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Economy

Amnestasia: A disease where you forget to pay tax

My article at Yahoo: Amnestasia: A disease where you forget to pay tax on the Yahoo Budget Site.

There have been some calls for an “amnesty” scheme again. The concept is simple: people who have stashed away money and not paid tax on it, should be allowed to do so now, and thus escape the ignominy of being called cheats and put in jail.

The reasons for providing such an amnesty scheme is two-fold: a) this money wouldn’t be caught anyway, because it is stashed in locations otherwise unknown and b) the government will be happy to have the money now.

Yet, this has a huge issue of moral outrage – why bother paying taxes, when every once in a while, the government throws an amnesty scheme? You could hide money forever and whenever there is an amnesty scheme, declare what you want and you’re home scot free. This does no justice to the honest taxpayer, or even the government. On a personal note, I am absolutely against such a scheme at the ethical level – but then, I have reason to be, since I have no such tainted money.

But to give this a hearing beyond the issue of morals, the issue is of lack of incentives. Firstly, it is widely known that the tax department, despite its recent technology upgrades, has no will to seriously enforce taxation. There is no real effort to catch tax frauds, except at the extremely large level. And even there, corruption in the ranks seems to be common, and people seem to get away quite easily after raids. If you don’t pay taxes or have substantial “side” income, you may not ever be caught. Even if you are, there is enough potential to pay the right people and get away without jail time. (Not paying taxes is a criminal offence) The incentive here is skewed towards the corrupt.

To fix this, there needs to be serious work on enforcement. We can use technology to detect tax fraud, by tallying the compulsory statements banks, credit card companies and investment avenues need to provide the IT department. Once found, we can punish defaulters severely. When a lot of people are punished – that is, not just an odd case – it will discourage further creation of black money. An obvious place to start is real estate deals, but the black money trail isn’t only there.

Without this lack of enforcement, there is no point of an amnesty scheme. It will surely generate some income, but not enough to believe that there won’t be leakage in the future.

The other big issue is that we have legal ways to avoid tax. Agricultural income, for instance, is tax free. So who’s to know, really, if a minister says he (or an extended family) sold a lot more mangoes than were otherwise possible on a farm? Or if high net worth individuals moved money out into agriculture and therefore avoided paying any tax?

There are other ways – money routed through FIIs in Mauritius pay no capital gains tax of any sort. All a corrupt person has to do is transfer his money out of the country through hawala and bring it back through the Mauritius route, and it’s “laundered” from black to white. SEZs have the same concept – they also provide a tax free way, but MAT at 20% must be restricting that route for now.

These are examples of “white money” – that is, they generate bankable moolah, on which no tax is applicable in the first place. The amnesty doesn’t do a thing to address this leakage. The government needs to plug these loopholes – by taxing all agri-income above 5 lakh, and removing the tax free status of Mauritius – before it can create an amnesty scheme of any sort.

While important economists believe that there isn’t too much black money, I don’t think so. There is a difference between the amount of black money out there, and what we know about – a “parallel” economy of sorts. But also, the figures that show a 1 lakh crore per year of “black money” is not just that – it’s just the taxes we forego, which is about 10% of the total such money involved and that is just the figure for one year. They also ignore that a large chunk of money is laundered effectively.

But then, the government still has a deficit. A better method to plug the leaks is to use the born-again de-launderers such as the Swiss Government and Lichtenstein, which have agreed to provide us information about Indian money in those countries. Our current laws don’t allow us to completely ring-fence this money and bring it back, and pursue these defaulters. If we can tighten up the laws – and that’s not really an issue with the budget – we don’t need an amnesty scheme to plug the deficit; just enforcement will be enough.

Politically, the opposition is looking to haul the government over coals on the issue of corruption, but the method they choose is a farce: A closed-door joint parliamentary probe. That creates avenues for corruption on the other side of the table, where behind the closed door, you could discuss handouts for leniency. It would be far more efficient to have a transparent JPC broadcast on TV, even if it exposes the lack of knowledge of our dear Parliamentarians. An amnesty scheme would hugely benefit the people in that building, and what is worse than hurting the honest taxpayer, is gratifying the dishonest politician. Or do I repeat myself?

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  • Pi says:

    >oh you have no idea how much money is converted from black to white using agriculture income as the route.. ive heard of CA's who make a living doing just this.. they create and maintain PAN cards and income tax files of hundreds of people.. real genuine people from rural areas to whom they pay a few thousand bucks a year.. each year they show agriculture income these files upto whatever they can pull off .. now after a few years a lot of white money is now available in these files.. which gets transferred to other companies in the form of loans, equity investments and other myriad ways.. in return for this the CA takes equivalent cash and a % commission of total amount as his compensation..

    govt should definitely make agri income above 5lakhs taxable.. atleast someone should file a PIL or a RTI request to ascertain how much income is shown every year as agricultural income and thus goes tax free..