Source: Business Standard

The Income Declaration Scheme was a triumph. India stands to gain as global tax policies converge towards the source-based taxation principle. But can India unearth unaccounted wealth from overseas sources?

The Narendra Modi government has reason to rejoice. Unlike sev­eral amnesty scheme rollouts in the past, the Income Declaration Scheme, 2016 (IDS 2016), has mopped up INR 65,000 crore – nearly 0.5 per cent of FY16 gross domestic product. Staggering statistics apart, hindsight reveals a significant shift in the socio economic mindset; the rush to embrace amnesty opportunity rein­forces the government’s relentlessness in ushering in transparency.

A brief on IDS 2016

The Finance Act, 2016, enacted a four-month window to hitherto delinquent taxpayers to come clean on undisclosed income and pay tax, surcharge and penalty aggregating to 45 per cent of such undisclosed income declared. The scope of the scheme covered disclosures to be made in respect of any income and/or investments in India for which the declarant had failed to disclose such income adequately or source thereof, either in a return or, such income that had escaped assessment. Dispensation from potential tax scrutiny under the income tax and (erstwhile) wealth tax laws, and immunity from prosecution under tax laws as well as the Benami Transactions (Prohibition) Act, 1988, for past non-compliances were held out as a bargain to willing declarants. Payment of tax on declared assets was staggered over three instalments in the next 12 months, to deal with liquidity concerns of taxpayers, and to prevent any distress sale of assets declared under the scheme. Also, fine-tuning of capital gains tax provision to enable cost step-up in respect of sale of declared properties was a win-win.

While comparisons with previous editions are inevitable, the success of IDS, 2016 is the result of multiple fac­tors that played out in tandem. For the first time, an amnesty scheme was so well and institutionally marketed by the government. The quantum of tax rate and penalty on disclosures were reasonable, too. Besides, the tax administration indeed worked as a whole with other quasi-government and independent professional bodies, facilitating the process of migrating a big chunk of the cash economy into the mainstream. Timely and multiple clarifications issued by the Board of Revenue immensely helped in broad-basing the scheme among taxpayers. Unlike in the case of the Undisclosed Foreign Income and Assets (Imposition of Tax) Act, under IDS, 2016, the declarant had implicit immunity from prosecution under the Prevention of Money Laundering Act. This also inspired confidence in taxpayers, particularly non-resident Indians, to come forward for disclosure. Further, confidentiality of disclosure was a criti­cal commitment by the government to those embracing the scheme.

IDS and emerging tax policies

Looking beyond statistical exuberance, IDS, 2016, complements the streak of tax policy measures pulled off by the government in the past 24 months to achieve enhanced tax transparency standards. The policy overhaul has wit­nessed the enactment of black money legislations in 2014, the constitution of special investigation team, the signing of tax information exchange agreements with treaty as well as non-treaty countries; the improvisation of the existing network of tax treaties to curb “treaty shopping”, embracing, albeit in a graduated manner, Base Erosion and Profit Shifting (BEPS) Action Plans in the legislation, etc. The impending implementation of the general anti-avoidance rules (GAAR) by April 2017 would add more muscle to combat tax evasion. India’s contribution at the multilateral tax policy deliberations at the G20/OECD forum, particularly in shaping the BEPS landscape, has indeed stood out. With the institutionalisation of G20 Tax Symposium, the momen­tum will sure get more tailwind to sus­tain itself.

It would be but fair to attribute the success of IDS, 2016, even if partly, to the retax policy landscape that has tight­ened the noose around stateless income.

An aspect that calls for deliberation is whether IDS, 2016, could have done any­thing different to be more effective. May be, it would do a round of good if the government were to run the amnesty scheme in tandem with the goods and services tax (GST) reforms, leaving little room for delinquent taxpayers to stay away from declaring their income sources and wealth. Perhaps, one more opportunity in the future could come handy in the GST era to fully sync the parallel economy with the mainstream.

Where next?

The two most relevant questions that have emerged since it has been curtains on IDS, 2016, are: Where does Indian tax policy go from here; and more importantly, can there be an equally successful attempt to unearth unaccounted wealth from overseas sources? On the first question, the direction is clearer now. With global tax policies con­verging towards the “source-based taxa­tion” principle, India stands to gain sig­nificant ground. Naturally, therefore, most of Indian tax policy actions and domestic tax legislation reforms would be woven around leveraging this advantage. The anvil of GAAR in April 2017 is a key tax reform waiting to unfold. However, a word of caution for policymakers: Unless the sophisticated anti-abuse legislation in GAAR is supple­mented with adequate administrative guidance, GAAR could yield unintended consequences such as causing signifi­cant erosion in taxpayers’ confidence. It is imperative the tax policy architecture does not promote the safe harbour or amnesty route for delinquent taxpayers to come clean, while suppressing the real potential of the economy for years.

Dealing with the second challenge would require more calibrated efforts, to socialise potential advantages of volun­tary disclosures of unaccounted overseas wealth and income sources. For example, the government may consider immunity from prosecution under anti-money laundering laws to willing declarants under the scheme to be rolled out under the black money legislation. Also, there may be a case for further moderating the tax and penalty rates (60 per cent under the 2015 scheme for black money disclosure), to inspire tax mop-up and mainstreaming of a bigger pie of the cash economy.

For now, the government should pat itself on the back for pulling off an extremely high-yield disclosure haul within a short span of four months. The Finance Bill, 2017, could be an opportunity for the government to consider replicating the performance of IDS, 2016, for unearthing unaccounted overseas wealth, under the aegis of the Black Money Act.