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The ‘hot’ topic of the day, in tax matters, undoubtedly is the Voluntary Disclosure Scheme of 97. The government expects the Scheme to become more successful than any previous Schemes. It is about to launch a major promotional offensive in all media ‘selling’ the Scheme to erring taxpayers. Two top ad agencies have been recruited to give the promotion a professional touch. Shortly you shall be bombarded with the results of their efforts.
I have already mentioned about the ethics, or their absence, in the government promoting the Scheme. The government has gone ahead with the Scheme, notwithstanding considerable criticism. It is now time for us to look at the Scheme professionally and understand how it works and how it can be taken advantage of by taxpayers.
Before proceeding, I may mention that the government is expected to announce clarifications and guidelines about the Scheme. If any clarification or guideline is material or interesting, we shall get back to the issues we discuss now.
There is one very major change that the finance minister has made to the Scheme between the time it was introduced and the time it was finalised. When the Scheme was introduced with the Budget, in February, it permitted declarations of both incomes and wealth. This was on lines similar to the earlier Amnesty Scheme. The Amnesty Scheme was misused considerably by taxpayers. Many declared merely only wealth without declaring income. This way they got away declaring the undisclosed assets without paying income tax, but only wealth tax. The government was helpless.
I explained this earlier. So also other commentators and officers would have pointed out. Thankfully, before the Scheme was finalised the ministry saw reason and removed the provision of declaring undisclosed wealth. The Scheme will quite certainly not be misused and taxpayers will not get away without paying income tax.
What are the implications of your not being able to declare undisclosed wealth? It means, for one, that your undisclosed wealth will remain undisclosed.
Secondly, if you are found with wealth that you have not disclosed, you will have to prove its source as you would have normally as if the Scheme were never there. This needs some discussion. If you are today found with assets that are not disclosed for tax purposes, the department is entitled to believe that they are acquired by you out of undisclosed income and tax you on the value of the assets. That is, your undisclosed assets can legitimately be subjected to income tax. However, if you are able to establish that the assets were acquired by you many years back and that at the time of purchase there was either no concealment of income or that it is far too back into the past when the department can really do anything about it.
In any case, it is for you to establish the source of money out of which the assets were acquired, and the date of acquisition. If you fail to do so, the department will assume that they are undisclosed assets purchased now and tax them.
In this background, the situation remains unaltered when VDS does not permit disclosure of wealth. If you are found with undisclosed assets and you wish to claim that they do not represent undisclosed income, you have to prove so.
Alternatively, you disclose the wealth as income and pay income tax thereon. If so, there is no further necessity of paying wealth tax. And the wealth gets properly declared. That is really what the government expects you to do.
Let us now proceed to the nuts and bolts of the Scheme.
The Scheme is effective from July 1, 1997 and ends on December 31, 1997. That is, you can make a declaration under the Scheme after June 30, 1997 but before January 1, 1998. Any declaration filed after December 31, 1997 will be invalid. Look forward to the formal announcement in the newspapers.
Any ‘person’ can avail of the Scheme. That is, anyone can file a declaration under the Scheme, be it an individual, joint hindu family, partnership firm, public or private company, trust, association of persons, body of individuals etc. Even a person who has not paid taxes or filed returns earlier can take benefit of the Scheme.
It does not matter that the taxpayer is a resident of India or a non-resident - both can file a declaration. This is interesting. I expect the government will make as much effort at selling the Scheme to non-residents as to residents. And, more probably, at selling the Scheme for disclosure of assets and money lying abroad belonging to residents and non-residents. The potential of the Scheme being successful, and useful, is substantially more with regard to assets abroad than in India. But perhaps the potential may become a reality when the rupee is made fully convertible.
It is not merely non-resident Indians who can file declarations. Even foreigners and foreign companies can file declarations.
The benefits of the Scheme are not available to a few classes of persons. These are, broadly:
- persons detained under COFEPOSA;
- public servants involved in offences of corruption;
- persons involved in illegal traffic of narcotic drugs;
- persons involved in terrorist activities;
- persons involved in Securities Scam of ’92; and
- persons involved in crimes regarding property like theft, robbery etc.
Everyone else, that is, the majority of us are entitled to the benefits of the VDS.
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