Government Eases Prosecution Norms For Income Tax Return Filing, TDS Defaults

The government has eased compounding and prosecution norms for defaults made by taxpayers in filing of income tax returns, under-reporting of income, and failure to deposit tax deducted at source.

It has introduced a one-time facility to settle such defaults made by taxpayers by giving them more time to file a compounding of offence application as a relief to taxpayers, according to a government circular. Compounding of offence means a tax evader accepts an offence and agrees to pay the tax due with interest and penalty. In exchange, the income tax department does not proceed with the prosecution case.

According to the current guidelines, a compounding application needs to be filed within 12 months of a prosecution complaint being filed. The new notification, as a one-time measure, allows taxpayers to file a compounding application up to Dec. 31, 2019 if the 12-month period has lapsed. This will be permitted for instance where the compounding application was not filed in time, withdrawn for the same reason or was rejected on technical grounds.

This one-time window obviates the need for any deadline extension to file a compounding application. Earlier, a compounding application could be filed beyond 12 months of the complaint being filed in court only in deserving cases and when approved by a competent authority like a Principal Chief Commissioner of Income Tax.

But this one-time relaxation in deadline will not apply to cases where a person has been evading taxes through entities to launder money.

New Guidelines For Prosecution

Another circular by the tax department, yet to be made public but viewed by BloombergQuint, has relaxed some prosecution provisions.

In cases where non-payment of tax deducted at source is up to Rs 25 lakh, and the delay in deposit is less than 60 days from the due date, no prosecution complaint shall be processed.

As per the current provisions, if a person fails to deduct or pay TDS, he shall be punishable with an imprisonment term of up to six months, and a fine.

In exceptional cases like habitual defaulters, considering facts and circumstances of each case, a prosecution can be filed only after approval from ‘collegium’ of two Chief Commission of Income Tax rank officers. Similarly, in cases where there has been a wilful attempt to evade tax prosecution shall not be processed without approval from the collegium, the circular said.

Section 276C of the Income Tax Act—provides for punishment for wilful attempt to evade tax—a person willfully evading taxes shall be punished with an imprisonment term of six months to seven years and with fine, where tax evaded exceeds Rs 25 lakh. In all other cases, the evader is liable to be punished with a prison term of three months to two years.

For cases where income tax returns have not been filed, and the amount evaded is discovered to be Rs 25 lakh or less, the prosecution can be filed only after the approval from the collegium. This offence carries a prison term of three months to two years and a fine. For amounts exceeding Rs 25 lakh, the imprisonment term is six months to seven years with a fine.

This move will aid in ensuring the selection of only genuine cases for prosecution, thereby reducing tax litigation and harassment faced by taxpayers, said Sanjoli Maheshwari, a director at Nangia Advisors (Anderson Global).

This is similar to the government’s move to increase the threshold for filing tax appeals at various courts, said Ravi Mahajan, a direct tax partner at EY India. The idea is to reduce disputes where amount involved in prosecution cases may not be material, he said.

End To Casual Complaints?

This would discourage casual filing of prosecution complaints by tax officials to meet their prosecution targets, said SP Singh, a former Indian Revenue Services officer. He said tax authorities used to file prosecution complaints for small defaults, and increasing the amount to Rs 25 lakh is a significant change.

Prosecution should be the last resort used by income tax officers, Singh said.

“This will create a tax-friendly environment for small businesses, and reduce prosecution complaints against micro, medium and small enterprises,” Singh told BloombergQuint.

The move will be an additional step to improve ease of doing business ranking of India, Mahajan from EY said.