Why has the income disclosure scheme not taken off?

Finance minister Arun Jaitley had announced the Income Disclosure Scheme 2016, in the Union Budget in February 2016, to enable persons to disclose their unaccounted income and wealth. After the Voluntary Disclosure of Income Scheme in 1997, this was the first such income disclosure scheme announced by the government. The scheme commenced on 1 June 2016 and ends on 30 September 2016.

The government and the tax authorities seem to be making all-out efforts to ensure that the scheme receives a good response, and does not receive the same poor response that the black money scheme of 2015 did.

What are the reasons that the income disclosure scheme has not yet taken off in a big way, though it is now entering its last month? For this, one would need to understand some of the features of the scheme.

One of the key aspects, as clarified by the government, is that if an undisclosed income has been invested in an asset, the market value of the asset as of 1 June 2016 is required to be disclosed.

Therefore, if you had earned an income of Rs.10 lakh in 2010, on which tax was not paid, and if this amount was invested in a plot of land or a piece of art whose market value has now appreciated to Rs.1 crore, you would have to pay tax on the current fair market value of Rs.1 crore, though what you had earned in 2010 was only Rs.10 lakh.

Such tax, charged at 45% (including surcharge and penalty) would amount to Rs.45 lakh, far more than the income that you had actually earned.

Obviously, many tax evaders view this as an unviable proposition, since they would, in most cases, have to liquidate the asset in order to generate funds to pay the tax, surcharge and penalty. This is one of the main reasons why the scheme has not generated much interest amongst tax evaders.

There are of course other minor issues that still persist, notwithstanding the clarifications issued by the Central Board of Direct Taxes (CBDT). For instance, in cases involving works of art, there are no registered valuers. Therefore, getting a registered valuer to determine its current fair market value, is near to impossible.

Declaration without a registered valuer’s support is effectively not permissible under the scheme. Many tax evaders are also not fully convinced that they would not invite greater scrutiny of their tax returns in the future.

In the past, such schemes have been far more attractive to tax evaders, who could get away by merely bringing in foreign remittances, or investing in certain specified bonds at a nominal interest rate, or paying a nominal rate of tax on the undisclosed income.

Many other countries, which have also launched similar income disclosure schemes, have kept the rate fairly low, so as to incentivise tax evaders to make a clean breast of their untaxed incomes.

Perhaps, the government seems to be confident that given the various anti-evasion measures that it has recently taken and the information gathering mechanism that it has put in place, it will be easily able to detect tax evasion, and hence it has consciously chosen not to bend backwards by giving undue benefits to tax evaders to come clean.

In the past, half-hearted measures at detection of tax evasion have allowed tax evaders a free reign.

One only hopes that tax evasion is tackled on a war footing and in a systematic manner henceforth, so that the risk of detection far outweighs the advantages of tax evasion.

It is only then that tax evaders would be deterred from such practices.

The introduction of the goods and services tax (GST) would also act as a significant deterrent to tax evasion.

The computerisation that GST entails should be able to capture and effectively prohibit the rampant practice of issuing bogus bills for goods or services, which is one of the significant methods resorted to for tax evasion.

Similarly, the gathering of information in respect of various transactions, including payments made in cash above a particular limit, would also act as a significant deterrent.

Effective implementation of the Benami Transactions (Prohibition) Act, 1988, which has recently been amended, can also act as a huge factor in the war against tax evasion.

The only problem so far has been that the government has seemed to lack the will to really tackle tax evasion. The current government seems to be determined and is taking sincere efforts to do so, and that could make a significant difference in the battle against tax evasion.

Most tax evaders have not realised this vital difference, and have been going by past experience of laxity on the part of the tax authorities in this respect.

In the ultimate analysis, a tax evader needs to weigh the significant possible risks of detection of the evasion by the tax authorities in the future, which may attract prosecution, besides a significant outgo of tax, interest and penalty, as against the price of payment of 45% of the market value of the undisclosed assets.

Given the current environment and approach of the government, the second option seems to be the better option.

Gautam Nayak is a chartered accountant
Source : livemint