The justification for scrutinising all banks and public sector undertakings is difficult to understand.

The fact that large public sector corporations contribute the maximum tax revenues should, in fact, be a cause for gratification for the Government.

The Government should trust its own corporations which are professionally managed and where there is little likelihood of senior officers either manipulating books of accounts or consciously trying to reduce tax liabilities.

One message that comes across from a study of the procedure for selecting cases for scrutiny is that no attempt is being made to bring within the tax fold tens of millions who have successfully kept out of the net for the past many years.

The various categories of persons whose returns are to be scrutinised does not include cases where large expenditure is incurred by individuals who have filed no tax returns or even if they have filed the income disclosed is disproportionately low compared to their style of living and level of conspicuous expenditure.

The procedure for selecting scrutiny cases fortifies the view that the honest citizen who has been diligent in filing his returns and disclosing his income is going to be the subject of scrutiny simply because he has faithfully claimed in his tax returns deductions under Chapter VI-A in excess of the limits laid down, namely, Rs 25 lakh or above for the mega cities and Rs 10 lakh or above in other places.

If deductions are permitted by law and the tax-payer claims them, he is perceived to be a potential evader, bringing him within the net of scrutiny.

Likewise, those who claim exemption of income over Rs 10 lakh are sought to be scrutinised despite the Government taking a conscious decision to exempt dividends from tax and to provide unlimited tax-free interest on bonds issued in the past by the Reserve Bank of India which carried rates lower than the bonds in respect of which the interest was taxable.

The crooked tax-evader is laughing all the way because if he has not disclosed his income and wealth, the question of claiming exemption under the tax law does not arise.

There are millions of Indians who have loads of jewellery, gold ornaments and other valuable articles running into several lakh rupees. They would never be brought within the scope of scrutiny though they would not have filed their wealth tax return which is necessary where the value of these assets exceed Rs 15 lakh, along with the value of cars and land.

Such persons are not only evaders of wealth tax; they are potential tax-payers who have been investing their undisclosed income in buying properties, hoarding gold and purchasing jewellery and ornaments.

If at all the scrutiny procedure is to achieve the objective of countering tax evasion, the entire focus of attention must change. The Government would first need to gather data in respect of persons who have purchased immovable property.

This information can be gathered from builders, real-estate agents, banks and institutions that provide housing finance. All purchasers of property become potential tax-payers even if 80 per cent of the value of the property is financed by housing loans.

The reason for this is obvious. The repayment of the housing loan and interest thereon every year would be substantial. Besides, the person owning the house would still have to spend a substantial amount of his income on personal and family needs. The aggregate of all amounts will certainly put most house-owners in the highest marginal tax slab.

Acquisition of a house would also entail substantial expenditure in the first year itself on furnishing it. Very often the furnishing and the interior decoration would itself average Rs 700 per square foot. While some amount of personal finance is available for this purpose, a large amount is generally spent from unaccounted income.

Considering that around 8-9 million new homes are estimated to be acquired every year as shown from past statistics, the Government would expect all new house-owners to be potential tax-payers. The scrutiny should, therefore, be focussed on such persons as they would widen the tax-payer base. Another large class of potential tax-payers would be persons who incur lavish expenses on marriages. While the bulk of such persons may come from the middle- or lower-middle-class, there is still the upper fringe that is known to spend at least Rs 50 lakh on the occasion of marriage of their family members.

The lavish expenditure and vulgar display of wealth should be looked upon by tax officers because they provide the most valuable source of information for concealed income and wealth. However, for reasons best known to the tax department, such persons are rarely subject to scrutiny because they have been wise enough to avoid filing their tax returns or to file returns in a manner which exempts them from scrutiny. Again, there are millions of shopkeepers, retailers, distributors, wholesalers who declare pathetically low levels of income. None of them is covered by the recent guidelines for selecting returns for scrutiny.

There are some shop-owners who are well-known for their huge turnover; even those selling sweetmeats are known to have daily turnover exceeding Rs 25,000. Such persons are rarely brought within the tax net.

While the Indian manufacturing sector has not been performing well in the last few years and the small-scale sector is known to make perennial losses, it is a riddle how such entrepreneurs maintain a luxurious lifestyle, when their books of accounts show losses or negligible income. Such persons again never get covered in the web of scrutiny. The scrutiny if it is to be made truly effective and efficacious in achieving its objective should do away with the need to cover tax-payers who have been regularly contributing substantial amounts of revenues to the Exchequer. In fact, the Government should send the right signal by accepting the returns of such persons based on their past track record.

The scrutiny procedure should be calibrated to bring within the tax net persons who have the potential to pay tax not only in the current year but in future. The information gathering systems must be so designed that relevant data are acquired in an unobtrusive manner. Based on the evidence collected, scrutiny should be initiated.

Even after 50 long years, it is not too late to send the message that the honest will not be harassed and penalised, but that persistent defaulters of tax, sooner than later, will be brought to book.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in)

More Stories on : Income Tax | Taxation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page