October 3, 2016 / 3:07 AM / 10 months ago

BREAKINGVIEWS- India illustrates fraught tax amnesty economics

3 Min Read

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

HONG KONG, Oct 3 (Reuters Breakingviews) - Tax amnesties are a tricky business. Indians have declared $10 billion of assets in a four-month long scheme to widen the tax base. A high penalty means New Delhi will pocket almost as much revenue as Indonesia, where locals have just declared about $250 billion in three months. In the long term, using more carrot and less stick is probably more valuable to a nation's finances.

India set a penalty at a whopping 45 percent. So the scheme will net more than $4.5 billion in a country where just 1 percent of people pay tax at the last count. India has previously offered lower penalties, though not in a significant way since 1997. By contrast, Indonesia charged as little as 2 percent - meaning Jakarta will bag just $7.5 billion.

Both countries will welcome the one-off boost to strained public finances. The long-term benefits, though, stack up better for Indonesia. India's punitive charges probably means a lot of undeclared money remains stuffed under mattresses or converted into gold bars.

In contrast, Jakarta is effectively giving rich tax dodgers a free pass - something that has prompted protests. But it learns a lot more about where money is stashed at home and overseas. If that information is used wisely, Indonesia is better placed to permanently widen the meagre tax base.

On Twitter twitter.com/ugalani

Context News

- Indians have declared cash and other assets worth 652.5 billion rupees ($9.8 billion) in a tax amnesty, the income tax department said on Oct.1.

- The department said that the final figure would probably be revised upwards as authorities count the remaining filings in the four-month-long "Income Declaration Scheme", which closed on Sept. 30.

- Cash and assets declared under the scheme are subject to a penalty of 45 percent after factoring in taxes and surcharges.

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Editing by Quentin Webb and Katrina Hamlin

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