CBDT’s New Compounding Guidelines: Costlier And Stricter?
The tax department reduces the list of offences that can now be settled.
In the revised avatar of its compounding guidelines, the revenue department has made the eligibility criteria more stringent, taken out certain offences from the purview of settlement umbrella and clarified that taxpayers will not be entitled to settlement as a matter of right. Relaxation of the guidelines will be made on a case-to-case basis, taking into account factors such as the nature and magnitude of the offences as well as the conduct of the person, the CBDT has said.
Compounding is a process which allows defaulters to settle their tax disputes by making payment of dues, penalty and interest instead of facing prosecution which is usually a costly and a long drawn process.
While the tax department has stated that compounding of an offence cannot be sought as a matter of right, it does not mean that the application can be rejected arbitrarily without any reason, Indruj Rai, partner at Khaitan & Co., said. The aggrieved party may explore the option of approaching the relevant High Court and argue their case for relief based on other cases which may have involved similar facts, he said.
Compounding Guidelines: What’s Changed?
The guidelines divide the offences into two categories:
Category A which are technical offences like failure to allow inspection, deduct tax etc. can be compounded for up to three occasions, as against up to two times in the earlier guidelines.
Category B which are non-technical offences like wilful attempt to evade tax, falsification of books of account etc. can be compounded only once, which is in line with the earlier version.
Compared to the earlier regime, some offences have been moved from Category B to Category A—for instance, failure to furnish return of income. This means that compounding of these offences will now carry a lower compounding fee.
Rai explained the process which needs to be followed to seek compounding of offences.
First, an application for compounding has to be filed post which one has to pay the tax that was in question along with the interest and any penalty which has been levied.The individual also has to give an undertaking to make the payment of any compounding charges which is calculated by the tax office. Lastly, if any appeal challenging the assessment has been filed, the tax payer has to give an undertaking to withdraw such challenges on offences which are sought to be compounded.Indruj Rai, Partner, Direct Tax Khaitan & Co
Offences No Longer Compoundable
Under its erstwhile guidelines, the tax department permitted compounding of certain offences relating to undisclosed foreign bank account or assets. But under the revised version, any offence which has a bearing on such offences in any manner cannot be compounded. Further, any offence which has a bearing on offences under the Black Money Act or under the Benami Transaction Act cannot be compounded as well.
The list also includes:
- Offences such as failure to comply with search and seizure action and removal, concealment, transfer, or delivery of property to thwart tax recovery can also no longer be compounded.
- ‘Category A’ offences on more than three occasions, unless exceptional circumstances exist.
- An offence for which the compounding application has already been rejected.
- Cases where it is proved that a person has enabled others in tax evasion/cases of money laundering.
Certain offences that were non-compoundable even in the earlier guidelines continue to be so—for instance, offences committed by a person convicted under the direct tax law or any other laws, offences committed by a person which have a bearing on a case under investigation by the Enforcement Directorate, Central Bureau of Investigation, Lokpal, Lokayukta or any other central or state agency, being involved in anti-national and terror activity etc.
Increase In Compounding Costs
Penalty, interest, scale of compounding fees has been increased for cases where there is a wilful attempt to evade tax. Earlier this used to be 100 percent of the amount of tax sought to be evaded.
Now, in cases where the amount in question is more than Rs 25 lakh, to get the offence compounded, the tax payable will be 150 percent of the amount. And when the amount in question is less than Rs 25 lakh, the tax payable will be 125 percent of the amount.
But the revised guidelines will be benign for taxpayers willing to come forward voluntarily before a compoundable offence is detected. As an incentive for such cases, the compounding charges will be at a reduced rate of 2 percent as against 3 percent earlier.