Did the fine of 7.5% cost IDS large chuncks of declaration?

In his Budget speech for 2016-17, the Finance Minister Arun Jaitley  proposed a limited period compliance window for domestic taxpayers to declare their undisclosed income, whether in the form of investment in assets in India, or abroad.

Income Declaration Scheme (IDS), 2016, as it was baptised, proposes to clear up black money-holders’ past tax transgressions by paying a total of 45% (tax of 30%, Krishi Kalyan Cess of 7.5%, and penalty of 7.5%) of the undisclosed income. The window for disclosure started on June 1, 2016, and closed on September 30, later this year.

Going down the pages of history almost two decades back, in 1997, the then Finance Minister P Chidambaram had come up with a somewhat similar scheme — Voluntary Disclosure of Income Scheme (VDIS). As many as 4,65,133 persons made declaration of undisclosed incomes amounting to Rs 33,339 crore, and the tax paid to the government amounted to Rs 9,584 crore, under the VDIS. This amount to Rs 1,43,881 crore of declared income in present value, if interest rate is considered at modest 8%. At the same rate, tax collections at present value stand at Rs 41,362 crore.

Under the current IDS scheme, the income disclosed was Rs 65,250 crore as a part of 64,275 declarations, as said by Finance Minister Arun Jaitley. This is less than the half of the amount declared under VDIS (at present value of money). The tax revenue expected, at the rate of 45%, should be Rs 29,363 crore. But the ratio of income declared per declarant is far higher this time around. At present value, the 1997 scheme yielded Rs 30.93 lakh per declarant, while the current scheme has yielded Rs 1.02 crore per declarant.

Identical schemes

Although, conceptually the two schemes are identical, there are some differences in the tax rates applicable. In the 1997 scheme, the individuals were taxed at 30% and companies at 35% on their incomes declared. There was no penalty and no questions were to be asked on the source of their declared undisclosed incomes. In the current year’s scheme, the tax payable on the declared undisclosed incomes worked out to 45%, which includes 30% basic tax, 25% surcharge on the basic tax (which works out to 7,5%), and 25% penalty on the basic tax. Again, no questions are to be asked on the source of these incomes and assets.

Given the aversion to high tax rates among masses in our country, is it the penalty of 7.5% that took a hit on the scheme? Given the fact that the mood in the country has now become sort of very anti-black-money, which was not the case in 1997, the then scheme still outperformed the present one, in terms of number of declarations. This might raise eyebrows in the North Block, for sure. The intent seems to be there, but needs to be addressed, whether or not, the government is handling it in a naive manner.