The Hindu Business Line : Lax implementation of tax provisions

Penalties, pecuniary or otherwise, and prosecution provisions have to be an integral part of any taxing statute to ensure correct and timely compliance. Barring some honest taxpayers, compliance hinges on (i) how effective penal provisions are; and (ii) how these are administered by the tax authorities.

Tendency to evade

While it may be desirable to make compliance voluntarily, there is this tendency on the part of taxpayers to avoid paying taxes either totally or to the extent possible if there is feeling that non-compliance may not be detected or, if detected, the chances of punishment are remote because of weak implementation of the penalty and prosecution provisions.

The Income-Tax Act, 1961 contains elaborate provisions concerning penalties. Chapter XXI in the Act mentions about a number of situations when penalties can be imposed for various acts of omission and commission by the taxpayers. The situations attracting penalties for compliance failures are many. Chapter XXII contains 24 sections relating to offences and prosecutions.

Courts have held that both penalties and prosecution provisions can be invoked simultaneously. It has been observed in CIT vs Maduri Rajeswar (107 ITR 832 AP), that proceedings entailing penalty cannot be equated to prosecution attracting punishment as no conviction for any offence is involved in the imposition of a penalty and Article 20(1) of the Constitution is not applicable to the proceedings imposing penalty under the Act.

Thus, the principle of double jeopardy cannot be invoked insofar as levy of penalty, payment of mandatory interest and prosecution resulting in fine or corporeal punishment under the direct tax laws are concerned.

However, it is a matter of regret that concerted and firm attention is not paid to the implementation of sanctions for non-compliance, and persons who are not honest and faithful in the discharge of their tax obligations are either not punished in time or not punished at all.

CAG report

This is apparent from the report of the Comptroller and Auditor General of India (CAG) on the Government’s direct taxes for the year ended March 2007, placed in Parliament on March 11, 2008, showing the position regarding penalty and prosecution cases under the I-T Act up to March 31, 2007.

If an assessee fails to furnish return of income/wealth or files a false return or fails to produce accounts and documents, penalty is leviable. The assessee is also liable to be prosecuted for the offence. Penalty is also leviable for failure to deduct or pay tax.

Table No. 2.15 in the report indicates that of the 8.50 lakh cases where penalty proceedings were initiated, only 0.59 lakh cases (6.90 per cent) were finalised during the year compared to 10.67 per cent in 2005-06. Total pendency increased from 6.56 lakh cases at the end of 2005-06 to 7.91 lakh cases at the end of 2006-07.

The report further shows that the number of cases where penalties were imposed decreased from 36,839 in 2005-06 to 22,392 in 2006-07 and the amount of penalty imposed fell from Rs 5,046.07 crore to Rs 2,947.84 crore during the same period. No reasons have been mentioned from the CBDT’s side to explain such fall in figures.

The position regarding prosecution is worse, and the progress regarding conviction is regrettable.

Coming to punishing the guilty, three convictions in three years can hardly create deterrence for not concealing or not making compliance to other provisions in the I-T Act.

Search and Seizure

Further, there has been total neglect of search and seizure provisions for detecting tax evasion and avoidance. During 2006-07, vis-À-vis 2002-03, the number of search and seizure assessments declined from 2.98 lakh to 2 lakh in the case of non-corporate assessees and from 0.14 lakh to 0.02 lakh in the case of corporate assessee.

Not surprising, therefore, that taxpayers in the country constitute merely 3 per cent of the total population. Of these persons, with incomes and losses exceeding Rs 10 lakh (on March 31, 2007) were only 0.68 lakh in corporate category and 5.79 lakh in non-corporate category.

To ensure prompt and proper compliance, resorting to penalty and prosecution provisions, as also search and seizure provisions, is imperative. Not doing so not only brings down revenue collections and the desire for voluntary compliance but also demoralises well-intentioned and honest taxpayers, which can lead to a further decrease in the number of taxpayers.

(The author is a former Chairman of CBDT.)

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