Decoding Finance Bill 2012

Ameet N. Patel - Partner, Sudit K Parekh & Co.
Measures for prevention of generation and circulation of un-accounted money

It is often loosely mentioned in discussions that the parallel economy in India is larger than the official economy. This is unproved and unsubstantiated. However, when one reads a about the large sums of money involved in various scams, one is not surprised at the unproved allegation.
Unaccounted money gets generated due to various reasons. One of the biggest sources of unaccounted money is corruption. The receiver of a bribe, obviously, would not account for that money. But, in most cases, the payer of the bribe too would try to camouflage the payment in his books of account through one way or another. This, in turn, leads to a cascading effect on the generation and circulation of money. The multiplier effect only ensures that the parallel economy feeds itself and grows by leaps and bounds.
My personal view is that the main generators of unaccounted money are as under:
a)      Politicians in power
b)      Bureaucrats who are in charge of various licences and approvals
c)       Gold and bullion sellers & buyers
d)      Construction industry
e)      Small traders/manufacturers/professionals who prefer to indulge in cash transactions
f)       Unscrupulous people who act as accommodating parties by giving fictitious invoices in return for a small fee.
Let us see how the latest Budget seeks to address some of these issues. The other side of this problem is whether the existing provisions of the law are adequate to detect the generation of unaccounted money or whether we need to amend our laws.
My personal view is that our laws do have enough number of provisions that empower our tax department to unearth black money and punish the guilty. What is lacking is the will to do this seriously. We have the search and seizure provisions. We have the survey powers. We have 40A(3) and 269SS/269T etc. We also have 271(1)(c ) and other penalty sections. We also have certain other sections which compel people to use non cash modes of payments. These are only illustrations. But the moot question is “Are these provisions being used effectively?” To me, the answer is a clear and resounding “NO”. It is common knowledge as to what actually transpires during a search operation. Do we all not know that a majority of the search operations end up with large sums of cash being exchanged? Do we all not know how many appeals are ultimately “settled” amicably? Who is responsible for all these?
Today, if one were to objectively analyse the situation, one would concur that:
a)      There are several deterrent provisions in the Income-tax Act that would stop a normal tax payer from indulging in wrong practices as far as taxes are concerned
b)      There are several penal provisions in the Income-tax Act which would make a habitual defaulter also think twice before attempting to evade taxes
c)       The real problem is that the law is not implemented properly and there is enough discretion given to the Govt officers to permit them to use this discretion to their own advantage. The various press reports telling us the extent of unaccounted money that many Govt servants have amassed clearly point towards this fact.
d)      Another chronic problem that the Govt departments are facing since past few years is that of staff shortage. A short visit to the tax department and a brief discussion with any randomly selected tax officer will reveal that almost every officer is under staffed and over worked. The number of cases selected for scrutiny being huge and consequently, the resultant litigation, appeals, rectifications etc arising on account of the scrutinies are simply too heavy to be handled efficiently by the current staff strength. To compound this problem, the CBDT chairman has apparently issued a letter to the Commissioners of Income-tax on 7th February to the effect that their career prospects would depend on their success in meeting targets for tax collection, emphasising the government's desperation to raise revenues to plug the rising fiscal deficit. The Chairman of CBDT has told 100 top officials that tax revenue targets are 'nonnegotiable'. The letter further goes on to state that "Among the parameters of performance in your area, achievement of revenue collection target will obviously be given the highest weightage while writing your APAR and (it) will also be a major factor while considering placements during AGT 2012." APAR is the annual performance appraisal report and AGT is annual general transfer. 
In light of this kind of a situation, it is common sense that the tax officers would be pressurised to make high pitched assessments and raise huge demands. A logical fall out of this would be that tax payers will be forced to pay under the table to prevent such harassment. This only gives rise to more unaccounted money.
e)      The construction industry is one of the biggest generators of unaccounted money. It is common knowledge that almost every transaction relating to an immovable property involves the give and take of huge sums of cash. Has any Govt worth its salt taken any steps to put an end to this menace? The latest Budget proposes to levy a 1% TDS on certain transactions. But here too, there are certain gaping deficiencies. Firstly, transactions involving agricultural land are excluded from this provision. It is common knowledge that agricultural land sale also involves huge sums of cash. Therefore, there is no effort to detect, prevent and punish the guilty from engaging in transactions of purchase and sale of agricultural land with unaccounted money. Secondly, the 1% rate of TDS is far too low to bring to tax the income from such transactions. For example, if a flat is sold for say, Rs. 2 crores and the profit margin is 20%, then the seller makes a profit of Rs. 40 lakhs. Presuming a tax rate of 30%, the tax payable is Rs. 12 lakhs. Against this, the buyer is now expected to deduct TDS of Rs. 2 lakhs only. Finally, there is the issue of giving credit for the TDS to the seller. While this does not, per-se, have a direct nexus with generation of unaccounted money, the fact remains that even with a detailed system of OLTAS and elaborate TDS statements, a large number of tax payers do not get credit for huge sums of TDS. This happens even though TAN, PAN etc are duly filled in at various places. Now, in the newly proposed section, there is a move to do away with the requirement of quoting the TAN and also filing of TDS statement by the deductor. I am very sceptical about the seller getting credit for the TDS in such cases. If this is an apprehension that is shared by the builders and/or sellers of property, it would only result in the selling prices of property being inflated to the extent of the TDS. In all probability, this amount would exchange hands in cash. The result, ironically, would be that the very proposal that is brought in to curb black money will only increase the generation of more black money.
f)       In the Budget, the Finance Minister has specifically referred to “the following legislative measures for strengthening anti corruption framework”:
  • Prevention of Money Laundering (Amendment) Bill, 2011 introduced in Parliament with a view to bring certain provisions of the Act in line with global standards;
  • Benami Transactions (Prohibition) Bill, 2011 is currently being examined by the Standing Committee on Finance. It would replace the `Benami Transactions (Prohibition) Act, 1988’

Now, with due respect to the Government’s stated objective of bringing the PMLA in line with global standards and the referral of the other Bill to the Standing Committee, I would like to question the outcome of both initiatives. We are all aware of the fact that the Standing Committee on Finance to whom the DTC was referred had come down strongly on the various GAAR related provisions in the DTC. Despite this, the Govt has thought it fit to introduce even more harsh GAAR provisions into the IT Act. Therefore, the sanctity of the Standing Committee itself is in question here. That being the case, the common man is entitled to a genuine belief that the reference to the Standing Committee is only an eye wash. So also, the stated objective of bringing certain provisions of the PMLA is in line with global standards. If this were actually the case, then some of the draconian provisions that have been proposed in the DTC would certainly not have seen the light of the day. I wonder which country has a long standing tradition of bringing retrospective amendments to its tax laws.
g)      On the issue of black money, the budget says that “The Government has taken a number of proactive steps to implement this strategy”. The strategy referred to here is the strategy outlined in the earlier Budget. The proactive steps mentioned here include the finalisation of 82 DTAAs and 17 TIEAs. It is claimed that “information regarding bank accounts and assets held by Indians abroad has started flowing in. In some cases, prosecution will be initiated”. Coupled with this, there is a move to make it mandatory for any tax resident holding assets abroad to file a return of income in India even if he/she does not have any income in India. A question that arises here is “Can the Govt first act on the small list of bank accounts held in HSBC by about 700 Indians”? In this connection, a press report is reproduced below:
MUMBAI: The Income-Tax Department in Mumbai has secured at least 17 'voluntary disclosures' out of 700 Indians having secret accounts with HSBC Bank, Switzerland.
The list of Indians having unreported accounts with the bank was handed over to India by the French government a few months ago.
According to sources in the tax office, the amount disclosed ranges from Rs 50 crore to Rs 300 crore. Many in the list have opted to file 'revised return' — a procedure allowed under the Income-Tax Act for taxpayers who think they made a mistake while filing the original return.
Revised returns are usually filed within a year of filing the original. The I-T department has chosen to summon the alleged evaders and ask them to declare their undisclosed offshore deposits rather than initiate prosecution proceedings. This is on account of two reasons.
Firstly, the tax department does not have the manpower to go after all the 700. It has, instead, prepared a shortlist based on the quantum of deposits in the HSBC accounts.
No strong action
The tax department is also not in a position to verify the list with HSBC Switzerland, as the information was stolen. It is these factors that have prevented it from taking stringent action against the alleged tax evaders.
The list is part of the stolen data that French authorities obtained from a former HSBC employee. Such a list has to be certified by Swiss authorities before it can be used as evidence in any court of law. Both the tax office and taxpayers are in a tricky situation.
I-T officials know prosecuting those in the HSBC list may be a long and difficult process while the taxpayers have sensed that fighting the department, which has come to know about the accounts, can be painful and expensive. Under the circumstances, the I-T department is taking a carrot and stick approach.
"If someone agrees to pay tax, there will be very little action against him. Otherwise, the department may not only use its powers, but also involve the Enforcement Directorate. Then, the party may face charges relating to violation of foreign exchange regulations and money laundering," said a person familiar with the situation. The Enforcement Directorate administers the Foreign Exchange Management Act and Prevention of Money Laundering Act.
It is clear to me that the Govt lacks the will to go after such tax evaders. The fact that regular tax payers are hounded day in and day out for the smallest of defaults including small TDS defaults while the big fish with several hundred crores in foreign bank accounts are not pursued vigorously because it “may be a long and difficult process” only highlights the fact that something is wrong somewhere. What is it that prevents the CBDT chairman from picking up 20 of his top CITs and their entire team and taking away all the regular scrutinies handled by them and instead handing over to them the work of going hammer and tongs after the 700 people listed in the HSBC list? The only reason that I can think of is that it is simpler for the tax department to punish honest people who are already tax payers than to go after the tax evaders.
h)      Another important aspect that is constantly neglected by the Finance Minister is about brining in accountability into the system. Today, we are all aware of the manner in which tax department is administering the law. The Govt has brought out the “Citizen’s Charter” for the Income-tax Department which is a “declaration of its Vision, Mission and Standards of Delivery.” In this Charter, one of the Mission Statements of the tax department is “to enforce tax laws with fairness”. This is a cruel joke that is being perpetrated on the tax paying community by the Govt. It seems very unlikely to a tax payer (who does not get his refunds in time, who is constantly served with notices informing him of arrears of demands for years dating back into history) that his ITO has ever read this Citizen’s Charter. In any case, if there is no deterring section or rule in the tax law of the country which will make an officer think twice before taking any action, how can one expect any officer to act responsibly and in a just and fair manner?
i)        Finally, based on the discussions that I have had with a broad spectrum of tax payers and the feedback that I get from the audiences where I have addressed meetings, I am of the opinion that the credibility of the Govt is at a new low. The common man learns about new scams and new corruption charges every day. He also reads news reports that the accused get bail and are out of jail very soon after they are caught. Therefore, the common man is very sceptical and cynical about the Govt’s intentions on unearthing black money. Till such time as these doubts, cynicism and scepticism remain, it is unlikely that people will stop generating and circulating black money simply because they would rather not pay tax because they are not sure how their hard earned money is spent by the Govt when it is recovered from him by way of taxes.