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What is an income tax amnesty scheme?

Governments around the world know that people underreport their earnings to avoid paying income tax. This leads to a loss in tax revenue and a shrinking tax base, both of which harm a government’s ability to achieve its socio-economic goals. When this problem goes beyond manageable proportions, a government announces an income tax amnesty scheme.

The Indian government announced an income tax amnesty scheme in 2016, and collected tax revenue of  ₹65,000 crores. This was achieved by providing the tax defaulters with the opportunity to declare their assets, pay a 45% tax rate, and an additional penalty. To put the collected sum in perspective, healthcare in India received funding up to  ₹62,500 crores in 2019’s budget.

The goal of an income tax amnesty scheme is to allow people who have evaded paying taxes over the years to become tax-compliant without the fear of criminal prosecution. 

When the tax authorities suspect that a company or an individual is paying lower than their fair share of taxes, they start an investigation that often culminates in a court case. This is a significant financial drain for both sides. An amnesty scheme is a way around this. 

The tax evaders are allowed to declare the full extent of their assets and income - and pay taxes they haven’t over the years in addition to a penalty. This increases the government’s tax revenue in that particular year, but more importantly, for all the years to come. Once hidden income and assets are declared, the tax base expands as they become taxable in every subsequent year too. The tax evaders also have incentives to participate in the scheme - they are assured that the Income Tax Department won’t conduct any further scrutiny or inquiry about their declared assets. 

Looking at the pattern of tax collections in 2019, the Indian government is not on track to hit its annual target of revenue collected through direct taxes. The target is ₹13.35 trillion, of which only ₹6 trillion has been collected. To boost the sagging income tax revenue collections, the government is considering another amnesty scheme for income tax evaders. Through this scheme, the government hopes to collect about ₹50,000 crores and plug in the gap between projected tax revenue and the actual numbers.

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