Nobody has been jailed in India for tax evasion
Compare this to the 2601 tax-related incarcerations in 2014 in the US. Jail for tax evasion is common in that country. The most well- known case is that of the gangster Al Capone who spent 7 years in jail as far back as 1932 to 1939. In recent years, actor Wesley Snipes spent 3 years in jail for failing to file his tax returns for 3 years.
Why is India different?
The reasons are eloquently mentioned by the C & AG in its report dated 14th February, 2014, wherein it has castigated the tax department for its woeful administration of prosecution matters. It made some telling comments about the sorry state of affairs. There were substantial delays in launching of prosecution cases ranging from 5 to 48 years. Cases were being launched and pursued even where companies had already been liquidated or had been declared sick by Board for Industrial & Financial Reconstruction. Cases were being pursued under repealed sections of the tax act; even against dead assesses, resulting in wastage of resources. Even after 11 years of Supreme Court judgment and 5 years of opinion from the Ministry of Law, 76 cases were still being pursued, frittering away valuable time and resources of the tax department. The coordination and pursuance of cases was grossly inadequate as revealed by non-attendance/non-representation in court proceedings. No prosecution counsels had been appointed at various stations. Poor record maintenance and delay in production of evidences had led to acquittal of assessees. Appropriate officers had not been posted to handle prosecution cases.
A strong indictment, indeed!
Not that the extant laws are ineffective – far from it. But the half-hearted and routine approach by the tax department to prosecuting tax offenders; the broken down institution of public prosecutors; and a clogged justice delivery system all conspire to ensure that tax evasion pays.
Against this dismal backdrop, it is no wonder that all efforts at tax amnesty in India have failed.
The Voluntary Disclosure of Income Scheme (VDIS), the tax amnesty scheme launched by the Government in 1997, revolted me and most of my colleagues in the tax department. The Scheme, like its several predecessors, was odious and legitimized money-laundering. It was an admission of the Government’s failure to ensure compliance with the laws of the land. Most importantly, it was unfair to honest tax-payers who had paid taxes at higher rates in previous years. We knew that, moving forward, the Scheme would damage compliance levels, create expectation of future amnesties, and leave a message that while the honest taxpayer pays tax regularly, the dishonest pays from VDS to VDS.
But as tax officers, we had to keep our personal opinion aside and work with diligence and industry to make the Scheme a success.
The Scheme itself was very liberal. The tax rate was 30 % for individuals and 35 % for corporates. There was neither penalty nor prosecution. While any jewelry acquired before April 1, 1986 was to be valued at prices prevailing on April 1, 1987, for other assets, such as property, silver utensils and gold/silver coins, the actual date of acquisition was considered.
What was particularly egregious was the Scheme’s serial misuse. Not content with the generous terms, and totally belying the trust reposed by the Government on tax evaders to come clean -in fact, Chidambaram had then explained that high tax rates was one of the important reasons for tax evasion and that given a chance, the people of India would come clean – there were several unscrupulous elements who took the Scheme for a ride.
So, if silver utensils were bought in 1997 (the year of the Scheme), not only could you say you bought it before 1987 to reduce its valuation (for tax purposes) , you could reduce it even further by certifying that you bought it in 1971, or 1961, even 1951! There was no proof of purchase to be given, except for an affidavit by the tax-evaders themselves. Overnight, second-hand silverware traders came into existence, providing receipts to anyone who needed them. The policy of declaring black black assets held in the form of property was even more bizarre, and no proof of purchase or valuation was asked for. So, in metros, property was being declared at a pittance.
The Government did try to curb the misuse but it was just symbolic. The success of the Scheme was paramount and such an aberration needed to be tolerated. As 1997 drew to a close, the stridency with which the Government pushed the Scheme reached fever pitch. It stepped up its drive to persuade tax-delinquent citizens to bring out their black money – with some cajoling and many threats. A blitzkrieg of advertisements in the print and electronic media exhorted them to come clean or else!
Disclosures under the Scheme touched Rs 33,000 crores and the Government collected a tax of Rs.10,050 crores. The Scheme was comparatively successful compared to the earlier ones – five earlier tax amnesty schemes signally failed to coax any significant amounts of black money out of the closet; together they yielded no more than Rs.780 crores. However, the undeclared assets unearthed was miniscule compared to the black money sloshing around in the ‘undeclared’ till. And the harm it did to the officers’ morale and the faith of the honest taxpayers was incalculable. It vitiated the tax climate by telling dishonest taxpayers that they need not fear they would be penalized if they did not pay their taxes since there would always be a second chance. And even if they did get penalized, a jail term was out of question. That only happened in other countries, not here!
Cut to the present. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 had a three-month long compliance window which closed on 30th of September 2015. This window of opportunity for tax offenders to come clean was in the nature of a quasi-amnesty scheme. It failed spectacularly. Undisclosed foreign assets amounting to only Rs 3,770 crores were disclosed.
India has no official estimates of black money abroad.
According to a 2013 report by Global Financial Integrity, India ranked fourth in the developing world for illegal money transfers overseas, behind China, Russia and Mexico, moving $440 billion between 2003 and 2012.
Prof Arun Kumar, author of ‘The Black Economy in India’, estimated the stash of black money abroad at a staggering $ 2 trillion.
Modi himself estimated the amount to be Rs. 80 lakh crores – which he promised to, retrieve in 100 days after coming to power, in the run up to the 2014 Lok Sabha elections. The BJP President had later dismissed the PM’s words as an idiom.
The bottom line is that the nature of the beast is such that no definitive number can ever be known .But one thing is certain – Rs. 3,770 crores is not even pocket change compared to the assets stashed abroad. It is but a tip of a mammoth ice-berg.
But why didn’t people declare their black money parked abroad? Why did this Scheme fail?
A taxpayer will participate in an amnesty if it offers a highly concessional tax rate compared to rate when he made the decision to evade, or if he calculates that economic prospects have so brightened that he can achieve higher returns by bringing out his black money, or if there is a greater present chance of being detected; and in the event of detection, high chances of landing behind bars.
The Scheme didn’t meet any of the criteria. The government imposed a 60% tax -income-tax at 30 % and penalty at 30 %. Those with large amounts of wealth stashed abroad, who also had means to conceal it, parting with more than half their assets just didn’t make sense. The economic prospects are still tentative and the take-off still some distance away. Even though the chances of detection are brighter now than ever before, with worldwide sharing of information and universal zero tolerance for evasion , the chances of a jail term are however negligible , notwithstanding that the law prescribes exemplary punishment. Till that first person enters Tihar, there is going to be no deterrence.
Moreover, the perception was that the government’s attempt at trying to get the money back was purely symbolic and the tax evaders realized this was much ado about nothing.
If amnesty schemes are morally corrosive, why have them at all? A disclosure scheme is an extraordinary measure, meant for abnormal situations such as after a war or at a time of national crisis. The Government has been offering tax amnesties practically every ten years on the premise that the citizens need to be given an opportunity to come back to path of rectitude and contribute their mite to the grand adventure of nation building.
Resorting to such a measure during normal times and that too frequently, shakes the confidence of the honest taxpayers in the capacity of the Government to deal with the law breakers and invites contempt for its enforcement machinery. Disclosure schemes not only fail to achieve the intended purpose of unearthing black money but have deleterious effect on the level of compliance among the taxpaying public and on the morale of the administration.
In future , if the Government is of the opinion that an amnesty scheme , after balancing all ethical and practical aspects, is absolutely necessary, in view of an abnormal situation , then it will need to go the whole hog ; no half-measures, no tentativeness, no uncertainty ; just a clear-headed approach . Followed by iron-fisted consequences for tax rogues who still do not fall in line .But much before any such scheme is introduced, the justice delivery system needs to be comprehensively overhauled: fast-track courts, revamping the institution of public prosecutors, posting of efficient officers in the prosecution wing and improved co-ordination between all stakeholders. Without anyone first going to jail, the ‘stick’ will just not work.
Also, without the active help of chartered accountants, tax lawyers and trade/industry bodies, no scheme can succeed. I recall at the time of Kar Vivad Samadhan Scheme in 1998, I addressed several trade associations in Mumbai urging them to avail the Scheme. At the time of VDIS, a petition was filed in the Supreme Court by the All-India Federation of Tax Practitioners, stating that such a practice was discriminatory against those who paid their taxes regularly and dutifully. The government had to give an undertaking to the Supreme Court that the VDIS was the last of its kind, and it would not bring about such schemes in future. Any future scheme would need the approval of the Supreme Court.
The squeamishness shown by the Government in not including politicians and bureaucrats in amnesty schemes will need to carefully considered. That, of course, is easier said than done. The country, perhaps, in not prepared to accept such a course of action. Big bribes paid to corrupt politicians and bureaucrats constitute a major source of black money and a perception exists that a large part of black money in the country and abroad belongs to them .Till they are covered , we will be toying with the tip only and failing once again to cover the entire iceberg. In any case, even in the earlier schemes such as VDIS, there were stories floating around that politicians had taken advantage of the scheme albeit under benami names. What will be the impact on their political career , will the public accept them when elections come calling , will confidentiality be maintained ;if so , how will that be reconciled with declaration of assets to be filed by candidates – all these are serious issues which will need to be gone into . But any scheme not covering this class is doomed.
The tax department has realized the vital importance of an effective deterrence to stem the generation of black money in future. One of the issues for discussion during the All India Conference of Chief Commissioners and Director Generals of I-T (held on 25-26 May) was ‘Lack of Credible Deterrence through Penalty and Prosecution – Causes and Ways to Improve’. It has decided to take stringent action in big cases of evasion which would go a long way in demonstrating to compliant taxpayers that laws are just and fair. The department is also working towards removing the various deficiencies in the prosecution machinery pointed out by the C & AG.
At the G 20 Summit in Turkey, Modi, on 16th November, has come out very strongly against corruption and black money and listed efforts to ferret out illicit wealth.
Once a credible deterrence is in place, and the fear of incarceration and consequent loss of liberty and social opprobrium looms large for the rogue taxpayer, then there would be no need for any tax amnesty schemes in the future. And that would be a very good thing for the tax payers and the tax department alike.
