Newspapers, periodicals, TV channels are full of advertisements of Income Declaration Scheme 2016. Hoardings, banners, posters and handbills highlight the details of the Scheme. PM, FM and top brass of the Income Tax Department are beckoning people to declare their undisclosed incomes and contribute to the nation’s mite. The local heads of the Income Tax department are holding conferences with the trade & industry associations to woo the constituents to avail the benefits of this ‘unique’ scheme. The Government wants this scheme to be a bounding success so that it not only fills their coffers but more importantly it gives them political mileage, especially with elections in many states ahead, that they have cleansed the nation from the menace of ‘Black Money’. It is undisputed that there is a parallel economy in our country. It is an irony that out of 140 crore people, there are only 1% Income Tax assessees who pay taxes and it is paradoxical that there were only 5430 individual assessees who had paid income tax above Rs. 1 crores for the AY 2012-13.

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 The Scheme opened from 1 June 2016 and is slated to close on 30-09-2016. Almost 2 months have elapsed but the Scheme has not got a favourable response with the taxpayers. It is too early to comment on the success/failure of the scheme and the scheme is likely to evoke response in the 2nd fortnight of September. But right now there is widespread despair in the Government circles as to the success of the scheme. There is mounting tension with the Government, the Income Tax Department and the taxpayers alike. The Government has threatened the erring tax evaders of coercive action after the deadline if they do not come out honestly with the income declarations. The Department is under tremendous pressure for income declarations. The heads of departments in various cities have probably been given ambitious targets for income declaration in their respective charges. There is impending fear in the minds of the taxpayers about the action of the department against honest taxpayers after the failure of IDS 2016. With tension mount all round, it is time to ponder on the facets of scheme vis a vis the expectations of the taxpayers at large.

Let us look back at the history of such declaration /disclosure schemes and their response in the past. Although there have been a number of schemes for disclosure of undisclosed income & wealth but it would be worthwhile to refer to VDIS 1997 where 4.75 lac declarations were made disclosing 33339 crores of undisclosed income yielding tax of 9584 crores. Mumbai collected the highest at 2032 crores followed by Delhi at 1228 crores and Ahmedabad at 968 crores. The rate of taxation under this scheme for individuals was 30% while for corporates it was 35%. This scheme was a success and the collections were to the expectations of the government. It is pertinent that out of 4.75 lac declarations, 3.09 lacs pertained to disclosure of jewellery as according to the scheme the valuation of jewellery was to be made for the year in which jewellery was said to have been acquired. This brought down the effective rate of taxation considerably from 30% to 5-10% depending on the year of disclosure of jewellery. Most of the jewellery disclosed under this scheme was sold off subsequently and the unaccounted money pumped to the economy to the ultimate benefit of the nation. It would not be out of place to refer to Undisclosed Foreign Income and Assets and Imposition of Tax Act, 2015. The total number of declarants was only 638 and the amount declared was only Rs. 4147 crores yielding Rs. 2488 crores as Tax @ 30% & Penalty @ 30%. The figures explicitly reveal that the scheme did not evoke a favourable response as expected by the government. High rate of 60% was the main reason for the low turnout in the said scheme.

Coming to IDS 2016, the rate of Taxation is 30% plus surcharge of 7.5% plus penalty of 7.5% thus making the effective rate of 45% of the total declaration. This rate has been intentionally kept at a higher side so that the court may not be critical and abuse the scheme for providing advantage to tax evaders and for being against the honest taxpayers The government did not want criticism for providing ‘ incentive for tax evasion ‘.

To woo the declarants, the government has come out with an extended payment plan. Earlier the entire tax was to be deposited by 30 September 2016 but to facilitate more declarations under the scheme the government has subsequently mandated payment of 25% of tax, surcharge & penalty by 30 November 2016, next 25% by 31 March 2017 & the remaining 50% by 30 September 2017. Thus payment of 45% has been spread over so that tax evaders can make larger declarations. However, this concession has also failed to attract the declarants.

It needs to be pondered why IDS 2016 has not fared well and not evoked favourable response with the taxpayers as yet. The reasons for the same can be summed up as under:

1. The rate of 45% is on a higher side and not accepted by the erring tax evaders. The prospective declarants have not forgotten the low rates of 30-35% in VDIS 1997. There is a set mindset amongst the people and the rate of 45% has been outrightly rejected as unacceptable.

2. The date for valuation of the assets has been kept as on 01-04-2016 in spite of the fact that the declarant had acquired it in earlier years. This is irrational. Suppose a person had purchased an immovable property for Rs. X on 31-03-2010 through a registered deed out of his undisclosed income and he wishes to declare the same under IDS 2016, he shall be constrained to pay tax on the current valuation as on 01-04-2016 of say Rs. 2X i.e. he would be required to pay 0.90 X on an undisclosed income/investment of 1.0 X. This is illogical especially when he has a document in support of his investment.

3. The confusion created by an article in a leading newspaper that since the source of payment of tax would not be asked, the effective rate would be only 31% , was widely circulated via the social media. At this rate, the prospective declarants made up their mind for declaration in IDS 2016. But soon this came out to be a farce. The government clarified that the scheme was being misunderstood and misinterpreted and the rate of 31% as claimed to the effective rate was wrong. This had a dampening effect on the scheme.

4. The date of closure of the scheme is 30-09-2016 . This is the time when the CA fraternity and the Tax consultants shall be busy in preparation of corporate returns of Income Tax. They would not have ample time to advise & pursue their clients for making declarations under IDS 2016. Moreover, until the Income Tax Return for AY 2016-17 has been filed, it would not be able for the assessee to ascertain the undisclosed cash/ property available to be declared under IDS 2016.

5. There appears no incentive for a declarant to declare under IDS 2016. The normal maximum rate of taxation is 30.9%. From the perspective of the taxpayer, the rate of 45% is high. Could it not be mandated that 20% tax be deposited along with the declaration and remaining 25% be invested in low interest rate Union Bonds with a lock in period of 10 years.

6. Those assessees who have been subjected to Search & Seizure operations could have declared their undisclosed income under IDS 2016 to buy peace but the scheme specifically excludes such assessees and debars them to file declarations.

7. Suppose an assessee has accumulated Rs. 60 Lacs in cash out of his undisclosed income during the last 6 years and he wishes to bring this money into his books, as of now he has 2 options. One is to declare Rs. 60 lacs as his income under IDS 2016 & pay 27 lacs as taxes, surcharge & penalty. Thus he will be able to utilise Rs. 33 lacs for his needs. He has another option also. He deposits Rs. 60 lacs in his bank account and subsequently show this amount as his income from other sources for AY 2017-18 which he cannot substantiate. It is pertinent that u/s 115 BBE of the Income tax Act, such income would be taxed @ 30%. Thus he would pay 18.54 lacs as tax & surcharge and utilise Rs. 41.46 lacs for his needs. Since he would be paying advance tax, no interest can be charged. There is no question of imposition of any penalty. Thus, why an assessee would choose for IDS 2016? This is indeed a food for thought.

 It should not be forgotten that the entire Indian economy is sluggish. The sales, exports and production has plummeted down and all are facing cash crunch. Most of the people have their money blocked in real estate investments which have hardly any buyers. IDS 2016 appears mistimed. It is high time the government should reconsider the anomalies of the scheme and make amendments and declare suitable relaxations/ modifications so as to attract maximum declarations.

(Author – Inder Chand Jain, Agra, Mobile:9319215672, Email: inderjain2007@rediffmail.com)

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  • I.S.Verma

    In Para 7 of the Article captioned as ‘Why the IDS 2016 is not clinching?’ the Author has suggested that declaring the undisclosed income as ‘ income from other sources’ instead of disclosing the same under the scheme (by adopting modus- operandi suggested in the Article) in the return for the Assessment year 2016-17 one can get away scot free by just paying normal tax u/s 115BE of the Act and that too if the person fails to substantiate, i.e., no interest, no penalty no prosecution.

    I am afraid, it is not so simple a case as the Author has tried to make, because, admittedly, the person will not be able to substantiate the facts material as to the source(s) of such income and once there is such failure, the case may fall within the scope and ambit of not only the Explanation 1 to section 271(1)(C) of the Act, but within the scope and ambit of the provisions of section 276 C and/or section 276 D and/or section 277 of the Income Tax Act, 1961.

    Dear Declarants, please do not fall in the net of such alluring Tax planning-least you may land to face more drastic consequences-both financially as well as Mentally and Physically.

    As far as net tax effect is concerned, it is only about 13% more than the normal tax rates , which in my opinion is not as big as is being made out in some quarters-especially when compared to the peace of mind.

  • Pawan Kr Agrawal

    IDS has provided golden opportunity for people holding Benami Property & undeclared property. For Benami Property no capital gains on transferor, no TDS, no fear of loosing propert for ever upon declaring under IDS. It is true that taking current valuation of self held property is great dampenor for the scheme.
    It is suggested that property being declared if registered in the name of devlarant in earlier year, value of the registration year as per registrar of assurance should be recognised for IDS purpose.

  • CA. M. Lakshmanan

    It is now certain that the tax has to be paid out of the income declared or in other words the declarant has to pay tax on the tax paid, if it is not out of the ‘income declared’. If it is so, for a property purchased in 2012-13 for Rs. 50 Lakhs and now the market value of the same is Rs. 1 Crore, then the effective rate would be 64% if the tax paid is offered as income in the A.Y. 2017-18 and again and again the ‘tax paid’ is to be offered as income and tax is to be paid on the same since the property is not sold and the amount is not realized in cash, due to the cascading effect. If the tax paid is offered as income along with the income declared in the year of declaration itself the effective rate would be 82%. Am I right?