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The tip of the iceberg

Print edition : Jan 10, 1998 T+T-

VDIS 1997 has enabled a very large number of people to launder their black money. But the total assets declared under the scheme - Rs.33,000 crores - may represent only a small part of the black economy.

AS 1997 drew to a close, the stridency with which the Government pushed its tax amnesty scheme, the Voluntary Disclosure of Income Scheme (VDIS) 1997, reached a high pitch. Faced with a fiscal deficit that the multilateral lending agencies are certain to find unpalatable, the Government stepped up its drive to persuade tax-delinquent citizens to bring out their black money - with some cajoling and many threats. A blitzkrieg of advertisements in the print and electronic media exhorted them to come clean or else..

On January 3, Finance Minister P. Chidambaram announced the figures. Disclosures under the scheme had topped Rs.33,000 crores and the Government had collected a tax of Rs.10,050 crores, he said. This tax revenue will figure in the accounts of the Central Government this financial year and it will be shared with the States only next year.

A total of 4,66,031 persons had made declarations under the scheme, Chidambaram said. He declined to give the break-up of corporates and individuals who had opted for the scheme, but said that the number of declarations was the highest in Mumbai.

Chidambaram also announced that the 5 per cent cut in Plan expenditure that had been announced in September would be restored in view of the improved revenue position.

Earlier, when estimates of the collection figures having topped Rs.7,000 crores appeared in some newspapers, Revenue Secretary N.K. Singh intervened to state that such estimates were exaggerated.

No targets were mentioned when the scheme was announced, but the Government had evidently expected a high level of collection considering the no-holds-barred approach adopted this time to get black money hoarders to pay their taxes. Estimates that the black economy had crossed 50 per cent of GDP heightened expectations.

Tax amnesty schemes are intrinsically odious. They are seen to legitimise money-laundering. They are an admission of a government's failure to ensure compliance with the laws of the land. They are also unfair to honest tax-payers who have paid taxes at higher rates in previous years. Five earlier tax amnesty schemes in India signally failed to coax any significant amounts of black money out of the closet; together they yielded no more than Rs.780 crores.

The latest scheme was devised by a Government that found itself driven to the wall after making across-the-board cuts in Customs duties to please potential foreign investors and reducing direct tax rates on a populist impulse. The Government's predictions of tax buoyancy have gone awry; in fact, there has been a decline in personal income tax collections during the first seven months of the current fiscal year.

The relative buoyancy registered by corporate tax collections is attributed to the new 10 per cent dividend tax; but since dividends were earlier being taxed at the hands of individual investors, and the incidence has merely been shifted to companies, the gains are not as significant as they may seem.

VDIS 1997 has certain features that make it even more odious than earlier amnesty schemes. Tax rates are now the lowest ever: individuals are taxed at 30 per cent of the declared income and companies at 35 per cent. Furthermore, VDIS 1997 gives immunity from investigation to those who have violated other laws of the land, such as the Foreign Exchange Regulation Act, unless investigations are already being carried out regarding such violations. It legitimises the ownership of a single unit of property overseas, and other investments in fixed deposits, shares, securities, bonds, debentures and life insurance policies. Declarations made under VDIS 1997 are not admissible as evidence against the declarant for the purpose of any proceedings relating to the imposition of penalty or for the purpose of prosecution under the Income Tax Act or the Wealth Tax Act or the Companies Act, 1956. Bullion and antiques purchased or acquired in the past could be declared under VDIS 1997.

Yet the scheme left most corporates unimpressed. A senior official in the Central Board of Direct Taxes is reported to have remarked that the declarations from the corporate sector have been below expectations. Will some of the money that might otherwise have been declared by corporations be diverted to fund elections? Even small businessmen and partnership firms who have made declarations have largely done so under individual personal heads, rather than in the name of the firm.

A number of clarifications regarding the scheme - some of them were contradictory - were issued by the Finance Ministry and the Reserve Bank of India from time to time, even long after the scheme was announced. The CBDT issued clarifications and modifications even as late as November. The 'Information Guide' on the scheme issued by the Government answered 52 questions. There were further interpretations and explanations through official circulars and press releases.

The clarification relating to the declaration of jewellery or silver articles is a case in point. The original provision relating to the declaration of bullion or jewellery under VDIS 1997 stated that such articles purchased or acquired prior to April 1, 1987 would be valued at prices that prevailed on April 1, 1987. This provision was modified in November so that gold and silver jewellery or articles could be declared at the value that prevailed on the date of purchase or acquisition. This was on condition that the declarant gave "credible" proof of purchase or acquisition. But just what constitutes credible proof was left vague. This loophole was allegedly exploited by many people to launder holdings. The scheme originally required only an affidavit or a declaration mentioning the year of purchase or acquisiton, in the absence of any other document. The modification requiring credible evidence of purchase or acquisition, though barely an improvement on the earlier requirement, has been the subject matter of litigation.

Not surprisingly, this was the most favoured route for money-laundering under VDIS 1997 by individuals. Tonnes of silver was shown as having been acquired in the distant past at prices that were only a fraction of those prevailing today; these were declared as having been sold recently. Tax at 30 per cent was paid on the acquisition or purchase value, taking the effective rate of taxation to very low levels. Overnight, second-hand silverware traders came into existence, providing receipts to anyone who needed them.

Simultaneously, the Income-Tax authorities stepped up raids on individuals and companies. Sources in the Income-Tax Department said that these raids served as threats to make people pay up under VDIS 1997. Sources in the Department confirmed that some assessments made by the authorities in respect of assessees who were raided were set aside on condition that they made VDIS declarations. Even the Income Tax Appellate Tribunal is reported to have intervened to set aside assessments by Commissioners in charge of appeals in order to favour voluntary disclosures.

IN an interesting aside, the Shiv Sena-Bharatiya Janata Party Government in Maharashtra has imposed sales tax on additional turnover declared by companies under VDIS 1997. The provisions of VDIS 1997 forbid the imposition of any tax by State governments on the basis of revelations made under the scheme, and the Maharashtra Government's move is likely to be challenged in court.

Whatever the total collections under VDIS 1997, it may not amount to anything more than touching the tip of the black money iceberg.