The compliance window under the BMIT Act had strong tax-policy logic underlying it. With the ability of the government to access information on assets held abroad greatly enhanced due to the global information sharing and Base Erosion and Profit Shifting (BEPS) initiatives, coupled with its introducing a more stringent law as regards undisclosed income and assets located abroad as compared to income and assets located in the country, it made sense to allow future compliance to be based on a clean slate. The information and compliance asymmetry was, in this case, in favour of the government as reflected in the high tax rate of 60% (30% tax and 30% penalty) for the 90-day compliance window. While the collections at about R2,500 crore from the declarations may not be overwhelming, the base for a higher level of compliance and tax collection has been laid as regards global incomes of high net-worth taxpayers who choose to remain tax residents of India.
IDS 2016 for domestic taxpayers, introduced in this year’s budget, has a compliance window of 120 days (starting from June 1, 2016) and the tax rate is mandated at 45% (30% tax plus 7.5% surcharge and 7.5% penalty). When compared to VDIS 1997, it avoids many of the pitfalls of that scheme. VDIS 1997 was introduced with the objective of mobilising resources and channelising funds into priority sectors of the economy, had a large compliance window of 180 days and low tax rates (30% for individuals and 35% for companies and firms). These rates were further compromised as the scheme allowed undisclosed income represented by gold and silver jewelry/utensils acquired prior to April 1, 1987, to be disclosed at the market value as on April 1, 1987. This reduced the effective rate of tax to nearly 16.32% as there was a considerable difference in market rates of gold /silver as on April 1, 1997, when compared to April 1, 1987. The IDS 2016 avoids these pitfalls with a reduced compliance window, much higher tax rate and mandating disclosure of assets at cost or market value, whichever is higher, as on June 1, 2016.
It is however difficult to find any strong policy or compliance logic for the Income Disclosure Scheme (IDS) 2016. The budget speech states that the capability of the tax department to detect tax evasion has improved because of enhanced access to information and availability of technology driven analytical tools to process such information, therefore the government wishes to give an opportunity to the earlier non-compliant to move to the category of compliant. However, the direct-tax-to-GDP ratio has remained relatively constant in the last five years. It needs to be realised that the overwhelming causes of tax evasion in India lie in evasion of indirect taxes and the generation of income through illegal means. While India’s direct-tax-to-GDP ratio is low due to the low collection of personal income taxes, a major reason for this is the low level of employment in the formal sector of the economy. Informal employment contracts to avoid high employer contributions also lead to avoiding the reporting of salary incomes which would be subject to tax withholding. Tax evasion due to the prevalence of the informal sector starts with suppression of turnover to evade value-added tax and service tax by small and medium businesses and professionals which automatically results in under-reporting of incomes for income tax. The informal sector also absorbs capital from gains made through corruption and violation of regulatory acts which therefore cannot be reported as taxable income. The systemic solutions to this are the rapid introduction of digital, mobile-based payment systems to replace cash transactions, a stringent reporting and penalty mechanism for benami transactions and assets (which has been pending for long) and the introduction of the nation-wide invoice based GST which is substantially self-regulating as a business needs a tax-paid invoice to claim credit against its own GST liability. There would have been a much stronger logic for a one-time compliance window like IDS 2016 once the GST was introduced or stronger anti-benami provisions had been put in place.
The author is Of Counsel, BMR & Associates LLP, and formerly, joint secretary, ministry of finance, Government of India