With the Supreme Court continuing to push the government on getting back black money stashed in overseas tax havens/banks, the buzz is that the government may just come up with another amnesty scheme for black money in the Budget. While doing so, it must keep in mind that, thanks to lower tax rates, using computerised tax-bases that talk to each other, and better-designed tax systems like VAT (and eventually the GST), compliance is up dramatically. Tax-to-GDP ratio rose from 15.7% in 1991-92 to 17.7% in 2007-08 before falling to 16.5% in 2009-10. Corporate tax-to-GDP is up from 1.6% in 2001-02 to 4.1% in 2009-10, individual income tax up from 1.4% to 2% and service tax from 0.1% to 0.9%given the 57% share of services in overall GDP, this is the area to focus on (with its 28% share in GDP, industrial taxes or excise duties are 1.6% of GDP). Getting black money stashed overseas is important, but raising tax-to-GDP ratios is far more efficient, more so given the economys growth in recent years. The most successful amnesty, VDIS-97, unearthed Rs 33,697 crore of black money, around 2.2% of that years GDP. Raising the tax-to-GDP rates by just 0.5% will get that much today, and a lot more each year, given how GDP is growing.
Also keep in mind that amnesties turn off honest taxpayers.
VDIS-97, for instance, was designed to be full of holes, and the government never changed this despite front-page stories in the newspapers. The scheme allowed evaders to declare their wealth in bullion and to self-declare the purchase date. The scheme said that any bullion bought before April 1, 1987, would be valued as on that date. So, an evader could buy gold in 1997, say he bought it in 1960, and be asked to pay taxes on the basis of the golds value on April 1, 1987. Since the value of gold rose by 84% between 1987 and 1997, this lowers tax rates on black money by 45%. The CAG pointed out huge undervaluation of jewellery and bullion in the range of Rs 7,277 crore to Rs 9,671 crorea circular from the finance ministry directed taxmen to issue VDIS certificates even if they felt the declarations were unusual in nature. Loopholes in valuing real estate allowed property in Kolkata and Mumbai to be declared as being worth Rs 5,530! With the amnesty scheme more black than white, the last thing we need is a repeat of it.