India Today Cover Story [VDIS: The Great Disclosure]

Critics dismissed it as a cheap way of laundering money, but the disclosures at the year end have made the scheme a success--over 3.5 lakh people declared assets worth more than Rs 25, 000 crore.

The saying from Arthashastra, engraved in brass letters on the teak-panelled wall of the office of the chairman, Central Board of Direct Taxes (CBDT), at North Block, means that punishment (or its severity) lies at the root of enriching the royal treasury.

It is about time somebody removed this piece of wisdom from there. How inapposite! How irrelevant!

At 11 p.m. on December 31, as the 214-day-long Voluntary Disclosure of Income Scheme (VDIS) of the Finance Ministry drew to a close, the overwhelming public response to it had proved, if anything, that persuasion rather than pressure held the key to tax compliance. The critics of the scheme had called it an inexcusable indulgence of the tax evader. The prophets of doom said it would fail because of the reportedly cheaper cost of laundering unaccounted money through other means, the audit trail that the disclosures would leave in the hands of income tax officials despite the scheme's professed confidentiality, and a variety of other reasons. But little did they understand that Finance Minister P. Chidambaram, who introduced the scheme in the 1997-98 budget, had actually targeted an ancient mindset: a man pays tax only when he is bludgeoned.

UNUSUAL CATCHES

A lady declared jewellery worth Rs 2 crore saying her husband shouldn't know about it. Likewise, a man said his wife shouldn't know he has Rs 3 crore worth of assets.

People came from Moscow, Zurich and London to make their declarations. There were also cases of children, aided by parents, disclosing assets.

A man declared 2,570 kg of silver and 17.5 kg gold coins, when in fact he had nothing. And a housewife born in 1964 declared that her jewellery was purchased in 1961.

In the period from July through December when the scheme was operational, over 3.5 lakh individuals, with a sprinkling of companies and firms, owned up to hitherto sequestered assets worth well over Rs 26,000 crore. With tax levied at 30 per cent of the disclosed asset, the inflow of around Rs 7,800 crore to the treasury is a good one-fifth of what the Government had collected in direct taxes in the past financial year. It is nearly ten times more than the entire amount collected in all past tax amnesty schemes. The aggregate of disclosed income is 2.6 times the figure in the past schemes. The amount represents, to put it on a scale of comparison, 10 days' GDP of India at current prices. However, the real success of the scheme goes beyond the numerals. As Chidambaram says: "It is my faith that, given a chance, the people of India come clean." Echoes CBDT Chairman Ravi Kant, in seeming forgetfulness of the motto engraved in his room, "The success of VDIS proves reasonable tax rates are the best way to collect tax revenues."

The frenzy to fill out the single-page VDIS form, printed on both sides, reached a feverish pitch in the dying hours of December 31 when close to 12,000 people turned up at the counters in Delhi alone. At Mayur Bhavan, the capital's income-tax (IT) headquarters, one of the last men to come huffing and puffing with a declaration of Rs 3 crore (or a tax cheque of Rs 90 lakh) was treated by the grateful officers to a sumptuous New Year's eve dinner. Mumbai, perceived as the fountainhead of black money, naturally took the lead with 71,000 people making disclosures of hidden assets worth Rs 6,620 crore. Of this press of confession-seekers, 17,000 reached the counters on the last day, with disclosures amounting to Rs 1,690 crore. At the high end of personal income disclosures, the figures went as far up as Rs 275 crore, at Hyderabad, though quite a handful of individuals declared from Rs 32 crore to Rs 50 crore. There was also no dearth of people seized by guilt. An army officer said he had not been paying tax on his pension. A salaried man turned up with a ridiculous declaration of Rs 20, perhaps as a year-end joke. In Patna, a fodder-scam accused disclosed unaccounted wealth of Rs 42 lakh under the scheme. He was perhaps taking a chance as VDIS does not apply to persons under prosecution for offences under the Indian Penal Code and the Prevention of Corruption Act, 1988. In Mumbai, even corporate houses reached the VDIS counters to use disclosures as a smart stratagem to settle contentious legal disputes with the tax authorities out of court. In all cities, middle-level businesses beelined to use the VDIS route to cover up past disputed claims for exemption on depreciation of boilers, energy-saving devices, even computers and office equipment.

Though the scheme was the finance minister's brainchild, a team of officers, led by Revenue Secretary N.K. Singh, Kant, and CBDT's Member (investigation) A.K. Batabyal slogged round the clock to implement it successfully. They motivated the 29 chief commissioners of income tax -- among them O.P. Shrivastava, S.K. Jha and S.C. Parija in Delhi, V.M. Muthuramalingam in Mumbai and A. Balasubramaniam in Chennai -- and more than 150 commissioners at various centres to set up from scratch a human infrastructure for collecting taxes with a smile. As early as May, Chidambaram held meetings with chief commissioners and commissioners in the metros, and got the officers to put their signatures on the year's commitment of targets: finding 33 per cent more assessees and collecting 20 per cent more revenue. VDIS was thought of as a way to discover new assessees. The real issue was to give it a structure.

The department, of course, had a past model, the 1975 tax amnesty scheme, considered most successful because of the high ratio of tax revenue to disclosure (32.39 per cent). But its low overall yield arose from the worst bane of tax administration in that era -- a high top tax rate of 97.75 per cent. On the other hand, the 1997 scheme began on a cheerful flat tax rate of 30 per cent, which is also the prevalent top rate. Besides, like the past scheme, it promised that the declarations would not be admissible as evidence for proceedings relating to income tax, wealth tax, the Foreign Exchange Regulation Act and the Companies Act. As an opportunity, VDIS was cheap and safe.

To seize the opportunity was not easy for the Government though. Therefore, even before the scheme was announced on June 18 last year, the it Department had begun a full-scale information-collection drive. It was basically a survey of high-spending individuals conducted through the intelligence networks operated by chief commissioners. Five-star hotels were discreetly told to furnish lists of members of their expensive health clubs.

There was an unofficial check on holders of credit cards with high spend limits. Lists were prepared of rich parents who send their wards to high-cost boarding schools. Airlines were tapped for the names of frequent foreign-trippers. it officials also made quick surveys of bustling trading centres, like the tanneries in Agra and the brass workshops of Moradabad.

Even after its launch on July 1, there was continuous fine-tuning. The advertising agencies were hand-picked from a panel of industry leaders. As the campaign progressed from a rather waffly beginning to a phase of cajoling and, finally, to a stern "now or never", the Government's attitude also shifted from the indulgent to that of outright psychological warfare. That indeed helped, as the collection till end-November pales into insignificance compared to that in December alone.

January 12, 1998