The year 2017-18 [following the announcement of demonetization Prime Minister, Modi on November 8, 2016] witnessed an unprecedented surge in tax collection led mostly by steep increase in personal income tax [PIT]. During 2018-19 however, it received a jolt with collection missing the target by significant margin. The set-back has continued during the current year.
In the budget for 2019-20, the finance minister, Nirmala Sitharaman had set gross tax receipts [GTR] target of about Rs 2460,000 crore of which the net central tax [NCT] was Rs 1650,000 crore [after transfer of Rs 810,000 crore to states as per 14th Finance Commission]. As we draw towards year end, the government is staring at a shortfall of about Rs 356,000 crore in GTR which translates to NCT shortfall of Rs 239,000 crore [after deducting Rs 117,000 crore which states will bear]. The shortfall is seen in almost all areas viz. corporate tax, PIT, GST [Goods and Services Tax] and customs duty.
Visibly upset with the slide in tax collection [indications of which were available from the second quarter [monthly collections under GST had slipped below Rs 100,000 crore mark for three consecutive months viz. August/September/October], Nirmala Sitharaman had launched a two-pronged strategy stem the slide. First, the government intensified efforts to rein in tax evasion, increasing compliance and check fraudulent claims of input tax credit [ITC]. This led to GST collection during November/December, 2019 crossing Rs 100,000 crore each. In January 2020, this is likely to touch Rs 115,000 crore.
Second, it has come up with schemes to lure assesses in to settling dues involved in tax disputes. On September 1, 2019, the government launched the ‘Sabka Vishwas’ Scheme [SVS]. With an intent to settle still-unresolved disputes relating to excise and service tax under the erstwhile dispensation [prior to GST launch from July 1, 2017], the scheme provides for relief varying from 40% to 70% of tax dues depending on the amount of dues involved for cases other than those covered under ‘voluntary disclosure’. Out of a total of 183,000 cases as on September 1, 2019, 134,000 have already been settled yielding Rs 31,000 crore.
In the follow through, the government is contemplating similar scheme for settling disputes in regard to customs duty, excise and direct taxes. In the area of direct taxation, the demand under litigation is about Rs 623,000 crore [as on March 31, 2018] including Rs 400,000 crore toward corporate tax and balance Rs 223,000 crore PIT. With SVS setting a benchmark, the tax foregone even under these schemes would be substantial. That apart, it sends a wrong signal by promoting the cult of non-compliance. The proof of pudding is in eating. In this regard, let us take a look at the schemes those were launched in 2016.
About three-and-a-half years back, in the backdrop of mountain of black money doing the rounds in economy, the government had launched an income declaration scheme [IDS]. Under it, a person could pay 45% of disclosed amount [30% tax plus 15% penalty] and thus convert his unaccounted cash in to white. For this purpose, they were allowed 4 months window [June 1- September 30, 2016].
Concurrently, based on information collected from various sources viz., banks, property registration offices, jewelers and other platforms where big ticket transactions were done, finance ministry had compiled a list of 9 million persons who spent up to Rs 1 crores in previous year but had not filed I-T return. The department had also sent discreet e-mails to alert them that they could be potential targets for levy of heavy penalties besides tax if they didn’t disclose. Modi had issued a stern warning that persons who didn’t come clean, will be dealt with a heavy hand after September 30, 2016.
Under IDS, a meager 64000 persons or 0.7% of potential dodgers declared their undisclosed income. The amount disclosed was Rs 53,000 crores [bare less than 2% of the black money taking this at 25% of GDP] yielding Rs 24,000 crore as tax. Despite an attractive offer [a tax rate only marginally higher than the normal, no penalty and no prosecution] as also wielding stick in case the hoarder decides not to avail, an overwhelming majority did not come forward. Post September 30, 2016, in line with the warning, the tax department ought to have unleashed its might of on those persons. But, it was not done.
Instead, the government launched another scheme Pradhan Mantri Garib Kalyan Yojna [PMGKY] covering period December 16, 2016 to March 31, 2017. Under it, a person could pay 50% tax on the deposit amount [read: the cash held in banned currency notes deposited by hoarders in banks in the follow-up to demonetization] and give another 25% as interest free advance for 4 years. To enable this, it made necessary amendment in the Income Tax Act.
Persons who didn’t avail of the scheme but declare the ‘undisclosed income’ in their return for the assessment year 2017-18 [corresponding to financial year 2016-17] had to pay tax @60% plus surcharge @25% plus penalty – all adding to a total of 85%. Further, those who didn’t declare the amount even in their return and are caught by I-T department during search and seizure, will have to shell out much more which could even exceed 100% besides prosecution. This scheme too turned out to be a damp squib.
The amount collected under PMGKY was less than Rs 4000 crores – a mere 1/6th of the tax collected under IDS. It ought to have prompted the government to go hammer and tongs after evaders. But, this was not to be. Although, it launched a project ‘Operation Clean Money’ on January 31, 2017, under which the tax department followed up with 1800,000 persons whose deposits did not match their returns profile. But, this is yielding very little in terms of either recovery or initiation of prosecution.
Even under SVS touted as a major success, the revenue flowing to the exchequer i.e. Rs 31,000 crore is a fraction of the demand under dispute. Yet, more and more amnesty schemes covering a wide spectrum viz. personal income tax, corporate tax, GST, excise duty and service tax, customs duty etc are in the offing. This is a dangerous trend. Apart from causing substantial loss of revenue, it sends a wrong signal to those prone to tax avoidance that the government is not so strong and hence, will remain glued to the business as usual.
Even worse, it causes resentment among honest tax payers who pay their dues in full and in time. If, the status quo continues i.e. instead of penalizing evaders, they are rewarded by coming out with amnesty schemes, then there is every possibility of even the honest tax payers joining the ranks of evaders. That will have serious repercussion on the ability of the government keep up buoyancy in tax collection and achieve the fiscal goal.
To sum up, one gets a sense that tax evaders and hoarders of unaccounted cash have taken Modi – government for a ride by denying to the exchequer taxes due from them. Ironically, the former have even sought to build a narrative [through hyper propaganda in the media] that latter is indulging in what they brand as ‘tax terrorism’ [this is far from being the case as the present dispensation has been extraordinarily soft even towards evaders]. This must change.
Even while continuing to deal with honest tax payers in a ‘fair’ and ‘transparent’ manner [to ensure that the assesses don’t face any inconvenience or harassment, the department has even latched on to ‘faceless interface’ making full use of information technology] and even rewarding them, when it comes to dealing with evaders, the government should take an ‘uncompromising’ stance. Instead of coming out with amnesty schemes, the agencies [Income-Tax department, Enforcement Directorate et al] should vigorously pursue such cases to recover taxes dues with interest and penalty as per law.
A major factor driving the government toward amnesty schemes [and resulting revenue loss] is delay in delivery of orders by courts. In this backdrop, there is also dire need for expediting judicial reforms and augmenting judicial capacity so that delays are avoided and judicial pronouncements come in fast track mode. If, court decisions come fast, the department will be able to recover dues in full without having to give unwarranted concession to assesses.
All the three arms of the government viz. executive, judiciary and legislature need to act in unison to make this happen.