Most would admit the tax and penalty collections from the Income Declaration Scheme (IDS) of around Rs 29,000 crore, based on undisclosed income of 65,250 crore, are significantly higher than expected. Taken together with the Rs 56,378 crore of income the government has managed to unearth via investigations in the last two years, that’s around Rs 1.2 lakh crore of hitherto undisclosed income which has been brought into the tax net, a substantial amount by most yardsticks. More important, it is safe to assume the efforts have netted several first-time assessees. While it is natural to compare IDS with the 1997 VDIS scheme which saw tax collections of Rs 9,760 crore – IDS doesn’t look so successful in comparison given both inflation and the rise in GDP – the two schemes are very different. VDIS allowed those declaring their incomes to do in the form of bullion and self-declare the period of purchase – since this meant they could have bought the bullion just prior to the scheme but declared they bought it a decade or two ago, this reduced the effective tax to single digits in a very large number of cases; IDS, on the other hand, charged a 45% rate including penalties and surcharges. All black-money schemes are unfair to the honest taxpayer since they allow defaulters to get away relatively easily, but the implicit level of unfairness was much less in IDS in comparison with VDIS.
While the scheme is a success in terms of the money it has netted the government, it hasn’t made much of a dent when it comes to unearthing black money. At under 0.5% of GDP, the income disclosed is a pittance in comparison with even the most conservative estimate that puts the size of the black economy at 30% of GDP. In other words, the government is making very little headway in tracking down the large sums of black money despite it being so visible in the purchases of property and luxury goods – indeed, given the average income disclosed is a mere Rs 1crore per person, it is clear IDS hasn’t really netted the big fish. The big lesson, though, is that the taxman’s letters to people, giving details of their big-ticket expenditure, have worked, even if to get relatively smaller evaders to come clean. In order to convince the bigger evaders to come clean, the government needs to keep up the pressure by writing similar letters – after rigorously mining the taxman’s database of annual information returns – and correlating expenditure patterns with incomes declared more aggressively. The fact that India’s tax to GDP ratio hasn’t risen meaningfully over the years – from 9.8% in 1990-91, it hit a peak of 11.9% in 2007-08, and then fell to 10.8% in 2015-16 – suggests efforts at raising tax compliance haven’t worked; indeed much more taxes can be collected from this than from any IDS-type scheme from time to time. Apart from better surveillance that comes from using the taxman’s database, tax rates also need to be relooked – as this newspaper has argued before, the top tax personal income tax rate kicking in way too early ensures poor compliance among those who earn between Rs 10 lakh and Rs 20 lakh per year. The good news here is that GST will help curb tax evasion since there will be a clear trail of transactions; increasing digitalisation of payments will also help do the same thing.