Mr Jaitley, the New Black Money Scheme is Nothing but an Amnesty Scheme

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In the budget speech finance minister Arun Jaitley made on February 29, 2016, he proposed: “a limited period Compliance Window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income.”

So, if you have black money, and are willing to pay 15% extra to the government, over and above the top tax rate, the laws of the land won’t apply to you. As Jaitley further said in his speech: “There will be no scrutiny or enquiry regarding income declared in these declarations under the Income Tax Act or the Wealth Tax Act and the declarants will have immunity from prosecution. Immunity from Benami Transaction (Prohibition) Act, 1988 is also proposed subject to certain conditions.”

In an interview to the national broadcaster Doordarshan, Jailtey later said: “It’s not a VDIS (Voluntary Disclosure of Income Scheme) and it is not an amnesty.” Like a good lawyer, he did not specify what the scheme really is.

So what does the word amnesty mean? I looked for and managed to find my fifteen-year-old The Compact Oxford Reference Dictionary. The dictionary lists out two meanings for the word amnesty. Here are the two meanings: a) an official pardon for people convicted of political offences. b) a period during which people admitting to particular offences are not prosecuted (the italics are mine).

As Jaitley said during his budget speech: “We plan to open the window under this Income Disclosure Scheme from 1st June to 30th September, 2016 with an option to pay amount due within two months of declaration.”

Hence, anyone admitting to having black money during this period and paying the tax, the surcharge and penalty on it, will not be prosecuted under the laws of the land and will have immunity. This is precisely the Oxford Reference Dictionary’s meaning for amnesty – a period during which people admitting to particular offences are not prosecuted. 

So, even if Mr Jaitley does not want to call the government’s black money amnesty scheme, an amnesty scheme, it is nothing but an amnesty scheme. If you are willing to declare your black money, pay 30% tax and 15% extra on it, the law of the land will not apply on you.

Now compare this to advance tax which needs to be paid by the non-salaried income tax payers several times during the course of a year. As per Section 234C of the Income Tax Act, if advance tax is not paid on time, a fine of 1% per month needs to be paid on the total amount of tax outstanding. Hence, the government is basically treating everyone who has black money and has not paid tax on it, a little worse than someone who has not paid advance tax for a year.

Also, it is interesting that this time around the government wants those who have black money to pay only 15% extra and get immunity. In May 2015, the Parliament had passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Act. After the passage of this Act, the government offered a compliance window.

This window allowed those with undisclosed foreign assets and income(or foreign black money) to declare them, pay a tax of 30% and a penalty of 30%. The window was closed on September 30, 2015.

Taking advantage of the compliance window 638 declarants declared assets and income of Rs 4,147 crore in total. This meant that the government was able to collect around Rs 2,488 crore (60% of Rs 4,147 crore) as tax revenues.

For all the hype and hoopla that happened, the actual collection was basically very small. Did this failure lead to the government just asking for 15% extra this time around, instead of 30%, as was the case last year?

Further, is there a distinction being made between foreign black money and domestic black money? The domestic black money stays within the country and has some utility. It is spent on consumer goods and real estate. Hence, the money enters the domestic financial system and is income for many individuals.

So, even though tax is not paid on this money, it does have its utility. The same cannot be said about black money that has left the country. And is that why the government is handling those declaring black money in the next financial year, with kids gloves?

The one good thing that Jaitley has done is that he has not assumed the total amount of money he expects the government to earn through the black money amnesty scheme, as a part of the government income for the next financial year.

Guess there is no way to possibly estimate this. The last time the government launched such a scheme was in 1997. The scheme ran between July 1, 1997 and December 31, 1997. The scheme allowed individuals with black money to come out in the open and pay a tax of 30% on their black money. In case of others i.e. corporates and firms, a tax of 35% had to paid.

The government ended up collecting Rs 9,584 crore from around 4.75 lakh declarants. Nevertheless, the scheme was different from the one that will be launched in June this year, given that back then the black money wallahs did not have to pay any fine. This time around there is a 15% fine. Also, the response to the amnesty scheme on foreign black money launched last year, had had a thanda response.

Given these ifs and buts, it’s a good thing that the government has not made any assumptions about the total amount of money they expect to earn through this route. But this hasn’t stopped the stock market wallahs from trying to come up with a number.

Akash Prakash of Amansa Capital expects the government to earn Rs 50,000 crore through this route. He doesn’t explain how he came up with the number. The thing is that the government hasn’t gotten around to putting a number to the money it expects to earn is primarily because there is no way a reasonable estimate can be made.

In that scenario how did Mr Prakash come up with a Rs 50,000 crore number? Or like other fund managers was he just being optimistic for the sake of being optimistic? That as we know is a favourite pastime of the fund managers.

The column originally appeared on Vivek Kaul’s Diary on March 15, 2016

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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