As the ice between the Government and Parliament melts on the constitution of the Joint Parliamentary Committee, it is certain that the focus will increasingly shift to certain fundamental issues in the coming weeks. Given the number of scams that have broken out in recent times, several questions follow: Who are party to the loot and plunder of the national wealth? Where is this money parked? How will it be laundered i.e. cleared of all its taint and brought back into the national economic mainstream? What are the steps taken by the Government to prevent it in future and get back past loot?

Investigative journalism by sections of the media, a proactive CBI, and judicial activism at the level of Hon’ble Supreme Court, is too much of a potent weapon for even the best of our crooks to handle. Naturally, the plunderers of this wealth are worried. Given this paradigm, it is indeed interesting to note that some commentators have begun batting for a Voluntary Disclosure of Income Scheme (VDIS). Ostensibly, the argument put forth is that the Government or any of our financial sentinels do not have the innate ability to get back all the illegal wealth of Indians secreted in Tax Havens.

Therefore, some well-intended and some not so well intended commentators have suggested a voluntary disclosure scheme by which all those who have such illegal wealth could pay a nominal tax and get away with the rest. How gullible (or is sinister?) could these commentators get?

Further, little do these commentators realize during the course of the previous VDIS scheme brought forward by the Central Government in 1997, a PIL was filed in the Hon’ble Supreme Court by some well meaning citizens. Their argument was plain and simple – the Government by repeatedly brining such schemes placed all those who paid taxes honestly – at a tremendous disadvantage. Crucially, they argued that such buckling by the State provided an incentive for evasion of taxes in the first place.

Pushed to a corner, the then Government reportedly came up with an affidavit in the Hon’ble Supreme Court stating inter alia that the 1997 VDIS scheme would be the last such occasion and the Government would not bring about any such scheme in future. In one stroke, the then United Front Government had bound future Governments.

Settlement through Commission?

But unknown to several commentators, the Income-Tax Act provides a provision for settling their tax issues with a separate yet perpetual quasi-judicial body. It may be recalled that a Settlement Commission under the Income-Tax Act was set up based on the recommendations of Taxes Enquiry Committee (popularly known as Wanchoo Committee). This was in the mid-1970s.

The distinguishing feature of this Commission is that instead of using adversarial techniques to determine the tax liability of any assessee, the Settlement Commission uses arbitral methods to settle tax issues. Therefore, instead of the usual cumbersome procedure of issuing notice, calling for details, scrutinizing evidences and carrying out personal hearing before completion of an assessment (the final outcome of which is subject to several rounds of vexatious appellate proceedings), the Settlement Commission provides an easier alternative to the tax payer to come clean once in a life time.

The underlying logic of the revenue is that Settlement Commission provides a statutory basis for settlement of cases which at times is necessitated by the complex nature of investigations involved therein. In short, it is a tacit admission by the revenue authorities that they are ill-equipped to carry out investigations in certain cases while allowing an assessee once in a lifetime opportunity to turn a new leaf. Needless to emphasize, this body allows immunity from prosecution under the Income-Tax Act.

Interestingly, the Act provides that the proceedings before the Commission shall not be open to the public and no person (other than the applicant, his employee, the concerned officers of the Commission or the Income-tax Department or the authorized representatives) shall remain present during the proceedings. Naturally, being held in camera, this provides enormous scope for “negotiations” between parties concerned.

What is discomforting analysts is that over the years this Commission has de-generated, thanks to overuse, abuse and mis-use and undergone metamorphosis into the first resort of all tax evaders. In the process, the Settlement Commission has earned a new sobriquet – settlement by commission with several “professionals” brokering the settlement processes between the Income-Tax Department and the assessee. 

Settlement Commission and Budget 2011

Obviously, given its potency, this body has indeed been a very useful tool in the hands of successive Finance Ministers to settle political scores. In 2007, the Settlement Commission, thanks to an application made by a prominent South Indian politician, was virtually defanged by the then FM. The mutual hatred between the two is too well known to warrant repetition here.

Subsequently, Budget 2010 once again sought to revive the Settlement Commission albeit in a limited fashion by seeking to include only “cases” where the proceedings are pending for assessment before an assessing officer on the date on which an application is made. Some experts believe this amendment was aimed at bailing out Hasan Ali who is reported to have tax dues exceeding Rs 50,000 crores. However, care was taken to exempt reassessment or re-computation cases under the Income-Tax Act from the ambit of the Settlement Cases. Similarly, monetary limits were placed for the tax payable or amount to be disclosed before the Commission. Obviously, it is not yet a free for all with the Settlement Commission.

Given this paradigm, it is reported that the members of the Settlement Commission have met the Hon’ble FM seeking enhanced powers for the Commission. More cases for settlement would definitely mean more perks and power for the Commission. Experts in the know suggest that Budget 2011 will further dilute the provisions of the Settlement Commission. Consequently, more cases can be referred to it and settled by it. Crucially, experts believe that it would be a VDIS (say with a 45% tax levy) couched as enhancement of powers of the Settlement Commission. And that may in all probability include funds parked outside with immunity from penalty under FEMA for a limited period!

And that would at once provide a leeway for all and sundry to come to the Settlement Commission and settle their cases. Interestingly, the Commission does not provide immunity from prosecution under any other laws, including the Prevention of Corruption Act (PCA). Never mind - one way out of this tangle would be to declare the ill-gotten wealth in the name of one’s spouse. And that would ensure a perfect escape route under most statutes.

Welcome to the Sovereign Republic of India where one can first loot the nation and subsequently orchestrate an amendment to the statute to legalize one’s loot.

[The author is a Chennai based chartered accountant; his email is mrv@mrv.net.in]