Monday, 18 July 2016

If you are a tax defaulter, a tougher I-T dept awaits you



                                                           


Even before football fans recovered from the news that Lionel Messi will no longer play for Argentina, they were in for another shock. The Spanish tax department sentenced Messi and his father Jorge Horacio to 21 months in prison apart from fining them a few million Euros for tax fraud.

It appears that both avoided Spanish income tax on his image rights by using shell companies in various countries. However, both may not have to spend time in prison since, as per Spanish law, prison sentences below two years are suspended - meaning they can be served anywhere including on a football field. It is apparent that the sentence was given for 21 months only to ensure that this benefit is availed.

Sports stars being penalised by the tax office is not a new phenomenon - Maria Sharapova and her father had their share of tiff with the tax department. Tax jurisdictions abroad may not arrest popular stars but they will not stop shy of naming and shaming them. This leads one to think aloud as to what would the tax office in India do with tax defaulters?

Sports stars in India may have the money but not the intention to defraud the tax office. Recently, there were reports of some arrests by the tax department but they were quickly denied. As with many things in India, the truth will never be known.

A strategy paper prepared by the department has some news in store for tax defaulters. In order to cripple and check (strong words these!) the activities of tax defaulters, the Income Tax Department has decided to block the Permanent Account Number (PAN) of such entities, get their LPG subsidy cancelled and take measures to ensure that they are not sanctioned loans. The taxman will block PAN in such a way that these defaulters are not sanctioned any loans or overdraft facility by public sector banks, as the same is bound to become non-performing assets.

With the objective of disincentivising the defaulters, it would recommend that the LPG subsidy which is directly credited to the bank accounts of the said defaulters be annulled. The taxman also proposes that the identities of such blocked PANs be circulated to the Registrar of Properties with a request not to allow any registration of immovable properties where such PANs are involved. Such defaulters' information has also been recommended to be circulated across tax offices so that their activities, loans or government subsidy can be plugged countrywide.

The department has also decided to subscribe to the Credit Information Bureau Limited (Cibil) data to check out the financial activities of defaulters and undertake action against them for recovery and freezing of assets. The department, beginning last year, also started to "name and shame" large tax defaulters by publishing their names and other credentials in leading national dailies and on its official web portal.

Beginning this financial year, it has decided to publicly name all categories of taxpayers who have a default of Rs 1 crore and above. While all these strategies are bound to draw attention, whether the tax department can curb the fundamental rights of a taxpayer to seek loans/LPG subsidy is a basic question that is bound to land up in the courts.

Amidst all this, an Income Declaration Scheme (IDS) is operational with effect from June 1, 2016. The government has been going on a marketing blitz in an attempt to get people to embrace the scheme. Sets of Frequently Asked Questions (FAQs) have been issued and IDS also found a mention during the prime minister's "Mann ki Baat" airing. The scheme will run for four months.


The declared income and related assets will be taxed at an effective rate of 45%. The undisclosed sum can be held either in the form of assets or in any other form. If the taxpayer is holding undisclosed income in the form of an asset, the market value of the asset as on June 1 shall be used to compute the sum of undisclosed income.

It has also promised that those declaring undisclosed income or assets would not be subject to further enquiry or scrutiny. If our friendly neighborhood tax office discovers any undisclosed income or assets after the scheme closes, the offender can be assured of a tough time.

The IDS scheme may, at best, meet with a lukewarm response because of the high rate of tax at 45% and also the need to pay tax on assets at market value as on June 1. One of the examples given in the FAQs illustrates that tax will have to be paid on cash remaining on hand out of the undisclosed income - a concept unheard of by the Indian tax payer and which will certainly make him wary of going for the scheme.

At best, the tax office should get some limited comfort that those who declare any income/assets under this scheme will not be able to short-change them again. It is possible that the scheme may be extended beyond October but the response would increase only if a few sweeteners (such as a tax rate that gives comfort) are thrown in.


Over the years, the Indian taxpayer in general and the defaulting one in particular, has become a war veteran in fighting his battles with the department. Unless there is something in the deal for the taxpayer by way of an incentive, he is not going break into a sweat over the moves being proposed by the department or the income declaration scheme. It should not come as a surprise if a person with five undisclosed properties discloses only three under the IDS scheme and keeps the remaining two in stock for the next scheme to be announced in a couple of years.

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