Towards better tax compliance

India in general is not known to be a tax compliant tion, as Fince Minister Arun Jaitley and some of his predecessors have often rued. So the rendra Modi government is now elated over what it believes its success in nudging more and more wealthy Indians to pay their taxes. Last year, its window to declare foreign assets had drawn only a tepid response of 644 declarations, worth Rs 4,164 crore and netting Rs 2,428 crore in taxes. So, it has been staking much on the Income Disclosure Scheme (IDS) launched in June this year, giving tax evaders a one-time compliance window till September 30 to declare hidden income here. The response has been claimed as the biggest disclosure ever, with 64,275 declarants disclosing an amount of Rs 65,250 crore (nearly 9.73 billion dollars). This works out to an average declaration of Rs 1 crore per declarant. Overall, the government is set to net over Rs 29,362 crore in tax and pelty. Prime Minister Modi has already praised the ‘tremendous work’ done by Jaitley and his team of top fince and tax officials. Jaitley meanwhile has drawn satisfaction that larger numbers of people in high income brackets are wanting to become more tax compliant, that they are heeding the government’s call to ‘sleep well and live with heads held high’. Those who have availed of this opportunity to own up having black money will be taxed according to the market value of their assets as on June 1, 2016; they will not need to pay property tax and will not be questioned under income tax or property tax laws. The Fince minister has promised keeping these declarations confidential. Will all this mollycoddling of hitherto tax evaders discourage honest taxpayers? Jaitley argues that it won’t. He is at pains to point out that the IDS is not an amnesty scheme, that it requires taxpayers availing the scheme to pay 30 percent tax, 7.5 percent pelty and 7.5 percent agricultural surcharge — which works out to paying total 45 percent of the disclosed income to the government. In comparison, the honest taxpayer in the comparable high income slab pays 30 percent tax on income, which with surcharge and cess adds up to 33 percent.

If this is the last opportunity offered by the NDA government to tax evaders to come clean, does it mean that the taxmen will become more aggressive in the coming days? In a recent TV interview, Prime Minister Modi had said bluntly: “No one should blame me if I take tough decisions after the 30th (of September)”. While Jaitley has assured there will be ‘no witch hunt’ — he too has sounded a veiled warning that generation of black money and tax evasion will become more difficult, that the State will not like to start the process of ‘big brother watching’. He has pointed out that major countries are nowadays sharing more information about people stashing money abroad and evading taxes. Nevertheless, critics are not overly impressed with the compliance window opened by the Modi government, arguing that the 45 percent tax, pelty and surcharge rate was too high. They have pointed to similar efforts by other countries recently, notably Indonesia where declarations totaled 277 billion dollars as well as Argenti with 80 billion dollars. Both these countries charged very low tax rates on incomes declared, and their guarantees of no further pelty after end of amnesty period were widely believed. Critics contend that in India, government promises of protecting those declaring hidden incomes have hitherto carried little credibility, which is a major reason for continuing tax evasion here. After all, the political system itself in this country is funded mostly by black money. Much hope is pinned on taxmen getting armed with sophisticated IT tools and big data crunching software to go after tax evaders, particularly in sectors like construction and real estate. But if the NDA government is to really get hold of the black money mece at its roots, it needs to engage the entire political establishment about how to make political funding more transparent.