AN amnesty for service tax evaders was announced by the Finance Minister while presenting the Union Budget for the year 2012-13, saying:
“While there are nearly 17,00,000 registered assessees under service tax, only about 7,00,000 file returns. Many have simply stopped filing returns. We cannot go after each of them. I have to motivate them to file returns and pay the tax dues. Hence, I propose to introduce a one-time scheme called ‘Voluntary Compliance Encouragement Scheme’. A defaulter may avail of the scheme on condition that he files a truthful declaration of service tax dues since 1.10.2007 and makes the payment in one or two instalments before prescribed dates. In such a case, interest, penalty and other consequences will be waived. I hope to entice a large number of assessees to return to the tax fold. I also hope to collect a reasonable sum of money.” (para 183)
In the Explanatory Memorandum to the Finance Bill, 2012, VCES has been referred to as the ‘Amnesty Scheme’.
The justification for leniency is wholly unjustified. When 10 lakh registered taxpayers, whose details are with the tax department, are not discharging their obligations, they need to be dealt with sternly—not cajoled by giving immunity from interest, penalty and prosecution. If tax dodgers are to be motivated this way, how will the FM check de-motivation of those, who, as good citizens, have been discharging their tax obligations in time and truthfully!
Tax economists and policymakers the world over have disfavoured amnesties. AM Nremner, while giving evidence before the Royal Commission on Income Tax in Canada, had said in 1920:“The real way to prevent fraud is that fraud should be punished by terms of imprisonment; that is the way to stop it. It will never be stopped
in any other way; the temptation is so great now. People must be made to understand that if they defraud the revenue, they are committing a mean and despicable offence against every one of their fellow taxpayers.”
Such persons do not deserve to be motivated by amnesties.
The Wanchoo Committee (1970- 71) in India in its report about such schemes, said: “We consider that a disclosure scheme is an extraordinary measure, meant for abnormal situations such as after a war or at a time of national crisis. Resorting to such a measure during normal times, and that too frequently, would only shake the confidence of the honest taxpayers in the capacity of the Govt. to deal with the law breakers and would invite contempt for its enforcement machinery….”
In his dissenting judgment in the case of RK Garg (1982) 133 ITR 229 (SC), AC Gupta, Judge of the Supreme Court, said: “The issues that arise in the context of amnesty are: Can fairminded, reasonable, unbiased and resolute men, who are not swayed by emotion or prejudice, regard such a scheme with equanimity and call it reasonable, just and fair, regard it as providing equal treatment and protection in the defence of the rights of being treated equally, which is expected of a sovereign democratic republic? The answers to these queries had to be obvious NO.”
Though the GOI stood committed, in the context of VDIS, 1997, floated by PC Chidambaram as Finance Minister, that it would not introduce any disclosure schemes in future, yet the VCES has again been mooted by Chidambaram against the commitment. Not only has he brought in the scheme, but he has enthusiastically marketed it by meeting trade and industry representatives in Chennai, Delhi, Mumbai, Kolkata, Bengaluru and Hyderabad and replied to their queries. Based on the replies to queries in these meetings, his Ministry has issued a number of clarifications—the latest being on December 11, 2013. The taxpayers have further been allowed the facility of paying the tax in instalments, i.e. 50 per cent by December 31 and the balance beyond this date without any liability for interest!
The Finance Minister expected to collect a reasonable sum of money from the scheme. According to a report in The Hindu Business Line, dated December 15, 2013, the Finance and Revenue Secretary, GOI, told the paper that till date, the total collection from VCES had been `2,500 crore and that the total would easily exceed `3,000 crore or even more than that. Even accepting that collection would be of `4,000 crore, in the background of annual tax collections from this tax and taking into account the period of amnesty, i.e. October 1, 2007 to December 31, 2013—a period of more than six years, much could not be said to have been achieved. Further, in a VCES seminar organised by the Institute of Chartered Accountants of India at Mumbai, the FM is said to have clarified that CENVAT credit would be available. Also, considerable sums have been spent in extensive travelling and advertisement through print, visual media and other means. All this will bring down the real monetary gain from VCES, which would not be commensurate with the loss of credibility of the government, indicating that it is unable to deal with errant taxpayers firmly. This has a disastrous impact on voluntary compliance.
The deleterious impacts of VDIS in the study on ‘Aspects of the Black Economy in India’ carried out by the National Institute of Public Finance and Policy in 1984-85 have been summarised thus:
Basically, these schemes seek to coax errant tax evaders to disclose their concealed income and wealth in return for taxation at concessional rates and immunity from penalties and prosecution.
By offering de facto amnesty for tax evasion, such schemes blunt the deterrent provisions of the tax laws, including the provisions for prosecution. Voluntary disclosure schemes have been severely criticised by a number of reports of the Lok Sabha’s Public Accounts Committee and the Wanchoo Committee.
The main criticisms are:
i. The quantitative results have been disappointing in relation to even the lowest estimates of tax evasion;
ii. The view that such schemes permit errant taxpayers to forswear their wayward ways is not supported by the large number of “repeat” beneficiaries of these schemes;
iii. When such schemes are launched every few years, they reduce the incentives for voluntary compliance in the first place and weaken the morale of both honest taxpayers and the tax administration.
Clearly, amnesty schemes blunt the impact of deterrent provisions. Deterrence in a firm way, not indiscriminately, is a sine qua non for successful voluntary compliance with tax laws—for that matter, any laws. Strict action is necessary in the case of recalcitrant assessees. Reports sometime back showed that debt-ridden Greece came down heavily on tax evaders, who owed money to the state. These included companies (nearly 6,000 in number), a railway undertaking and a host of individuals and other entities. Such concerted action is bound to have a deterrent impact. Amnesty cannot be the answer to non-compliance with tax laws. The Finance Minister needs to appreciate that tax gets collected by good governance and not by surrender to evaders.
The writer is former Chairman, Central Board for Direct Taxes (CBDT)