Globally, successful tax amnesties are the exception rather than the norm. We have yet to see whether IDS 2016 will have any lasting effect.
The Income Declaration Scheme (IDS), 2016 has been declared a success. Over Rs 65,000 crore of previously unaccounted for assets or incomes have been declared to the tax department and a tax collection of almost Rs 30,000 crore is anticipated. This will surely be welcomed by the finance minister at a time when income tax collections have fallen way behind the targets that were set for them. In FY 2015-16, for example, as per budget documents the shortfall in corporate income tax as compared to the budgeted target was as much as Rs 17,658 crore and in personal income tax, it was a staggering Rs 28,316 crore, totalling over 45,000 crore! It is another matter that the targets themselves may not have been set realistically.
One of the key criteria on which the income tax department was informally going to be judged as to the success or failure of the IDS, 2016 by the public and the media was whether or not it beat the voluntary disclosure of income scheme (VDIS), 1997 of former finance minister P. Chidambaram. In this respect the department has clearly done well, at least in nominal terms. In real terms, adjusted for inflation, it is lower than the 1997 mop up. The total declarations under the VDIS were about Rs 33,000 crore, yielding a tax of some Rs 10,000 crore. On the other hand, the number of declarations under VDIS 1997 were far more, at over 4 lakh, compared to some 65,000 under IDS 2016.
At the time, VDIS 1997 was also declared a great success. However, if we look at the figures for personal income tax collections in the years just prior to and following 1997, we see that any success was very temporary. In FY 1996-97 the collections for PIT were Rs. 18,843 crore (revised estimates in the budget documents). This jumped up to Rs 28,750 crore in 1997-98, including the VDIS collections. Note that the budget estimates had been just Rs 21,700 crore, so there is a large windfall gain in the year 1997-98 from VDIS. Did the increased revenue continue in the following year? No, collections from PIT in the year 1998-99 were much lower than in 1997-98, at Rs 21,430 crore, almost back to the levels of two years ago and equal to the Budget Estimate of 1997-98. We will have to wait for FY 2017-18 to see what will be the fate of PIT collections in the following year to see whether that old trend will be repeated or not.
The point is, an amnesty scheme may provide a short term revenue raising opportunity but may not lead to a long run sustained uptick in tax compliance. This government has announced two amnesty schemes in two years – one last year which provided a window to Indian taxpayers with undeclared foreign assets to come clean, which turned out to be a low-yielding scheme in terms of tax revenue and now the IDS 2016. Taxpayers cannot be faulted in assuming further such opportunities may lie around the corner and hence, while many have come forward, there is little motivation for them to significantly change their compliance behaviour. In fact, the announcement of amnesties would tend to trigger a reverse trend: declare now and revert to non-compliant behaviour until the next amnesty comes around.
For honest taxpayers any amnesty is virtually a stab in the back, as they feel let down. Moral hazard is one of the major fall-outs of tax amnesties.
Now the finance minister has repeatedly said that it is wrong to characterise IDS 2016 as an amnesty scheme since there is no tax reduction. Remember that Section 271(1)(c) of the Income Tax Act, 1961, provides for a penalty of up to 300% of the tax sought to be evaded. Section 276C provides that in a case where there is wilful tax evasion of an amount exceeding Rs 100,000 the tax evader is faced with rigorous imprisonment for a term up to seven years and a fine. As long as these provisions are suspended under IDS, there is certainly an amnesty.
What is the international experience? A paper by the International Monetary Fund (IMF) from 2008 shows that “successful” tax amnesties are the exception rather than the norm. The key issues that are sought to be addressed are a long-term, sustained improvement in tax compliance. An improvement in tax administration is the essential ingredient in addressing this issue, not tax amnesties. The paper draws its conclusions from experiences in Argentina, Turkey, the Philippines and other country experiences. In Argentina, multiple tax amnesties were implemented between mid-1950s to early 1990s and 1995 to 2004. The overall experience has been unsuccessful in terms of improved tax compliance and likely to negatively affect taxpayer’s perceptions. In Turkey there is no evidence suggesting a positive long term revenue or compliance effect. In the Philippines, there have been many amnesty programmes introduced between 1972 and 1987 and in the early 2000s; tax revenue collection figures have not increased and taxpayer compliance has deteriorated. Programmes have instead encouraged taxpayers to forgo or delay payments while speculating another tax amnesty is underway.
Repeated amnesties only erode taxpayers’ commitments to become more compliant and lead to dissatisfaction among “captive” taxpayers such as the salary and wage earners. Let us hope the government focuses on systemic reforms in revenue administration which is the only way to improve tax compliance and increase India’s woefully inadequate revenue base on a sustainable basis. You do have a bird in hand, finance minister, but is it really better than two in the bush?
Rajul Awasthi is consultant with World Bank on Tax Policy Reform. He was Officer on Special Duty (OSD) on tax issues to the finance minister during UPA I.