As the second instalment of advance tax numbers rolled in on Thursday, it is obvious the finance ministry will fall short of the budget estimates for tax receipts for 2011-12 by at least 7%. Since the disinvestment receipts, too, will be nowhere near the budgeted R40,000 crore, the struggle finance minister Pranab Mukherjee will face is tough to come anywhere near his target for fiscal deficit.

In that context, floating of a tax amnesty scheme to fill in some of the gap makes accounting sense. Placed in the backdrop of the anti-corruption campaign, it makes a political sense, too. The Voluntary Disclosure of Income Scheme (VDIS) of 1997 earned the government R9,729 crore and brought out R33,697.32 crore of unaccounted income.

If the idea is to permanently raise the income tax-to-GDP ratio as a result, this is among the worst possible ways to go about it. The accompanying chart shows that in 1997-98, the gross tax revenue of the Indian government as a percentage of the GDP went down from 1996-97 (despite VDIS) and did not recover until 2003-04 to the same level, in tandem with the recovery from the East Asian crisis.

Drilling into receipts from the direct tax for the years also show the same trend. Collections from both income and corporation tax was lower in 1997-98 and until 2003-04 remained at less than 2% of the GDP each.

So, by all accounts, what the finance ministry is aiming to do is a very short horizon oriented plan to shore up numbers. In fact, it is distinctly possible that Mukherjee?s team will plan to bring in the scheme this year itself. The Direct Taxes Code is supposed to come in with the Finance Bill for the next year and that will make it far more difficult to run an amnesty scheme.

Leaving aside the ministry?s perspective, the others concern India?s tax regime in the global context and the issue of parity between honest and dishonest tax payers.

Unlike our last amnesty scheme and the 12 that went before since 1965, this one is directed at foreign jurisdictions. Indian bureaucrats have worked madly in the last few years to make us a member of the world?s most important anti-money laundering organisation?the Financial Action Task Force (FATF), where until February this year we just had an observer status.

The FATF does not recognise any tax amnesty programme as it regards them as facilitating money laundering.

The reason is simple. If a terrorist organisation stashes its money in a tax haven, under the amnesty scheme it cannot simply channel all of that into India as legitimate money to finance whatever it wants. It only needs to have stashed the money in some other name ab initio, which it would have done in any case. Since an amnesty will, by definition, not question the source, the most important problem will be sorted out. All the firewalls the Indian banks have created to block money laundering will become defunct.

If the banks in the tax haven are as porous about parking funds as the Indian government tells us, this should be enormously great news for all the criminal elements who plan to do war on India.

In September 2009, Italy, now in the news for all the wrong reasons, was in the news for a similar tax amnesty scheme. The scheme got the country $82 billion (R3,69,000 crore) but it had to literally crawl at the FATF to retain its membership after that.

The Manmohan Singh government looking to occupy the high table in global finance will, one expects, obviously not like to do a repeat.

The third reason why a tax amnesty is bad is that it allows evaders to game the system. In the decade since 1997, despite a Supreme Court stricture against further disclosure schemes, we are close to another one. What is the basis for someone who has evaded tax to pay up all her loot right now and not wait for a better deal, the next time around? There will be one, despite any protestations by the government.

An amnesty basically tells the world the tax collection machinery is weak. Using the detailed records from the 1997-98 VDIS, the CAG report had clearly shown that in five charges of Jaipur, Lucknow, Hyderabad, Ahmedabad and Chandigarh, the collections were doubled because of the scheme. While the country-wide collections from the amnesty scheme were about 95% of two years average of regular tax revenues, in these five income tax charges the percentage went up close to 200%.

?The incidence of disclosure of large amount of unaccounted income in an amnesty scheme is symptomatic of the malaise of poor tax administration over the years that enabled concealment of income by the existing assessees?, the report noted. A high receipt from amnesty is, therefore, nothing to be proud of.

An amnesty scheme in 2011 will, therefore, only tell us we have moved little in 15 years in terms of improving our tax administration. Since Pranab Mukherjee has repeatedly told us this is not true and he has also said we have moved fast on information-sharing between tax authorities through amending tax treaties, it is difficult to see how the amnesty scheme fits in with our long-term tax strategy.

Instead, if the government waits for the report of its own committee in NIPFP, which is measuring the extent of flow of black money in the economy, one suspects he would have been surprised. That report is due next year. When the Indian economy is growing at 8%-plus and the OECD?s at 2.1% in 2011, with the trend unlikely to change, it must be a foolish investor who parks his money in the wrong place. Certainly, not the ones who have the ability to defraud a tax system.

subhomoy.bhattacharjee@expressindia.com