Penalty and Prosecution for Tax Evasion

“Paid Taxes buys you civilization.”

Oliver Wendell Holmes Jr.

Introduction:

Tax is a monetary obligation to be paid by citizens of a state multiplying their income by utilizing the state’s resources as a contribution to the state’s revenue. This can also be considered as a payback to the government by citizens which is further used for the state’s betterment. Every citizen is morally and legally obliged to pay back to the country they are procuring resources from. This article will explain thoroughly the concept of ‘tax evasion’ and the penalties and prosecution charges that can be levied on any person for evading tax payments. The article will meticulously describe important incidents and a timeline of those incidents which led to the enactment and furtherance of the ‘Income Tax Act 1961’ today. The research will further explain few international provisions and the basic perspective of authorities globally on tax evasion along with supporting case laws. 

What is Tax Evasion?

Tax evasion is described as illicitly absconding from tax payments or paying less than what is to be played. In both, the situation a person can hold liable for tax evasion and can face consequences. The degree of punishment or penalty is prescribed according to the degree of negligence of the taxpayer. In case of big pay scams of business owners and companies, the court usually resorts to heavy fines along with prosecution. Tax is collected from the citizens of the state to improve the socio-economic facilities of the state. The act of tax evasion by the citizens and company owner’s itself becomes a root cause of increased corruption in the country. India criminalizes the act of tax evasion and the Income Tax act defines the punishment of the same depending on the severity of the crime. researchers had discovered that the crime of tax evasion is overlooked by the taxpayers and is considered as a much moderate crime[1]. Moreover, researchers over time have detected a casual approach of people towards crime that do not involve people.

History of Taxation Laws in India

Today the taxation system is broadly divided into two categories direct taxes and indirect taxes. Direct taxes are the one’s that are levied directly on the person’s income, while the indirect taxes are levied indirectly on the services and goods people avail. Indirect taxes are in form of service taxes, value-added taxes, and sales tax. It is believed widely across the state that the categorization in taxes is a modern evolved technique of collecting taxes rationally. Although, there are enough traces of the system prevailing in the primitive era. The most reliable source as evidence of these facts is Manu Smriti and Arthshastra.

Taxation Laws in India Post 1922

In the year 1922, for the first time India enacted and enforced an ‘Income Tax act 1922’, this laid down the structure of Income-tax laws in the country and gave an instrument to administer taxation in the country. A statutory body formed under the provisions of the Central Board of Revenue act was the only authority looking into the administration of the Income Tax act. Thereafter in the year 1939, an amendment was made in the act which made considerable alterations for instance administrative functions and appellate functions were separated from one another[2].

In the late 40’s the concept of excessive and business profit tax was introduced. This made businesses and profit-making enterprises liable to pay a percentage of their profits to the government. In the following years, a commission to watch over income tax payments by the citizen was made, this was declared ultra vires by the apex court. However, soon the authorities realized the necessity of the same and established a unit named ‘Inspectors of IT’ along with the regulation of internal audits in the years 1952 and 1954 respectively. Around the 1970s the accountability of reporting arrears in tax collection was transferred from the state to tax recovery officers. This was considered a huge step and while all of this was taking place the ‘Wealth Tax Act 1957’ was introduced followed by the ‘Gift Tax Act 1958’.

In 1984 a hike in the use of digital devices forced the system to shift from the conventional method of Challan and PAN procurement to a digitalized one. An amendment in the taxation laws was also brought in by the authorities in the same year to ease the tax paying process. In the early ’90s, the ‘Interest Act of 1974’ was reinforced. As the new era hit in the 2000s, the department’s operations were fully digitalized including filing returns. Meanwhile in the 200’s a lot of constructive steps were taken as the concept of ‘Annual Information return was brought into the light, in 2005 Banking Cash Transaction Tax was introduced and an all India tax network was established as well.

Tax Evasion Penalty and Prosecution

Tax payment includes a very crucial step of assessment that evaluates the return of tax on an individual’s income. Section 143(1) of the Income Tax act 1961 describes the scope of assessment of income returns. Section 143(3) explains the significance of assessment is to evaluate if the taxpayer has provided true income details, have paid all taxes, and not underpaid any returns.

The income tax act 1961 prescribes certain penalties in case of the following defaults under chapter XVII & XXI[3]:

1. Section 221: This section explains the penalty of a tax defaulter. In case a person is found to be a tax defaulter, the defaulter is liable to pay a penalty of an amount prescribed by the assessing officer along with a and interests.
2. Section 270: This section puts a person to liability who has fraudulently misrepresented his/her income and has respectively underpaid taxes.
3. Section 271: Failure to operate audits of an individual’s or company’s account or concealment of certain transactions or failure of payment of tax at source.
   (D) accepting payments, deposits, payment, or repayment of loans of more than 20,000 out of bank transactions.
   (F) in case of failure to pay returns on income.
4. Section 273: This section puts a penalty on individuals who have failed to file their advance tax returns as directed by the assessing officer.

Prosecution of a person can be made in the following sections and scenarios[4]:

1. Section 276(C): In case a person willingly tries to abscond returns on income or profit of the business. This section is conclusive of these situations:
   • The owner or the individual has tried to maintain false accounts of income.
   • The owner or individual has made any false entries to books.
   • Deliberate concealment of transactions.
     In case the taxpayer has evaded a tax liability or has misrepresented income of more than 25 lakhs, the act will be punishable with an imprisonment of not less than 6 months to a maximum of 7 years with fine.
2. Section 277: Where a person has made false statements during the investigation or has presented false statements and accounts in full consciousness.
3. Section 278: Where a company has falsely presented unreliable accounts or statements or has made false statements during the investigation, every person in charge on the behalf of the company will be held liable for it.
   In case the individual has made a false statement and has concealed an income or has evaded from payment of taxes of more than 25 lakhs, the act specifies a punishment of a minimum 6 with the fine.

International Perspective

As discussed above taxes have a very crucial role to play when it comes to a country’s overall development. This includes the health sector as well; due to the current situation of COVID-19, the countries have been facing a reasonable crisis in the health sector. Undoubtedly arrears in tax payment by citizens is a big reason country is lacking the required funds. US & Hong Kong stand in the first four ranks in the financial secrecy index[5]. Recently Italian official Gazette presented an amendment in the tax law of Italy. The new decree has reduced flexibility in tax evasion cases and has increased penalty for the crime[6]. the decree has repealed the provisions which decriminalized the concealment or underpayment of less than 10% of the original amount.

Case Laws

Beaver Estates Pvt. Ltd. And Ors. VS. The Assistant Commissioner of Income Tax Corporate[7]

The petitioner filed a plea in the Hon’ble High court of Kerala seeking a stay on the trial proceedings, where the petitioner was to be being prosecuted on ‘wilful attempt to evade taxes’ under section 276C(1) of Income Tax Act 1961. The petitioner filed this plea seeking the support of the precedent, K.C Builders VS. Assistant Commissioner of Income Tax[8], wherein the apex court held that in case the penalties on the accused are withdrawn on the ground of non-concealment of income or any other statements, the prosecution is inevitably quashed. However, the High court of Kerala allowed the trial to continue against the company and the managing director.

Conclusion

The crime of tax evasion is not considered to be a crime anymore, it is an act of convenience for people to evade taxes even when the amount is very less. It is indeed the correct observation made by several researchers that a crime non involving the human body is addressed as a minor crime. Internationally the concept of crime evasion is evolving and the legislatures of different countries are undertaking stricter arrangements to reduce tax arrears and concealment issues. However, the issue of tax evasion is still very unpopular in India. Hence, there is a constant need for righteous implementation of the laws in India.

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References:

[1] Nor Aziah Abdul Manaf et. al., Tax Evasion as A Crime: Survey of Perception in Yemen, 6. IJBM, 1833-3850, (2011) https://pdfs.semanticscholar.org/5eee/d6223348781928a4ad4027009385efe6069a.pdf .

[2] History of Direct Taxation, Income Tax Department,

https://www.incometaxindia.gov.in/pages/about-us/history-of-direct-taxation.aspx .

[3] The Income Tax Act 1961, No-43, Acts of Parliament- 1961, (India).

[4] The Income Tax Act 1961, No-43, Acts of Parliament- 1961, (India).

[5] Wayne Swan, Global Tax Evasion is a Penalty on Health Care, Education, Climate Change and More. The World Cannot afford it, ICRICT, Feb 22 (2020), https://www.icrict.com/icrict-in-thenews/2020/2/28/global-tax-evasion-is-a-penalty-on-health-care-education-climate-change-and-more-the-world-cannot-afford-it .

[6] Barbara scampuddu & Gian Luca, New Italian Tax Decree Imposes Stricter Evasion Penalties, ITR, November 27, (2019) https://www.internationaltaxreview.com/article/b1j6tz6kx0bn1d/new-italian-tax-decree-imposes-stricter-evasion-penalties .

[7] MANU/KE/4435/2019.

[8] MANU/SC/0070/2004