Despite $10 billion in tax net, Modi sarkar's amnesty is a colossal failure

Despite the long history of failed tax amnesty schemes, the Narendra Modi government tried its luck with tax pardons, but to no avail. Howsoever pliable the statistics might be, the fact remains that declarations of Rs 65,250 crore under the black money disclosure scheme could attract just a moderate success for the NDA government. However, going by the massive failure (a paltry Rs 2,262 crore of tax against the declarations of a mere Rs 3,770 crore) of last year’s amnesty window for black money stashed abroad, the IDS only garnered a face-saver for government.

Now let's compare the IDS with a relatively successful amnesty scheme of 1997. VDIS 1997 garnered Rs 9,729 crore tax against the black money disclosure of Rs 33,697. Since then, the economy grew manifold, but black money declarations under IDS 2016 are not even double of VDIS 1997. The likely Rs 30,000 crore tax harvest under IDS is impressive only because people are liable to pay 45 per cent (30 per cent tax plus 25 per cent penalty) tax on the unaccounted wealth they declared.

India is literally gushing with black money. There is no dearth of black money estimates either. In new findings, equity research firm Ambit Capital pegged India’s "black economy" at over Rs 30 lakh crore ($460 billion) or about 20 per cent of the total GDP, which is larger than the GDP of emerging markets like Thailand and Argentina.

Interestingly, Indonesia and Argentina are also running amnesty schemes. Indonesia has garnered $277 billion in the first three months of a nine-month scheme, while declarations in Argentina are estimated to touch $80 billion. India’s amnesty scheme’s declarations stand nowhere close to these massive numbers.

Whichever black money estimate one may reckon with, IDS declarations are simply inconsequential against the colossal parallel economy of India. Although IDS details are confidential, sources close to the scheme indicate that the amnesty window has failed to generate adequate voluntary submissions in the metros and major hideouts (read richer states) of black money.

The Income Tax department was forced to introduce another amnesty within amnesty plan at the closure of the window to avoid the embarrassing failure of the scheme. The I-T department had been "directed" to accept declarations without PAN under the black money compliance window during the final days of scheme. Doing away with the PAN, mandatory for a valid declaration under the IDS, helped benami transactions to become holy by taking a dip into IDS.

The most important takeaway of IDS 2016 is that the limited success that we saw could come about thanks to the stick, not carrot. Unlike the past, Income Tax department launched massive raids across the the nation while the scheme was open for declaration. The Income Tax department avoids raids and surveys during the Income Disclosure schemes as those measures are construed as being against the voluntary nature of such initiatives. However, sensing the failure of the scheme, I-T officers literally hounded people to join the IDS.

What next?

As the Modi government's romance with tax amnesties is now over, the recent recommendations by the Special Investigation Team (SIT) on black money must set the next course for the battle against black money.

The SIT, working under the Supreme Court, has recommended that cash transactions be capped at Rs 3 lakh and keeping more than Rs 15 lakh in cash should be banned. With this recommendation, the most organised efforts against black money, lack of transparency and political corruption can be launched.

The curbs on cash transactions have to be linked with other legal measures like enforcing embargo on cash political donations. It is equally important to revise the provision of income tax on agricultural income to prevent tax evasion by billionaire non-farming farmers.

India has to construct its RICO (The Racketeer Influenced and Corrupt Organisations Act of America) moment against the black money through policy and legislative measures. In 1960, Don Joseph Valachi was nabbed by the police amid the mafia terror. In his confession before the US Senate Committee, Valachi acknowledged that Cosa Nostra (Mafia’s parallel government) was running America.

After Valachi’s confession, American senators understood that the current laws were just ineffective before the complex network of social and economic crimes. The US government, with the help of law expert Robert Blakie, came out with the Racketeer Influenced and Corrupt Organizations (RICO) Act. The lethal RICO act, passed a year after the publication (1969) of Mario Puzo’s classic The Godfather, has paved the way for the elimination of the mafia from USA. The RICO act came handy to catch some big crooks later as well. Bernard Madoff, infamous ponzi swindler, was sentenced to a 150-year jail term in 2009 under this act. RICO act was also instrumental to squeeze huge compensation for damages from the oil spill in the Gulf of Mexico in 2010.

Unlike its predecessors, the Modi government has stuck its neck out on dealing with the parallel economy. With one failure and one moderate success in amnesty efforts in hand, the government is now enriched with sufficient experience in dealing with the issue. The fact remains that creating a transparent system via bringing cash transactions under tax net, cleansing the bullion market and checking the movement of black money in the stock market is more effective than the mollycoddling of tax cheaters through amnesties to deal with black money.

One hopes the government will now prefer structural reforms and legislative means over the morally corrosive business of tax amnesties to fight black money.