FinMin panel for stringent action to check tax evasion

Legal experts advise caution as it could harass even genuine tax assesses

A finance ministry committee, set up to look into strengthening of laws to curb black money generation, has recommended making minimum imprisonment provisions under various taxation Acts more stringent to deter investors from not paying taxes.

However, legal experts said such a move would harass investors and lead to more litigation.

The committee, headed by former central Board of Direct Taxes (CBDT) chairman M C Joshi, said, "Under economic laws, different punishments are prescribed for different offences. Minimum punishments should also be prescribed for economic offences, to have greater deterrence."
 

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What the CBDT committee wants

• Minimum 3 yr imprisonment under I-T Act, Wealth Tax Act, Central Excise Act and Customs Act, but I-T Act already provides for minimum imprisonment
• Prevention of Corruption Act to have maximum Imprisonment clause for 10 yrs against 7 yrs at present on lines of Prevention of Money Laundering Act
• To make minimum imprisonment mandatory, say official 
• Legal experts say move to make minimum imprisonment cognizable, but fear harassment of tax assessee and more litigations 
• Does not prescribe death sentence under PCA as is the case in Narcotics Drugs and Psychotropic Substances Act for second time serious offence

The report prescribed minimum three months of imprisonment under the Income Tax Act, Wealth Tax Act, Customs Act and Central Excise Act . All these provide for maximum number of imprisonment for seven years. But these Acts also have minimum periods of imprisonment. For example, Section 276 (c) of the I-T Act provides for a minimum period of six months' imprisonment for an assessee who has evaded tax to the tune of Rs 1 lakh, and 3 months for others.

So, what does the committee's recommendation mean? An official close to the development said the committee wanted to make the clause mandatory for tax evaders above certain threshold and clarified these are only suggestions, so far.

According to legal experts, the attempt was to make the provision cognizable, a recommendation they called unwarranted at this stage.

Avishek Dutta, partner, Hemant Sahai said there is a focus on revenue generation these days. But he warned tax officials should be educated enough to make the difference between tax avoidance and tax planning.

What could be considered tax avoidance, as in the case of Vodafone by tax officials, may be interpreted as tax planning, he said. To get a notice, threatening a minimum three months of imprisonment would harass tax assessees who could actually be going for tax planning.

This would lead to more litigations, he said.

"While the intention seems to be genuine, to deter non-compliant assessees, its impact on them should be properly judged, before rushing into such a provision," he cautioned.

If the present provisions are made even more stringent, then would it be the case that an honest taxpayer is also caught in the net for a tax planning that he may have implemented? Dutta asked. "That’s a latent question that needs to be answered."

When pointed out that the committee was asking for deterrence for tax evasion, he said there is a thin line between evasion and avoidance as also between avoidance and planning.

The committee also recommended increasing the maximum years of imprisonment under the Prevention of Corruption Act (PCA) to 10 years from the present seven years on the lines of Prevention of Money Laundering Act (PMLA).

The committee recommended that corruption under the PCA be treated as diobolical as money laundering and drug trafficking and, hence, maximum years of imprisonment be raised from seven years to 10 years. Under PMLA, the maximum imprisonment is for 10 years, while it is 20 years under the Narcotics Drugs And Psychotropic Substances (NDPS) Act.

Sanjay Israni, partner in Rajani Associates, said increasing the years of punishment may be the least possible thing the legislature can do, but the crucial issue is implementation with the present institutional structure of judicial system where the conviction rate is low and it takes years to prove a charge.

The second time serious offence under the NDPS also has a provision of death sentence, which however, the committee refrained to recommend for the PCA. Officials said corruption may be an economic offence, but drug trafficking may lead to harmful effect on others' health and life, so the committee maintained this distinction.