A bad idea

It is difficult to reconcile the government’s exhortation to people to pay their taxes with its proposal to come up with yet another black money scheme.

If the scheme is sufficiently attractive to get the attention of tax evaders, then by definition it is manifestly unfair to the honest taxpayer.

Also, since such black money schemes appear with a regular periodicity (1992, 1997 and now 2004?), the message to the evader is clear—never mind if you don’t pay right now, there’s certain to be another laundering scheme a few years down the line.

Since the government is reported to have ruled out a VDIS-1997 type of scheme, where effective tax rates went down as low as 2-3 per cent in several cases—thanks to the loose wording of the scheme and lax administration—one must hope the prize for tax evaders will not be so high this time round.

In that scheme, also the brainchild of Finance Minister P Chidambaram, tax evaders were allowed to declare their income in bullion and this bullion was to be valued depending upon the year in which it was claimed to have been bought.

Naturally, there were several cases where the bullion was claimed to be of 1961 vintage and, the Comptroller and Auditor General’s report revealed, the government actually issued a circular asking taxmen to issue certificates even where the declarations were of an “unusual” nature!

One of the possible schemes being worked out this time is to issue bonds that will pay no interest for the first few years. Assuming the interest rate on such bonds is 6 per cent, and assuming a 6 per cent inflation rate, this means that on a very rudimentary basis the effective tax will be just 17 per cent if no interest is paid on the bond for the first three years.

Given that the current tax rate is 33 per cent for those who earn more than Rs 8 lakh a year, that’s a very clear signal that it makes sense not to pay your tax.

Interestingly, the Comptroller and Auditor General’s report on VDIS 1997 found that people who had declared zero income (and even losses) in their official returns for 1997-98 declared incomes for that year in their VDIS declarations.

There is, then, the issue of how this money is to be spent; the “moral” justification for yet another black money scheme is that this is meant to fund programmes for the poor, such as the rural employment component of the Common Minimum Programme.

The problem with this argument is that, as with most other such programmes, the poor rarely get more than a minor part of the total money spent.

As is the case with the proposal to use foreign exchange reserves to fund infrastructure expansion, the issues have been wrongly framed—in the case of money for social programmes, for instance, there is enough being spent even today, it’s just that a large part of it is wasteful or mis-directed spending.

It is this that needs to be tackled; throwing more money garnered from tax evaders is not the solution.