programmes announced by the Prime Minister, the Union Minister of State for
Finance Pranab Mukherjee said in Calcutta on Tuesday, reports PTI. Mr
Mukherjee said that the anti-smuggling operations would be intensified and
with this end in view, top level meetings would be held in five smuggling-
prone centres in the country. The five centres are: Calcutta, Bombay, Madras,
Ahmedabad and Cochin… The Minister said 243 smugglers against whom
detention orders had been issued were absconding throughout the country
including 51 in West Bengal. Of them, action had already been initiated against
107 smugglers to attach their property after declaring them as proclaimed
offenders. In the first week of July 1975, goods worth Rs 5 lakhs were seized.
Against 82 detention orders issued under COFEPOSA, 44 persons were
arrested while 12 were absconding. In the case of 16 others, writ petitions were
pending in the High Court in Calcutta, Mr Mukherjee said.
Though the action plan for rounding up absconding smugglers was executed, we came up against a few roadblocks. Attaching their property with the aim of compelling them to surrender proved to be difficult. It was found that the smugglers did not hold the property in their own names—that is, most of their fixed assets were benami, or unaccounted for, in terms of title. Not only that, given the resources at their command, some of them could avail of the best legal and medical services to avoid detention on health grounds. At times, even after detention, there were kingpins who had to be released on health grounds on account of certificates issued by eminent medical practitioners. During this entire phase we had to contend with these problems, constantly trying to plug loopholes.
Another legislation was passed by both Houses of Parliament in January 1976 for confiscating the properties belonging to smugglers: the SAFEM (FOPA), or the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property Act). While speaking on the issue in Parliament, I emphasized
that the legislation would send a clear message to smugglers and foreign exchange manipulators that they would no longer be able to enjoy their tainted money. It had been framed so as to ensure that habitual offenders failed to hoodwink the law. The main feature of the legislation was that if one half of the investment in a property remained unproven, options would be given to the persons affected to pay a fine in lieu of confiscation, with this fine being equal to one and one-fifth of the value of the unexplained investment. I explained that the legislation empowered the government to deprive smugglers and foreign exchange manipulators of their ill-gotten properties, and was to be administered by senior central government officers, not below the rank of a joint secretary. Competent authorities were to be situated at important places like Calcutta, Bombay, Madras and Ahmedabad. An appellate authority was to be established under a retired judge of the Supreme Court or high courts or a person eligible to be appointed as a judge. There could only be one appeal against the order of forfeiture by the competent authority to this appellate body. After the Ordinance was issued, the Revenue Department started collecting information on the properties of the smugglers; in Bombay, such information was collected for nearly a thousand people.
The success of these interventions notwithstanding, we realized that anti-smuggling operations could never be successful so long as there existed a huge gap between the demand and supply of consumer goods, some of these being synthetic fibres, clothing and watches. We decided to increase the production of such items; duties on man-made fabrics manufactured in the country were suitably adjusted so as to increase indigenous production; and HMT (Hindustan Machine Tools, a government undertaking which manufactured watches) was encouraged to set up new units to produce more watches.
Curbing the smuggling of gold was not that easy. While seizures under the Gold Control Act had increased significantly, this area remained a problem. Given the lack of social security, gold has always been the asset of choice in India. The continuous appreciation of the value of gold in the country thus acted as an incentive for gold smuggling. During the late 1960s, Morarji Desai tried to combat the rising demand for gold by passing the Gold Control Act, but the legislation failed in its endeavour and, instead, created business problems for goldsmiths. The long and short of the matter was that gold continued to be smuggled into India. Though India had two gold mines in Karnataka, our indigenous gold production was not more than ten to twelve tonnes a year. So the problem couldn’t be tackled by increased indigenous production either.
The issue with gold notwithstanding, some of these measures had a salutary effect on curbing smuggling activities in India. News received from intelligence sources pointed to the accumulation of huge quantities of stocks of various items in places like Dubai and Hong Kong, from where goods were regularly smuggled into India.
COFEPOSA, though not repealed, became inoperational during the three-year rule of the Janata and the Lok Dal. In fact, the Janata Party Finance Minister, H.M. Patel, went to the extent of suggesting that he was not interested in the departments (income tax or others) within the Ministry of Revenue conducting tax raids as, according to him, ‘the raids were politically motivated’. As a result of this attitude, the war against economic offenders initiated before the Emergency and strengthened during this period could not be carried to its logical conclusion.
After taking over as Minister of State for Finance in December 1975, I carried on with the work initiated by my predecessor, K.R. Ganesh. The income tax department was instructed to bring new
assessees within the tax net, an instruction based on the knowledge that a large number of professionals and self-employed persons were avoiding tax. As ‘survey-search-seizure’ intensified, many people who had so far avoided paying tax volunteered to disclose their concealed income and were brought within the tax net. The provision of voluntary disclosure was made an in-built feature of the tax system by amending the tax laws (direct). In 1974-75, the number of professionals and self- employed persons brought under the tax net touched 1,33,642. Of these, 1,08,012 were new assessees belonging to the professional classes: lawyers (78,638); chartered accountants (11,243); doctors (8,366); engineers (15,278); contractors (6,981); and architects (2,724). Given the significant increase in the number of tax payers, there was a resultant increase in tax revenue too.
We then focused on simplifying the procedure of remittances from abroad. A large number of non- resident Indians sent money to relatives in India mostly through clandestine routes: smugglers collected foreign exchange from people abroad and paid their relatives in India in the local currency, with transactions carried out at higher exchange rates. In fact, they built a parallel banking system to fund smuggling and ran it efficiently. Our task was to demolish this arrangement and, with this aim, a large number of branches of Indian banks were opened abroad in localities with high concentrations of Indians. Remittance procedures were simplified in consultation with the Reserve Bank of India (RBI) and operators of this unauthorized banking system were nabbed under the Preventive Detention Act. To encourage the receipt of foreign exchange through regular channels and to ensure that part of the investable surplus of non-resident Indians went into Indian banks, two deposit schemes were introduced. Non-resident Indians could deposit foreign currency—US dollars and British pounds—in Indian banks and they could get back their money, both the principal and the interest, in foreign currencies. Higher rates of interest were provided for these accounts. Alternatively, such depositors could also choose a plan of receiving Indian rupees against their foreign currency deposits. Both these deposit schemes had a lock-in period to avoid speculation. Additionally, concessions were given to non-resident Indians investing in India, including in real estate. These measures were taken to ensure that the money to fund smuggling activities was not available. They also helped India’s meagre foreign exchange reserves to swell. From October 1974 to November 1975, that is, in fourteen months, remittances through legal channels increased by Rs 441 crore. From an average of Rs 41 crore per month before the crackdown, remittances spiralled to Rs 67 crore per month. In the post-Emergency period, foreign exchange reserves increased by 144 per cent and 93 per cent, respectively, in two years against 5 and 21 per cent, respectively, in the two years before the Emergency.
Our strategy to tackle economic offences started yielding results. The raids and searches by the income tax department made life difficult for tax evaders and black money operators. A total of 2,029 income tax raids were conducted during the financial year of 1974-75, with 1,523 more between April and November 1975. Assets seized during this period were valued at Rs 17 crore and Rs 14 crore respectively. In short, an environment was created where tax dodgers had to spend sleepless nights.
It was in this scenario that a group of top industrialists met me and suggested that the government consider giving tax dodgers the chance of voluntarily disclosing their concealed income and wealth. The influential Congressman Rajni Patel was a strong advocate of this scheme. I was initially disinclined—I not only agreed with the Wanchoo Committee report that such an action seemed to reward dishonesty at the cost of honest taxpayers, but also knew that there would be an unfavourable
public reaction—but as my officers thought the suggestion viable I asked them to study its feasibility and put together a report on the results of similar schemes introduced earlier. Similar schemes had been introduced on three occasions in the past—during the tenures of C.D. Deshmukh, T.T. Krishnamachari and Morarji Desai—but the response had not been encouraging. But my officers remained eager to give it another try. It was then that I discussed the issue with the Finance Minister who had always been a valuable guide to me. He suggested that I talk to a cross-section of people without giving an indication of what the government was contemplating.
Having done that, I also talked to the Prime Minister, who advised me to prepare a note indicating the pros and cons of the scheme. After all these exercises were done, and having gained broad support from my senior colleagues, I submitted a cabinet note. And then the Voluntary Disclosure Scheme was approved by the cabinet and put into operation through an Ordinance on 8 October 1975. The essential feature of the scheme was that the rate of income tax to be payable under the scheme was 50 per cent (against the normal rate of 60 per cent) and the name and identity of the declarer would be kept confidential. Two-and-a-half per cent of the disclosed income and wealth was to be invested in specified government securities. There would be no penalty and prosecution for the income and wealth so disclosed under the scheme. However, the immunity would not be extended if, on subsequent information, any undeclared concealed income and/or wealth was unearthed. People detained under COFEPOSA were not eligible to avail of the scheme.
An all-out attempt was made to make this effort successful. The then Chairman of the Central Board of Direct Taxes (CBDT), S.R. Mehta, made a valuable contribution to its success. A two- pronged strategy was adopted: raids and searches were intensified in almost all major cities. I toured many cities, as did S.R. Mehta and other CBDT board members. We addressed professional organizations, chambers of commerce, tax consultants, lawyers, chartered accountants, clubs and societies, throughout urging people to buy peace by taking the opportunity offered by the scheme. At such meetings, I used to say: ‘I would invite every tax dodger to be our guest by 31 December 1975 and if they do not accept my offer, I shall be an unwelcome guest at their houses after 31 December.’ This statement became very popular. We also launched a massive information campaign throughout the country: hoardings, posters and media advertising started appearing.
From October to December that year, I addressed twenty-seven meetings across the country. In the initial stages, the response from taxpayers was not very encouraging. A few people responded to the scheme but the amount received was disappointing. There was then a suggestion to extend the date. I refused to accept the suggestion, and the Finance Minister as well as the Chairman of CBDT supported my view. Any extension would only expose the government as weak. I spoke to the Prime Minister who, too, agreed with my view, but said that all efforts should be made to ensure that the scheme did not flop. I assured her that it would not.
From the second week of December, the drive gathered momentum. It was made clear that there would be no extension of the date and people started availing of the scheme. In the last few days of the month, the tempo reached its peak. During this period, a couple of big business houses were raided, creating some panic among tax evaders. Some thought that these raids were organized deliberately to inject fear among the people. But it was not so. Those who were acquainted with the system knew that such raids were the culmination of two to three months of information gathering and due diligence. And, in the case of big corporates, extra care was taken. Consequently, for raids executed in November-December 1975, preparatory groundwork needed to have been done months ahead.
When the results of the Voluntary Disclosure Scheme started coming in, I was in Chandigarh attending the 75th session of the Indian National Congress. I received the figures over the telephone, and was specifically asked by the Prime Minister to quote the figures and explain the economic policies in detail in my speech to the economic session.36 The delegates broke into loud applause as I read out the figures of the concealed income and wealth disclosed through the scheme: close to Rs 1,500 crore! I told the session that this gain to the national exchequer was the Prime Minister’s new year’s gift to the nation.
Many had doubted the success of this scheme. ‘This young man will burn his fingers one day,’ some senior ministers had jokingly commented. One exception was Babu Jagjivan Ram. ‘Pranab is clever enough and surely he will be successful,’ Jagjivan Ram had quipped. When I informed him of the result, he hugged me warmly. ‘Well done!’ he said.
I came back to Delhi and met C. Subramaniam, who was still recovering from his illness. He agreed to pay one month’s salary as ‘bonus’ to all staff associated with the scheme, for which we later faced some criticism from our colleagues who contended that government officials should not be rewarded for doing their routine duty. Technically correct as they were, they had failed to appreciate the facts fully. While it was the routine job of the income tax department, the scheme would not have succeeded without the total commitment of the people executing it. I thought I was more than justified in strongly defending the decision to pay the bonus.
On 2 January 1976, I addressed the nation on All India Radio, detailing the scheme and its results, besides outlining our future programme. This national broadcast was relayed by every radio station (see Appendix 7 for extracts from the broadcast).
The Times of India (Delhi, 2 January 1976), in its editorial, observed: