Voluntary Disclosure of Black Money: Comparing 1997 and 2015

The current black money declaration scheme may not be doing well. Can it learn anything from the VDIS?

There was considerable disappointment when the government announced the declarations received and amount declared under the compliance window under The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015. According to the government, a total of 638 declarations have been received, declaring undisclosed foreign assets worth Rs 3,770 crore. This amount was later revised to Rs 4,147 crore, while the number of declarations remained the same. The compliance window opened on July 1 and remained open until September 30. For the declarations made, tax at the rate of 30 percent and penalty at the rate of 30 percent is to be paid by December 31.

The Voluntary Disclosure of Income Scheme (VDIS) 1997

Many tax experts compared the current initiative with the Voluntary Disclosure of Income Scheme of 1997, an idea of the then finance minister, P Chidambaram. In his Budget speech of 1997-98, Chidambaram remarked that in a country of 90 crore people it was absurd that only 1.2 crore people were assessed for income tax, and that only 12000 of the assesses were in the tax bracket of income of above Rs 10 lakhs.

In that budget speech, he said that it was time to think of a scheme to harness ‘black money’ for productive purposes, believing it to be an opportune time to introduce a Voluntary Disclosure Scheme. The scheme was supposed to be very simple, such that irrespective of the year, the source of funds, the amount disclosed (either as cash, securities or assets) or if it was held in India or abroad, the funds would be charged at the revised highest rate of tax. Apart from this, interest and penalty would be waived. Immunity would have also been granted from any action under the Income Tax, Wealth Tax and the Foreign Exchange Regulation Acts.

Another feature of this scheme was that 77.5 percent of the funds collected through it would have accrued to the state governments, seen as a step to seek their active co-operation.

The scheme was introduced in 1997 and the compliance period was six months. The tax payable on the declared amount was at the rate of 35 percent in the case of companies and firms, and 30 percent in the case of others.

By the end of the scheme period, a total of Rs 33,339 crore was declared by 4,75,133 declarants. This resulted in a collection of Rs 9,584 crore in taxes by the government. The highest amount was collected in Mumbai (Rs 2,032 crore), followed by Delhi (Rs 1,228 crore) and Ahmedabad (Rs 968 crore). As promised, Rs 7,594 crore was transferred to the states.

Comparison

Why not Another VDIS?

There are multiple reasons given by tax experts for the failure of the current black money declaration scheme, the major one being the higher tax rate. The 1997 scheme was successful because of a lower tax rate of 30%, which was not very different from the normal tax rate. In addition, the rigorous imprisonment clause of three to ten years for wilful attempt to evade tax too has not helped.

Another issue that went against the current government is the affidavit filed by the previous governments that there won’t be another amnesty scheme like the VDIS. The affidavit was filed in response to a public interest litigation filed by a private citizen in the Supreme Court that such schemes discourage honest tax payers and are unfair to them.

(The story appeared on Factly. The original author, Rakesh Dubbudu, has been working on issues related to Right to Information for a decade. He is a data and information enthusiast and is passionate about governance and policy issues.)