VDIS 08/09, the Voluntary Declaration of Income Scheme, is a tax amnesty scheme feared by the taxpayers. This scheme is aimed at “difficult to tax” taxpayers’ group whose income sources or income levels are otherwise difficult to assess. The tax defaulters, who did not pay their income tax in past, are able to pay it now at a rate of 10% on the value of voluntarily declared assets valued at the market price of July 16th, 2008. They will also receive an amnesty for the previous tax defaults and a guarantee that the sources of such income will not be investigated. The administration has tried to create a perception of threat in the taxpayers by saying that it has done extensive homework in collecting information on tax defaulters and it is prepared to initiate severe actions against them including the seizure of their properties, should they fail to utilize the scheme. Initially a lot of unwillingness was shown by some business associations. But as the final days of the scheme approached, big crowds were drawn to the tax offices and the news is that the government has almost hit the target of collections intended from this scheme and the tax payment date has been extended by one more month.

The VDIS targets the ‘income reporting’ gaps. The income reporting gap is found more in the transactions in informal trade, professional and private services, cash payments and illegal/criminal activities. There are other gaps as well which can result in lower tax yield. The tax base gap is created by the government itself by not taxing certain sources of income like agricultural income or industrial income under the tax breaks. The tax arrears feed into a collection gap. These gaps are also significant gaps and are the product of the government itself or the lax attitude of the administration.

An honest and regular taxpayer pays the full amount of taxes in time while a hardcore defaulter receives multiple amnesty under VDIS and pays a lower rate. There is an argument that the VDIS is based on the present market value of the asset and thus attracts a higher collection. But is this true? The present value of an asset is a summation of previous income and the capital gains that it attracts. The capital gains, mostly, are taxable under the Income Tax Act, 2002. So, the valuation gap may not be so significant as argued. Moreover, the decision by the administration to value the assets in securities at the purchase price has eroded the tax base for VDIS substantially and it is also not fair for the holders of other sorts of assets. The VDIS could weaken the morale of honest taxpayers. It could also erode the tax administration’s capacity to assess/investigate in future and weaken it because it takes a presumptive/arbitrary route to tax assessment. It has created a perception that illegal and corrupt practices also receive the amnesty ( which is not true and the Chief Secretary has clarified this in reply to a PIL at the Supreme Court) and that VDIS is not business friendly.

VDIS was executed in the past also but those were the days when the government did not have a comprehensive Income Tax Act and the tax administration had limited powers to investigate and assess ‘Hard to Tax’ groups. The story is different now. The taxpayers are under self-assessment regime (a VDIS?) with a responsibility to declare their income and pay taxes, and the failure to do so attracts severe actions and penalties by the administration. The tax administrators can make ‘jeopardy’ and ‘amended’ assessments of income based upon investigations including that of disproportionate or unexplained assets, which is also the backbone of VDIS. If they are unable to investigate for regular tax assessments, they will be unable to do so under the VDIS drive too because they have to apply the same laws and tools.

The government, rather than relaxing the tax rules and providing amnesty to the tax defaulters, could have done a better job by applying more fair means like closing the tax-base gap and treating all taxpayers equally. Similarly, a better efficiency and revenue productivity could be achieved through the application of stricter rules to check accounting frauds and reporting gaps, adoption of measures that help transparent customs valuation, makes banking transactions compulsory, minimizes the plethora of tax exemptions and tax incentives and strengthens the institutional capacity of the administration.

Finally, the taxpayers who have paid taxes under this scheme should understand that, they better change their behaviour and pay taxes regularly, because the government may not be able to give them such amnesty regularly only to humiliate the honest taxpayers and weaken the tax administration. The public also deserves a clear explanation by the government on VDIS which should say that it is a tax amnesty scheme and does not intend to compromise with the ethical standards of a civilised society and that this scheme will not hamper the investigations under the anti-corruption or money-laundering law.

Mallik is former finance secretary