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Income Disclosure Scheme – a “Tax” Surgical strike? Or is this just the lull before the storm?

“Hi, boss is quite worried. He feels he should do something. You know na those guys are roaming all around the city”.

Those guys” aren’t robbers, thieves, rioters, or terrorists. “Those guys” are Income Tax sleuths who were undertaking “surgical strikes” via raids at random business houses, during the tenure of the Income Disclosure Scheme, and the conversation is a real conversation which I had with a CFO of a firm.

A mission which lasted for 4 months just ended. The Income Disclosure Scheme of the Income Tax Department officially ended last night with reports saying more than Rs 65000 crores was reported as undisclosed income by various people in India, until 8pm on 30th September, and the amount is expected to increase. This is a very large amount, especially considering the scheme didn’t have a great start. This marks the end of scheme wherein the Income Tax officers used all tactics, saam, daam, dand, bhed.

The Income Disclosure Scheme was a scheme wherein people who had undisclosed income or assets (commonly called as black money) could come clean, pay tax and buy peace with the IT Department. The main benefits of this scheme were:

1. The tax rate was 45% on the amount voluntarily disclosed as opposed to a possible 60% (excluding interest) when the Income Tax Department detects tax evasion and issues penalty
2. Taxpayers were given the opportunity for staggered payment of tax in order to reduce hardships due to cash-crunch
3. It included an assurance of privacy to the people who came forward
4. Most importantly it promised immunity from prosecution and a few other laws, which would have been applicable if the Department had detected evasion on their own

So in a way, this was a welcome scheme for crooked businessmen, where they could buy peace of mind by paying a concessional rate of tax. But such schemes hinge on one crucial factor. When businessmen choose to evade taxes, they are playing the percentages game. They are betting that:

A. The Department will not be able to trace them and catch them
B. If at all they’re caught, they will get away cheaply either by hiring a hotshot tax professional or by bribing or a combination of both

Most crooked businessmen never even get detected or caught by the Tax Department. So the lure of an amnesty scheme would be low. Why give up my black money when the chances of getting caught and penalised are minuscule? Hence initially the scheme saw a lukewarm response. But then, some “surgical strikes” were required. The Tax Department played multiple cards to lure people to comply with the scheme:

1. They started off with a massive education cum awareness drive, with each officer being given a target of conducting at least a fixed number of meetings with tax professionals as well as businessmen, educating them about the scheme.

2. Businessmen were informally called to IT Department offices where the officers would flash the evidence they already had. The message was clear: We know everything about you, once the window closes, we will come for you. Better you get in line now and file under the IDS scheme. In some cases this might have even been bluffs, but it was a tactic.

3. Finally, as the deadline loomed, we heard news of raids being conducted, not only on the usual mid and large size suspects but even on roadside food stalls etc whose income would almost entirely be unaccounted. There were some concerns among the public that such small eateries were targeted, but reports say such people have declared over Rs 50 crores as black money, within Mumbai itself! Such raids have a ripple effect: You raid 1 guy and 10 other guys are woken from their slumber.

And all these efforts bore fruits, the kitty surged as the deadline neared. Some of the effect may not be captured in the IDS figures since many businessmen have chosen not to go for IDS, but just clean up their books, showing a truer picture rather than going with the same fudging which was going on for decades.

The key here is fear. For the first time in recent memory, the business community was actually scared that the Tax Department will screw them post the closure of the IDS scheme. How did this happen? It is obviously the impact of a clean no-nonsense leader, who is backing his tax sleuths to the hilt, who in turn know that they are being watched, because of which usual under the table settings wont work. The tax officers were also given targets, and would be held responsible for not meeting them, so any out-of-office “settlement” would mean trouble for the tax officers. Mind you, this is not a permanent shift in behaviour of businessmen and tax officials, but at least its a start.

With the IDS scheme and the way collections were augmented, by using fear as a tool, the Modi government has made its stand on black money crystal clear. At the same time, it is a huge political gambit from Modi. The business community is a traditional vote base and funding source for the BJP, which is seen to be a pro-business party. Already one can see some disgruntled voices in the medium-sized business lobby, the group which is not big enough to be fully clean, and not small enough to be immaterial, basically the prime target of the Tax Department.

And the amusing part is, all these complaints and grumblings came up during an amnesty scheme! Here a Government is giving crooks an opportunity to renounce their sins, pay up, and move on without getting penalised heavily, and on the other hand, a section of the crooked businessmen is crying foul. What they do not realise is that the real game will start now. Now that the window is closed, it is time for the IT Department to act on all the information they claimed to have. This was precisely the fear driven into the minds of the crooks, and now it is time follow-up on it.

Will the department do it? Does it really have all the information needed to go after the corrupt? They probably do have the information, since in today’s highly networked world, data flows seamlessly from sector to sector and the Tax Department has also sharpened its data mining tools. The only question remains will the Tax Department act? If they do act, will the cases be settled by “amicable settlements”  or will we see a new uncompromising side to the IT department?

The worst part of the upcoming storm would be the collateral damage. In trying to nail the crooks, one can easily expect a few honest businessmen being harassed. This will give rise to “Tax terrorism” and may affect the  ease of doing business in India, another pet project of PM Modi. It may very well become “Na khaaoonga, Na khaane doonga” vs “Ease of Doing Business”. This is where “surgical strikes” are needed, where the crooks are identified, isolated and brought to book without unduly harassing the honest taxpayer. One thing is for certain, if the Department decides to act on the massive information it claims to have, then business folk would have to endure a long and chilly winter. And if GST is on track for a release on 1st April, then the summer will also be painful for the tax evaders.

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