Expert View: Tax offenders betray the nation

The brazenness with which we violate tax laws makes us one of the least tax compliant in the world. The biggest offenders are some high net-worth entities who have devious ways to evade tax as well as the law. We need more stringent ways to catch them and bring them to book, and show them up for what they are: nation’s offenders

Unlike the regular tax desk which is manned by a tax officer whose job is to levy tax on you, this desk is manned by a non-serving tax officer who wishes to share his experience of 35 years in the tax department, while, discussing tax provisions. It is advantageous to know how the tax department thinks and acts when, as said by Benjamin Franklin, “In this world nothing is certain except death and taxes”

Early last year, there was a media report that an advocate in Delhi purchased a bungalow in a posh locality for Rs.100 crore from a leading industrialist. Subsequently, the income tax department conducted a raid against him in October. The raid was immensely successful and the advocate admitted to a concealed income of Rs.125 crore and offered to pay tax on that. Immediately thereafter on November 8, 2017, the demonetisation of high-value currency notes was announced. All over the country, people were seen standing in long queues outside banks to convert their dead money into new currency, which was in short supply. For quite some time one person could not get more than Rs.4,000 in one week, but the case of this advocate was different. Within a week after demonetisation, the Income Tax department again conducted a raid and found that the advocate was in possession of new currency worth Rs.2.50 crore and old demonetised currencies of more than Rs.11 crore. The puzzled department seized the currencies and proceedings were initiated under the Money Laundering Act which resulted in his arrest by the Enforcement Directorate. The enquiry revealed that he had floated many shell companies for money laundering. He was arrested again as he was out on bail after his earlier arrest. The Income Tax department and the Enforcement Directorate are investigating the modus operandi of his earnings though he was hardly seen going to the court. It is suspected that he has been in association with international syndicates of arms dealers and racketeers. The story about him is yet to unfold fully.

No fear of the law

A conclusion that can be drawn is that repeat offenders and tax evaders have no fear of the law. Such people do not give true disclosures even after getting caught in the raids. Their appetite for money is insatiable. Such cases are mushrooming in spite of the active role of enforcement agencies like CBI, ED, IT, DRI, etc.

Recently a massive income tax search action was conducted against a group related to a political family. The search resulted in a huge seizure of cash, jewellery and other valuables. Concealed income of more than Rs.1,200 crore was detected. The enquiry is still in progress and as a result it, was found that the group had many shell companies used for money laundering. There is an ongoing investigation against the group, and some members are already in jail on charges of tax evasion and for possession of disproportionate assets. But the group appears undaunted about the ongoing investigation.

In yet another case, a mining baron was arrested in Chennai, post-demonetisation. He was found to be in possession of Rs.170 crore which included Rs.24 crore in new currency and 127 kg of gold. The mining baron was fearless as he had developed close links with important people in the government.

Evasion not taboo

The obvious question which arises from the above cases is, why are tax evaders so bold and not afraid of the law? There are several reasons. In our country, tax evasion is not a taboo. This may be the first reason. Generally tax evaders come from a higher economic background and they enjoy higher status in the society. The cases of income tax raids and even arrests by enforcement agencies are only seen as occupational hazards of earning income. Such people are garlanded at social events instead of being boycotted. They set up factories, produce films and enter politics. They create wealth and provide jobs. In short, there is no difference in treatment between the honest taxpayer and the tax evader.

Legal snail's pace

The second reason is our slow legal process. Tax-related cases go on for many years. We do not have special courts for tax frauds. The average time taken up to the final adjudication by the higher courts is never less than 10 to 15 years. This slow process eradicates fear from the minds of the culprits, and they keep repeating their crime of tax evasion. After some time, people forget about the action taken by the enforcement agencies against tax evaders in the neighbourhood, and so does the media. The hot breaking news remains hot only for a few days, and as there is no follow-up about punishment, it becomes a forgotten case. Due to the long judicial process, evidence collected is lost and cases against tax evaders become very weak and they finally win the old legal battles. Added to this, tax evaders are rich enough to hire expensive advocates who help them win the cases in the higher courts. Their wealth makes them bold and confident. They remain assured that nothing will happen to them. Some people who were arrested under the Prevention of Money Laundering Act recently approached the Supreme Court challenging the validity of the provision of this Act relating to bail against arrest. The Apex Court held the provision ultra vires and this reduced the bite of the said Act. In the judicial process, the absence of clarity of law is also a cause of long-drawn litigation and this helps tax evaders.

Corruption corrodes all

Corruption is yet another reason that makes tax evaders brazen as they think that they can buy the system. The tax department and the related enforcement agencies have some real bright and honest officers, but some bad fish spoil the case against tax evaders. Corruption is the real evil against the development of our country. Recently, we saw the malefic effect of this evil, post-demonetisation, when we saw that some bank officers of both public and private sector banks released huge quantity of new currencies against bribe when the same was prohibited. The corrupt system has given rise to market brokers whose job is to fix the case against big commissions. Things have improved in recent times, but it is yet to be fully cleared.

‘Tax evasion is not a taboo. Generally tax evaders come from a higher economic background and they enjoy higher status in the society. The cases of income tax raids and even arrests by the enforcement agencies are only seen as occupational hazards of earning income’

Fearless, brazen

Fear is always a very strong reason for stopping a person from doing something wrong. Potential tax evaders will think twice before evading tax if they know that punishment will be harsh and they may go to jail for a long period. Unfortunately, under our Indian system, Income Tax is a civil law and there is no provision for immediate arrest. Prosecution can be launched but it takes very long time. There is also a provision of paying a compounding fee which is normally 3-4 times of the tax on concealed income, in addition to penalty, which can be up to 200% of the tax. Wealthy tax evaders can comfortably pay both when caught, and so there is no fear.

In a big country with a population of more than 130 crore, the probability of getting caught is always very less unless there is an insider who becomes an informant. Tax evaders enjoy their ill-gotten wealth and inspire others to follow them as role models. Remember the case of the infamous Harshad Mehta, the kingpin of the share market scam in the '90s. In his heydays, he was an icon for many youngsters who wanted to become super-rich in a short period. Many students in Mumbai used to wear Harshad Mehta’s lockets on a chain around their necks. Nobody was bothered that Harshad Mehta was a notorious tax evader.

Unlike in our country, the fear quotient in the US tax administration is very high and that ensures good tax compliance. Taxpayers in the US are very careful while filing their income tax returns, as they are very scared of the power of the IRS (Internal Revenue Service). Many celebrities had tax-related problems at the hands of the IRS like Lindsay Lohan, Marilyn Monroe and Pamela Anderson. Since taxpayers are very diligent, there are less cases of prosecution. In our country also we have the IRS, but people are not much scared as it does not have the same powers as the IRS in the US. We in India prefer to play the game of chance in the matter of tax as we either avoid filing of returns of income or show understated income.

The act of earning income is closely followed by the act of keeping it or investing it. There is no tension if the income earned is from disclosed sources. People will think about making a wise investment out of this so as to earn better returns. Tax-evaded unaccounted income raises tension about its safekeeping. If the safekeeping of such money does not give any worry, then this encourages earning more black money and this is another reason for our tax evaders becoming more bold.

Property stashes

Immovable properties, particularly plots of land, are the biggest absorbers of unaccounted cash in our country. The official circle rate of both urban and rural agricultural land is much less than the ongoing market rate. To illustrate this point, the circle rate of property in South Delhi is almost 1/3rd of the market rate and this means that while buying property in South Delhi, 2/3rd of the actual cost can be paid in unaccounted cash. Hence immovable properties become a safe place for investment of unaccounted money. The unaccounted money so invested will also come back at a premium when the property is sold. It becomes difficult for taxmen to unearth this black money in a casual routine scrutiny since the property remains purchased at the official circle rate.

‘Immovable properties, particularly plots of land, are the biggest absorbers of unaccounted cash in our country. The official circle rate of both urban and rural agricultural land is much less than the ongoing market rate’

Gold hoards

Indians have love for gold and people do try investing some part of their unaccounted money in buying gold. Gold and other such unaccounted valuables are kept hidden in bank lockers but it is feared that they can be seized during tax raids.

Shell abodes

The creation of shell companies is becoming very popular among the wealthy for the safe keeping of black money in the bank accounts of these companies. Another option for the safekeeping of unaccounted money, as favoured by citizens of many other countries as well, is keeping wealth in the names of offshore companies registered in tax havens as has been detected by the Panama and Paradise Papers. With the safekeeping of black money properly planned, people go on pursuing their love for more and more money, irrespective of any concern about the colour of the money.

The boldness with which tax evasion takes place in India makes it one of the least tax compliant countries in the world. We Indians do not contribute to make India big though we all want to see our country become truly big and great. We have to change our old habit of not paying tax. We have to stop applying our minds to finding ways and means to avoid and evade legitimate tax on our income. The government needs to give more teeth to our taxation laws while at the same time to make them simpler for everyone to understand. The media needs to break more stories of tax evasion and do the work of naming and shaming.

by S K Jha