PSSSST. Don't look now, but is that a taxman creeping up behind you? Or are you enthused enough by Finance Minister P. Chidambaram's tax cuts to mend your ways and fess up to your sins? For, if Budget 97 was about anything at all, it was about curbing tax evasion. Chidambaram has his gimlet eyes fixed on your black money. He's just fini-shed waving the carrots. But, in his other hand, the one he has behind his back, he could be holding a stick. A big one. With spikes.
Maybe it's time to get worried. More so, if you don't figure in Chidambaram's list of the mere 12,000 assessees in the country whose incomes are supposed to be above Rs 10 lakh per year.
To help you get fully legit, Chidambaram's budget has offered the following:
- Income tax rates have been lowered across the board, with the highest slab at 30 per cent for incomes above Rs 1.5 lakh per annum.
- Corporate taxes too are down, and the surcharge on tax has been abolished.
- A voluntary disclosure scheme (VDS) has been introduced to give a one-time option to declare unreported income.
- Excise duties have been moderated across industries.
Will these measures help? The Government is putting its faith on the economic theory that lower tax rates mean better compliance, and that taxes are now so low that it's no longer worth it for the average Indian to run the risk of hiding their income. Possibly, it's also banking on a spark of patriotism in the Indian heart. For, the nation definitely needs to mop up that black moolah.
A simple calculation will make the stakes clear. Last week, Madhu Dandavate, deputy chairman of the Planning Commission, said that there was black money worth Rs 100,000 crore in the Indian economy. Add to that the $80 billion (Rs 280,000 crore) estimated to be stashed away in Swiss banks. Of course, these are but guesstimates, and the Rs 100,000 crore may be far lower than the real number. But if we accept these figures for a moment, and if the Government manages to mop up 5 per cent of this total, that's Rs 19,000 crore, 30 per cent of the 1996-97 fiscal deficit. And if the Government can mop up 30 per cent of the black money....
And remember that the VDS is time-bound and will run for exactly nine months. T-Day is December 31, 1997. Says Chief Commissioner of Income Tax A.K. Batabyal: "These reforms are only the beginning to check the pulse of the people." If the response from the public is good and people voluntarily come up to pay taxes, the Government would take up another phase of reduction in tax rates in the next budget. If the response isn't good, the Government has three months time, till March 31, 1998, to crack down on the recalcitrant.
Whether the Government succeeds or not in its final aim of harnessing a significant part of India's parallel economy to productive use, what is indubitable is that the new siren song to illegal cash has started a debate of far-reaching proportions. The core reason for that is of course that 50 years after Independence, almost every cog in every wheel in Indian life is greased by some form of tax evasion. From the bribe that Indians pay to get their newborn child's birth certificate, to the final repayment of the child's debt to his parents, when he pays up to get his parent cremated, the cycle of Indian life is pure kickback karma. School admissions, purchases without insisting on a bill to avoid sales tax; getting a job, a seat on a train or a bank loan; renting a house, building a house; paying medical bills—every step of an Indian's life is tinged with black.
And then there are the scams: from gas cylinders to petrol pumps, from ayurveda to animal fodder, from fake shares to phone networks. The minister keeps your briefcase in the corner and blesses you. The government clerk leans across and whispers to you that he takes bribes because he never wants his wife to say that her neighbour has a household appliance that she doesn't. And you pay the parking attendant a rupee and tell him not to issue that Rs 5 parking charge coupon. As the Outlook-MODEopin-ion poll of 1,000 people in five metros shows, 66 per cent of people believe that most or all Indians evade taxes.
It's therefore small wonder that there's enormous cynicism about whether the Chidambaram strategy will work. Says Rajash Kapadia, a Mumbai-based tax lawyer: "Since Independence, this is the 11th amnesty scheme to bring fringe economy within the mainstream." Indeed, in the last 20 years alone, the Government has declared five amnesty schemes. Only the 1991 India Development Bond (IDB) scheme has been successful to any extent. Says Suraj B. Gupta, economist and author of the book Black Income in India: "The Government may collect a few hundred crore rupees, but that will not even be the tip of the iceberg." "Lowering the highest tax rate to 30 per cent compares favourably to the cost of evasion," says Subodh Bhargava, CEO, Eicher Group. "But to assume that lowering of tax rates will make people honest is wishful thinking. The media, the NGOs, the apex chambers of commerce will have to play a key role in promoting awareness and communicating to the people that it is good to pay tax. Only this can mitigate the cynicism." A cynicism bred from watching politicians and big businessmen flouting the country's tax laws with impunity.
The group chief (taxation) of a pharmaceutical company claims that the reduction in rates may be an incentive for existing assessees to disclose more income, but is unlikely to promote new people to come into the tax net. "It is far simpler not to pay tax than to file a return, get a notice and an IT inspector and bribe him," he says. Tax consultant S.S. Bagai mirrors the corruption effect: "The bureaucracy is badly paid and is bound to be corrupt. Nothing moves without bribery. I know of even income-tax lawyers who have had to pay bribes to get their personal cases decided." He also contends that since the tax laws are so complicated, it would be impossible for people to prepare income tax returns without the help of experts, who demand a minimum of Rs 2,000 for preparing returns.
Add to that the Indian's talent for figuring out loopholes. As soon as Chidambaram announced the tax rate cut and the VDS, many had worked out the fact that if they don't disclose their income this financial year at the current 40 per cent tax rate, and disclose it in April under the VDS, they save a cool 10 per cent. Others were claiming to have cracked the tax base-widening proposal. So, many Indians who, say, own a car and a telephone, are hastily transferring the car to their wife's name and slipping past the widened net.
Carrots work, point out tax experts, only when they're balanced by the stick. "Compliance will remain an issue as long as there is no big deterrent," says Atul Dhawan, partner, Billimoria & Co. "Compared to the US, where you could land up in jail, have your credit card impounded and your social security withdrawn if you default on taxes, in India you can go through an appeal process, pay a fine and get away. You certainly won't go to jail." The fine can range from 100 per cent to 300 per cent of the tax evaded. But this depends upon the discretion of the income tax officer, leaving ways of escape.
There's also the question of the fairness of tax amnesty schemes. Industrialist and major taxpayer Rahul Bajaj, while agreeing that lower tax rates should lead to better compliance, has a complaint that is echoed around the country across income classes: "The voluntary disclosure scheme is in fact a penalty on honesty and puts a premium on dishonesty. Chidambaram has not balanced the economics and ethics as he purports but has gone in for all economics. For the last 10-15 years, cheats have been stashing cash abroad in Swiss banks, while people like me have been paying taxes at high rates. I have been made to feel like an idiot. In the guise of pragmatism, Chidambaram has drawn the line a bit too far ahead. The cheats have gained not just in terms of rates but their money has appreciated abroad as the dollar has moved up. So they gained both ways." A similar sentiment of the honest being let down emerges from the Outlook-MODEopinion poll too.
And is the country's IT department at all up to the task of increasing compliance and stretching the tax net wide? Consider the car-telephone-foreign travel scheme. This requires the IT department to coordinate with the motor vehicles department, the property registry office and the passport office, a humungus task by itself. And then map the data received from each of them onto each other and then on IT records, impossible without state-of-the-art computer technology. Now comes the twist. A person who is occupying a house using the power-of-attorney route and is the owner for all practical purposes does not show up on the records, while the legal owner who has washed his hands of the house does. These are legal complications. Consider the simple hypothetical example of Sunil Rajaram, residing in his own house at 21, Safdarjung Enclave, New Delhi-110029. His car registration reads S. Rajaram; his property records read Sunil Rajaram, 21, S.J. Enclave; his phone bill reads S.R. Ram. This is a stack of needles with the hay all knotted up.
IT department sources reveal that they have already intimated to the Finance Ministry their funds and manpower requirements for executing the task set for them in this Budget. Says a senior offi-cial: "If we don't get what we need in the next three months, there's no way we'll be able to cope in 1997-98." He will also have to cope with the endemic corruption inside his own department.
Computerisation of records has begun. It is supposed to be almost complete at New Delhi, while Mumbai and Chennai will follow in the next couple of months. During 1997-98, 36 important cities including Calcutta, Pune, Bangalore and state capitals would be computerised, and within the next three years, the exercise would be completed throughout the country. In that fully-networked system, information will be available on-line to the IT department on any assessee anywhere in the country.
That's the target. In its haste to go on-line, the department has not even waited to get approval for buying the massive number of computers it needs. It's working with hired machines. This speaks equally of the department's seriousness and the sad neglect it suffers from.
The department also intends to have a unique 10-digit permanent account number (PAN) for every tax assessee. By the end of fiscal 1997-98, it would be mandatory for all assessees in most important cities of the country to have a PAN. Otherwise he will be penalised. Another drive being undertaken is that of simplifica-tion of IT rules and the IT form—which remains too complicated for most non-accountants to fill it up on their own. A beginning has been made by modifying the IT Act and weeding out archaic rules and provisions. At the form level, Chidambaram is seeking to simplify this by a brief four or five-step form. And by the end of 1997-98, an assessee will be able to file his returns on a floppy or a CD-ROM.
The target for personal income tax this fiscal year: Rs 21,700 crore. This, say experts, should be met. Reason: compliance is expected to increase with reduced tax rates and the inclusion of new assessees. In the case of corporate tax, however, the targeted Rs 21,860 crore might look optimistic. Reason: while tax rates have been slashed and surcharge has been done away with, unlike the case of personal income tax, the number of corporate entities are not increasing in similar proportion. Sources in the IT department are not confident of achieving the target.
But then, if just 10 per cent of the total illegal funds held by Indians comes into the Government's coffers under the voluntary disclosure scheme, it's a different story altogether. And maybe even a different economy.
