The Government appears to be giving serious thought to the idea that tax evasion must be declared a criminal offence with all the attendant consequences.

Generally, it is assumed that in taxation, a specific intent to evade a tax which a taxpayer believes to be owing is an essential element of civil fraud. On the other hand, a crime is defined to be any act done in violation of those duties which an individual owes to the community. Many crimes have their origin in common law, but most have been created by statute. Jurisprudence classifies crimes as crimes which are mala in se and crimes mala prohibita . Some crimes involve moral turpitude and others do not. Crimes mala in se embrace acts immoral or wrong in themselves, such as burglary, larceny, arson, murder and breaches of peace. Crimes mala prohibita do not involve moral turpitude but involve things prohibited by statute. There is also a category called white-collar crime which includes violation of anti-trust laws bribery, computer crimes, drug violations etc. To which of these category will tax evasion belong?

The American Example

In the US, tax evasion is considered a criminal offence which can lead to penalty or imprisonment or both. Section 7201 of the IRS Code prescribes a fine of not more than $1,00,000 or imprisonment for not more than 5 years or both for tax evasion. Revenue must prove that there existed an unpaid tax responsibility and that the offender did some affirmative act to avoid or evade tax. It should also prove that there was a specific intention to evade. The annual tax evasion in the US is estimated at $100 billion.

Law recognises tax evasion as distinct from tax avoidance. A recent innovation is the concept of tax mitigation. The American court recognised the legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them by means which the law permits (Gregory V.Helvering US S.C). Either tax mitigation or tax avoidance, if unsuccessful, can land in tax evasion.

The US taxes its citizens on world income. This ensures that the taxes cannot be avoided by transferring assets or moving abroad as we can do in India. A noteworthy feature of the American system is that the tax filer must report even illegal incomes such as those gained from gambling, theft, drug trafficking etc. The law requires that unlawful gains should also be declared as income (James vs. US). Those trying to report illegal income as coming from a legitimate legal source can be charged with money laundering.

The 1968 Nobel Laureate Garry Becker and his disciples constructed a tax evasion model which found a direct correlation between the level of punishment and the level of tax evasion. In the UK, tax avoidance became a big issue last year.

The Indian Context

Like the Indian State, tax administration in India is notoriously known to be slack. There is a lot of political interference. . It will be shocking to know that China can award even death penalty in extreme cases of tax evasion. While Switzerland considers tax evasion as a civil offence to be dealt with in Swiss tax courts, planned falsification of data is considered criminal. Two decades back, India set up Special Courts to try economic offences. The idea is laudable, but the results are nothing much to boast about.

The DTC has brought in elaborate General Anti-Avoidance Rules which will be in force from next year. Checks and balances have been built in to prevent abuse of the provisions by the tax authorities. But surprisingly, DTC has omitted the term ‘concealment' from the Code. The American IRS undertook Taxpayer Compliance Measurement Program to find out the tax gap. Tax gap is the difference between taxes legally owed and the amount actually collected. It will be next to impossible to find the tax gap in India. The US has also been constantly updating the Money Laundering Regulations 2007 and the Proceeds of Crime Act 2002. The Indian Money Laundering Law is in a limbo; it does not include tax evasion in its definition and its application.

We need to take a serious view of tax evasion and declare it as a criminal offence. This will require rewriting the law and strengthening the tax administration. This is the opportune time since the public mood is now seriously against all forms of tax evasion.

(The author is a former Chief Commissioner of Income-Tax.)

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