Wilful evasion of taxes has always been a criminal offence, punishable with imprisonment of up to 7 years and a fine. But when the income tax department puts out a press release, as it did last week, saying there has been a shift in its focus ‘from civil consequences to criminal consequences in serious cases of tax evasion’, it is time to get more than a bit worried. It is no one’s case that wilful tax defaulters mustn’t be tackled, but it is the consequences of criminal action that needs to be examined. And put in context of the taxman’s dismal record in proving its cases at the level of either tribunals or various courts while, at the same time, going overboard in slapping tax demands on companies—between FY09 and FY14, to cite one number, transfer-pricing adjustments added to R2.17 lakh crore. If the powers to decide on what wilful evasion is left in the hand of the assessing officer, this opens up the likelihood of the taxman running amok, and is something that needs to be avoided, especially at a time when the government is trying to go out of its way to calm frayed investor nerves.
Take the case of Cairn Energy Plc, whose shares worth $1 billion have been frozen by the taxman for over a year in a case that looked shaky from day one—Cairn was simply reorganising its business and creating wealth in India—which is why the Parathasarathi Shome committee has recommended that such cases be kept out of the tax loop. What if individual taxman was to take this to mean a ‘serious case of tax evasion’? Ditto for Vodafone and Shell where, just recently, the Bombay High Court ruled in favour of the companies after high-pitched demands of capital gains tax. In which case, if at all any decision has to be taken to launch a criminal case, it has to be taken at a very high level in the finance ministry, not at the level of the assessing officer.
Equally important, every punishment has to be commensurate with the crime. If you go by the tax department’s press release, prompted no doubt by the pressure to tackle black money including recent media reports of Indian money in overseas banks like HSBC, searches of 414 corporate groups led to seizing undisclosed assets of R582 crore and undisclosed income of R6,679 crore during the year. Another 1,174 surveys, the press release says, led to detecting undisclosed income of R4,673 crore. On the face of things, that may appear a lot of money, but keeping in mind India’s gross tax collections are projected to be R13.64 lakh crore this year, it doesn’t really amount to even peanuts. Indeed, the fact that the central government’s tax-to-GDP ratio has fallen from 11.9 in FY08 to 10.4 in FY13 is far more serious and tackling this will yield greater results. Given India’s expected FY15 GDP of R128 lakh crore, a 1 percentage point hike in tax-to-GDP ratio would yield extra taxes of R1.28 lakh crore. Getting higher tax compliance has to be done through increased computerisation of tax data, and linking it with other databases such as VAT—and eventually GST—and the truckloads of information got through lakhs of annual information returns. Why create panic among taxpayers when just more rigorous scanning of data, without even visiting assessee premises will yield far better results?