Modi's war on black money is a let-down, amnesty schemes cheat honest taxpayers

If one pays his or her taxes honestly and does not expect any favours from the government, he or she has every right to show angst over this never-ending business of amnesties to tax swindlers.

Prime Minister Narendra Modi repudiated history when he, during his last Mann Ki Baat, reminded people of the September 30 deadline as the last opportunity to declare their undisclosed income under the new amnesty scheme.

The prime minister may claim this to be the "last" opportunity, but the fact is that successive governments have been mollycoddling tax evaders with amnesties almost every decade.

Amenities may not have increased the number of honest taxpayers, but every successive government has passionately made each amnesty scheme more lucrative than the previous one for tax evaders.

Also read: Modi government has actually worked hard to deliver on black money

Under the new Income Declaration Scheme 2016, people are liable to pay 45 per cent (30 per cent tax + 25 per cent penalty) tax on the unaccounted wealth they declare.

The scheme is operational till September 30. No scrutiny or inquiry will be done under the Income Tax Act, Wealth Tax Act or Benami Assets Transactions (Prohibition) Act, 1988, on declarations made under the scheme.

The income tax department will not make any inquiry on the declarant's sources of income, payment of tax, surcharge and penalty.

Amnesty schemes are morally corrosive, therefore, around the globe, governments resort to them in extreme situations to avoid injustice to honest taxpayers.

However, in India repeated amnesty schemes have already demolished their ethical premise. Now, the massive and recurring failures of tax amnesties have become a greater challenge to the tax administration.

Still, governments are unable to wean themselves away from this.

The Modi government is the second government in the past 65 years (three schemes in 1965) which has brought two amnesty (after paying tax) schemes for tax evaders in just two years of its rule.

Also read: Modi must stop Jaitley from punishing honest taxpayers

Surprisingly, last year, the NDA government's first attempt at amnesty was a super flop. The amnesty window under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, garnered a paltry Rs 2,262 crore of tax as only 638 individuals and entities declared their unaccounted overseas wealth to the tune of a mere Rs 3,770 crore.

The long history of failed amnesty schemes signals a mysterious sympathy for tax evaders in our political system. Within four years of independence, India witnessed its first voluntary disclosure scheme.

The Tyagi scheme (launched by then finance and expenditure minister Mahavir Tyagi) failed miserably as tax evaders had no faith in the amnesty assured in the scheme.

The scheme garnered just Rs 10-11 crore as tax against the disclosure of Rs 70 crore. The year of the India-Pakistan war, 1965, marked three such initiatives.

The Six Forty (60 per cent tax) scheme failed because of the high rate of taxation.

The government's effort to collect black money through the National Defence Gold Bond of 1965 also fell flat owing to the unwillingness of those with black money. The Voluntary Disclosure Scheme of October 1975, during the Emergency, with a comparatively better tax and amnesty offering.

It, however, added only Rs 241 crore to the government's kitty. In 1978, the scheme for demonetising currency notes of Rs 1,000 did not yield much result. To facilitate the investment of black money, a special bond was issued in 1981 with a tax-free return, which also met the same fate.

The income tax department's concessions (1985) on disclosure of black money, Indira Vikas Patra (1986) for the investment of black money and the National Housing Deposit Scheme of 1991 also failed to extract black income.

The Foreign Exchange Remittance Scheme and National Development Bond of 1991 had the provision for amnesty on the disclosure of black money. These bonds were relatively successful but the Gold Bond Scheme of 1993 failed again.

The VDIS of 1997 was the only relatively successful scheme which garnered Rs 9,729 crore as tax against Rs 33,697 crore black money disclosures. Over the years, the design of black money amnesty schemes has not changed much except the rates of tax and penalty.

These schemes have failed to encourage trust about confidentiality of declarations.

However, black money amnesties have taken a heavy toll on the enthusiasm and credibility of the tax administration.

Not only does the honest taxpayer feel cheated but also the repeated amnesties have created expectations of more such chances in the future among tax evaders.

After studying the last three schemes, the Wanchoo committee had stated in 1971, "We are convinced that any more disclosure schemes would not only fail to achieve the intended purpose of unearthing black money but would have a deleterious effect on the level of compliance among the taxpaying public and on the morale of the administration. We are, therefore, strongly opposed to the idea of the introduction of any general scheme of disclosure either now or in the future."

In 1985, the Shankar Acharya committee observed, "With the incentives for black income generation unaltered (or worse, enhanced), there is little reason to credit VDS with any long-term effectiveness in the fight against black incomes."

Going by history, it's highly unlikely that this new amnesty will be the last one.

As Prime Minister Modi said in his Mann Ki Baat, tax evasion is a habit and some old habits die hard. We can also assume that amnesties to tax evaders are also an old habit of successive governments that is hardly likely to die.