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All you wanted to know about: Tax terrorism

AARATI KRISHNAN | Updated on November 25, 2017 Published on October 13, 2014

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Forget pugs and mobile phone networks. When it comes to doggedly pursuing suspected cases of tax evasion, who can match the perseverance of Indian taxmen?

The latest reminder of this came from Vodafone winning a tax case against the Indian authorities last week. Vodafone India (this time around) was slapped with a ₹3,200-crore tax demand for issuing new shares to its parent company at what the taxmen alleged, was an unduly cheap price. They reckoned that this violated ‘transfer pricing norms’ which require all parent-subsidiary dealings to happen at a fair price. By undervaluing the shares issued to the parent, tax authorities argued, Vodafone India had saved a tidy sum on taxes. But the Court felt the company was in the right. As this transaction was about capital received by an Indian firm and not income, there wasn’t any income tax owed, it ruled.

What is it?

The term ‘tax terrorism’ was first used by the current Prime Minister to describe the adversarial approach adopted by tax authorities under the UPA. “The tax terrorism prevailing in the country is dangerous. One can’t run the government by thinking that everyone is a thief,” he said, addressing members of Ficci in January. His party colleague Subramaniam Swamy built upon this idea in a later interview, saying as much as ₹31 per litre out of petrol prices of ₹75 at the bunk flowed into the Government’s coffers as taxes. But the never-say-die attitude of the Indian taxmen first came to light after they lost a case with Vodafone in January 2012 (capital gains tax on an offshore transaction) in the Supreme Court. Instead of calling it a day, they amended tax laws with retrospective effect, making Vodafone liable for a tax on a past transaction.

Why it is important?

So what if large multinationals are forced to shell out more tax? Bravo, CBDT (Central Board of Direct Taxes) for taking on the high and the mighty. If this is your view, it is not just multinational firms which have had reason to complain about the overly aggressive Indian tax machinery. Ordinary salary earning people face its wrath too.

Domestic tax laws allow the authorities to issue ‘demand notices’ even to people who have paid all their taxes for the year and have dutifully filed their returns. Sections 143, 153 and 210 of the Income Tax Act for instance, allow the CBDT to send you notices, if the scrutiny officer disputes your calculations or even simply believes that you have under-reported income. Many law-abiding investors who make big cash transactions, property purchases, or even mutual fund investments have indeed been taken up for such ‘scrutiny’.

Why should I care?

If the Government of the day is short of cash, don’t forget, it can delay your refunds, open up your old returns for scrutiny or extract its pound of flesh in myriad other ways. Dealing with tax authorities, if they do decide to ‘terrorise’ you, isn’t easy. You need to understand the legalese that underpins such notices, hire an expert and personally convince the assessing officer of your arguments.

You can also get into trouble if you delay payments or forget to pay your taxes on time. While the taxman may take his time with your refunds for many reasons, if you delay paying your annual taxes, the penalties can be pretty stiff. You not only have to pay interest at 1 per cent per month on the tax due, you can also be asked to cough up a penalty of another 1 per cent per month (totalling up to 24 per cent per year), if you underestimate your advance tax dues!

The bottomline

If you’re in India, evading taxes is downright foolish. But paying them is no guarantee that you will certainly sleep well at nights.

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Published on October 13, 2014
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