TAX AMNESTIES: THEORY, TRENDS AND SOME ALTERNATIVES
Updated: Apr 21
Author: Anand Srivastava, III year of B.B.A.,LL.B from Himachal Pradesh National Law University, Shimla.
A tax amnesty is a government programme that allows taxpayers to come forward and admit previously undeclared income, assets, or obligations in return for reduced fines, lower interest, and, in certain situations, protection from prosecution. Tax amnesties have been employed for many years over the world in various shapes and sizes, ranging from small-scale municipal efforts to broad-based national schemes. Tax amnesties have been adopted on multiple occasions in India, the most recent being the Pradhan Mantri Garib Kalyan Yojana (PMGKY) in 2016.
Tax amnesties are intended to enhance tax compliance by providing an incentive for taxpayers to come forward and declare concealed income, assets, or obligations. This benefits the government by increasing tax income and providing greater information about the size and structure of the economy. Some have criticised tax amnesties as being unjust to individuals who have paid their taxes on time and as encouraging tax evasion by communicating that the government is lenient on those who do not comply with tax regulations. Tax amnesties, on the other hand, might be considered as a measure to encourage compliance with tax regulations, particularly when the tax administration is having difficulty discovering and prosecuting tax evasion.
Tax amnesties have been applied multiple times in India during the last few decades. The Voluntary Disclosure of Income Scheme (VDIS) in 1997 was one of the first and most well-known tax amnesty initiatives. This programme was created to combat tax evasion and enhance tax compliance by allowing taxpayers to voluntarily declare their concealed income. The plan was a success, with more than INR 33,000 crore in taxes collected.
Sayidah and Assagaf in their work “Tax Amnesty from the Perspective of Tax Official” observed that tax amnesty is a helpful government programme that forgives earlier tax blunders for the greater good for individuals who are tax compliant. Further, the implementation of tax amnesty can result in a rise in tax revenue for the government.
Alm and Others researched on the topic “Amazing Grace: Tax Amnesties and Compliance” and concluded that higher post-amnesty compliance is observed when a tax amnesty is implemented alongside heightened enforcement efforts, compared to just an increase in enforcement without an amnesty.
Tax Amnesties in India
In India, tax amnesty schemes have been used to increase tax income and promote tax compliance. The Voluntary Disclosure of Income Scheme (VDIS) in India was the first of its kind, allowing non-compliant taxpayers to come forward and voluntarily disclose previously unreported income without suffering any penalties or fines. The initiative was a success in terms of raising tax income and encouraging tax compliance, which led to the development of similar schemes in the future.
The Indian government announced the Pradhan Mantri Garib Kalyan Yojana (PMGKY) in 2016 as a follow-up to the demonetization programme, which intended to minimise the usage of cash in the economy and prevent dirty money. Taxpayers were given the option under the PMGKY to declare their concealed income, assets, or obligations and pay a 50% tax on the reported amount, coupled with a 10% penalty and a 33% tax surcharge. In terms of revenue collection, the plan was a success, with the government collecting nearly INR 9,000 crore in taxes. Tax amnesties have been used as a tactic to encourage compliance with tax rules by the Indian tax administration, which has faced various obstacles in detecting and prosecuting tax evasion.
Several variables impact the efficacy of tax amnesties, including the program's design and administration, the country's level of tax compliance, and taxpayers' perceptions of justice and equity. A tax amnesty programme, for example, that is viewed as fair and equitable is more likely to succeed in improving tax compliance and revenue collection. A programme that is perceived as unjust and arbitrary, on the other hand, is less likely to be effective.
Tax Amnesty and Theory
The idea underlying tax amnesty is based on behavioural economics. Individuals, according to behavioural economics, make decisions based on their impression of justice and the repercussions of their acts. They contend that if non-compliant taxpayers are given the opportunity to pay their taxes without penalty or fee, they will be more inclined to do so. Furthermore, the threat of prosecution and fines for previous tax offences might act as a disincentive for non-compliant taxpayers, encouraging them to comply in the future.
Tax amnesty schemes are a low-cost way to increase tax income. While traditional methods of tax enforcement, such as audits and criminal investigations, can be time-consuming and costly, tax amnesty programmes provide a faster and less expensive way of generating tax income. This is because tax amnesty schemes are intended to encourage people to come forward and voluntarily pay their taxes. This decreases the need for the government to expend resources on enforcement actions, allowing it to focus on more effective methods of encouraging tax compliance.
Alternatives of Tax Amnesty
Following are the few alternatives of tax amnesty schemes: -
Strengthening tax administration and enforcement: This involves improving the efficiency and effectiveness of tax administration and increasing the deterrent effect of penalties and fines for non-compliance.
Offering tax incentives for repatriation of funds: This involves offering tax incentives, such as reduced tax rates or amnesty, for taxpayers who repatriate previously unreported funds to the country.
Implementing a tax reward system: This involves providing incentives, such as tax credits or rebates, for taxpayers who voluntarily comply with tax obligations.
Many nations throughout the world have implemented tax amnesty schemes to raise tax income. Several tax amnesty initiatives, such as the Voluntary Disclosure of Income Scheme (VDIS) in 1997 and the Pradhan Mantri Garib Kalyan Yojana (PMGKY) in 2016, have been introduced in India. These programmes have had a positive impact on tax income and tax compliance. Tax amnesty programmes, however, are not without difficulties. One of the primary objections levelled about tax amnesty schemes is that they may lead noncompliant taxpayers to anticipate that they may be granted amnesty in the future, diminishing the deterrent effect of penalties and fines. In the long run, this might lead to a loss in tax compliance and income. To address this issue, tax amnesty schemes must be supported with intensified enforcement measures to guarantee that noncompliant taxpayers do not believe amnesty will be accessible in the future.
Further, amnesty programs are often criticized for several reasons. Firstly, they are seen as unfair to honest taxpayers who have been consistently paying their taxes, as they allow non-compliant taxpayers to avoid paying penalties and fines for past tax offenses. Secondly, tax amnesty programs can undermine the deterrent effect of penalties and fines, as non-compliant taxpayers may expect future amnesties and therefore have little incentive to comply with tax obligations. Thirdly, tax amnesty programs may not be effective in increasing tax revenue in the long run, as they do not address the root causes of non-compliance, such as a lack of understanding of tax obligations, complex tax regulations, and inadequate tax administration. Finally, tax amnesty programs can undermine public trust in the tax system and government, as they may be seen as rewarding those who have evaded taxes in the past.
Many governments have established tax amnesty schemes in order to enhance tax income and promote tax compliance. While these initiatives may temporarily raise tax collection, they are sometimes criticised for being unjust to honest taxpayers, undercutting the deterrent effect of penalties and fines, and failing to address the core reasons of noncompliance. Tax amnesty alternatives, such as strengthening tax administration, improving tax education and outreach, leniency for first-time offenders, and tax incentives for repatriation of cash, can provide a more sustainable method to promoting tax compliance and generating tax revenue. Finally, the efficacy of tax amnesty programmes and their alternatives will be determined by the individual circumstances and the tax authorities' intentions. Given these factors, it is critical that tax authorities thoroughly assess the possible impact of tax amnesty programmes and weigh the costs and advantages before establishing such a scheme.