Fraud tax for tax frauds

Updated on: Feb 11, 2011

Like all other things, taxes too come in different shapes and sizes. Tobin Tax was conceived as a currency transaction tax for spot conversions from one currency to another while taxes on tobacco and alcohol are named sin-taxes. The Tax Department assumes that a tax-payer would be honest enough to pay his legimitate taxes. Mechanisms such as deduction of tax at source ensure that the Revenue gets the moolah when the taxable transaction occurs. It is assumed that one commits a tax fraud if one intentionally violates its legal duty to voluntarily file income tax returns and/or pay the accurate amount of income, employment and excise taxes owed. By neglecting legal duty, we pose a threat to the tax administration and economy and can be charged with tax fraud by the Criminal Investigation. Extending the corollary of sin-taxes, a Fraud Tax – which can also be christened a Scam Tax- for a tax fraud can serve as both a deterrent and a punishment.

Taxing Scams

The numbers could change economic figures in India. The Comptroller and Auditor General (CAG) arrived at a figure of Rs 1,76,700 crore as the amount involved in spectrum scam.This challenged and disputed but remains. Assuming an error percentage of 25, the number comes to Rs 1,35000 crore - about 12 times the Rs 10,772 crore that was paid as spectrum fee.

One company that purchased a licence for Rs 1,537 crore sold 45 per cent of the company for Rs 4,200 crore while another one that purchased a licence for Rs 1,661 crore gave away 60 per cent for Rs 6,200 crore — which can be averaged to 3 times the purchase price. Assuming that 50 per cent of the companies sold their spectrum, the total consideration at three times is around Rs 202,500 crore. Tax this at 30 per cent and the notional revenue loss is Rs 60,750 crore.

The Budgeted Revenue Deficit for 2010-11 of Rs 276,762 crore would have reduced by almost 22 per cent had the notional spectrum fees lost been legalised. Add in similar scam taxes for the Commonwealth Games and IPL etc, and the Revenue Deficit would probably look healthy. To emphasise the punitive nature of the tax, Scam Tax should be levied at 40 or even 50 per cent.

Amnesty Schemes

The tax department has introduced several amnesty schemes which probably did not have the wow factor to turn all ill-gotten wealth into gold. These schemes have been used as tax-planning initiatives to declare some but not all assets/income untaxed. The interval between the schemes permits accumulation of additional wealth and declaration of the old wealth when the next scheme is announced. Cross-holdings, endless money-trails, benami transactions and innumerable related-party transactions do not ease the task of the Revenue.

Though the entire 2G spectrum issue opened up with the phone-tappings done by the tax department, it has been noticed in many instances that action has been initiated by the Department only after some other agency has initiated action on the event. A Scam tax in place for about a decade and levied with no leniency in implementation can create a fear factor. While covering scams, it could also extend to information about illegal funds stashed abroad if and when the Department is able to get information about them.

Budget 2011 offers an opportunity to make announcements regarding the Scam Tax and the Direct Taxes Code could be the ideal platform to launch it.

(The author is a Bangalore-based chartered accountant.)

Published on March 12, 2018

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