed that there were just 12 million tax assesees, and only 12,000 taxpayers whose annual income topped Rs 10 lakh. Besides the easing of procedural rules, a policy design featuring moderate taxes was what would help widen the tax base, he believed. The move to reduce tax rates appears to have paid off down the line.
Prior to the VDIS, the gold bond scheme of 1993 was also seen as an amnesty offer — and going by the gold mobilised, it did succeed. Later governments may have been tempted to come up with quasi amnesty schemes, but shied away for fear of the Supreme Court. A scheme for service tax evaders may have been perceived as one such scheme.
Later, the Tax Reforms Commission, or TRC, in its recommendations too voiced discomfort, saying that it led to inequity among taxpayers. It also indicated that such schemes may not improve the behaviour of tax evaders. That may perhaps be true. Fewer than 700 individuals used the one-time compliance window to disclose undeclared income under the scheme introduced by the NDA government. That is because unlike in 1997, this compliance scheme lacked flexibility. With a global crackdown on tax evasion as economies struggle to recover, the era of tax amnesty schemes may well be over.