(Source: BloombergQuint)

Tax Department’s Prosecution Notices Galore

With no reprieve in sight from the Indian tax department’s recently found aggression on serving prosecution notices, various chartered accountants’ associations have approached the finance ministry again. The associations of Mumbai, Ahmedabad, Surat, Karnataka, Lucknow have written to the ministry urging it to take note of lakhs of prosecution notices issued by the tax department ‘on mechanical issues without undertaking any qualitative analysis’.

Typically, a tax default is first met with the levy of interest, then the imposition of a penalty. Only in very serious cases is a prosecution notice issued.

But over the last year or so the number of such notices have been on the rise, mostly in cases involving filing lapses in income returns or failure to deposit taxes deducted at source.

An start-up entrepreneur told BloombergQuint, on the condition of anonymity, that he received two notices for assessment years 2017-18 and 2018-19 - both for TDS defaults. One for an international transaction where the company wasn’t clear if TDS needs to be deducted and the other for a delayed TDS deposit. And though the TDS - the principal and penalty- was deposited, albeit late, for both transactions, the company received prosecution notices. The notices, copies of which BloombergQuint has reviewed, have directed the company to share the names of chairman, managing director and all other directors as well.

On behalf of such clients, tax experts first made a representation to the finance ministry in August 2018. But it fell on deaf ears. Because the tax department is wearing the increase in prosecution notices as a badge of honour.

A notification from the Central Board of Direct Taxes issued all the way back in January 2018 warned of an increase in prosecutions as part of an anti-black money drive.

Prosecutions have been initiated for various offences including wilful attempt to evade tax or payment of any tax; wilful failure in filing returns of income; false statement in verification and failure to deposit the tax deducted/collected at source or inordinate delay in doing so, among other defaults.
CBDT Press Release, January 2018
Tax Department’s Prosecution Notices Galore

The tax department’s zeal in pursuing prosecutions was also forthcoming in CBDT’s Central Action Plan 2018-19. TDS Officers have been mandated to conduct at least 30 surveys or spot verifications during the year to detect non-compliance in TDS.

The importance of Tax Deduction at Source as a non-obtrusive but powerful instrument for preventing tax evasion, widening the tax base and augmenting revenues has been growing over the years… The contribution of TDS to the overall gross direct taxes collections during FY 2017-18 was about 41.16 percent. Effective and efficient TDS administration therefore remains a key area.
CBDT’s Central Action Plan, 2018-19

Deterrence vs Harassment

Tax officers explain that prosecution notices aren’t sent on frivolous grounds and due process is followed.

A Karnataka-based joint commissioner in the income tax department explained the process on the condition of anonymity. He said, the tax department’s internal manual requires an assessing office to first, based on records of a taxpayer, make a case for prosecution before the appropriate commissioner, who then decides whether or not such a notice should be issued.

  • The assessing officer undertakes an inquiry under section 142(1) – to gather documents, details - which typically goes on for a month.
  • The officer then submits this report to an additional commissioner who gives the taxpayer an opportunity to be heard.
  • The matter is finally heard by the commissioner, who also hears the taxpayer again, before determining whether or not a sanction for prosecution is to be given.

The tax officer cited above pointed out that since the amounts involved in TDS cases are very small, the department itself shies away from initiating prosecution unless it’s a case of egregious default. Also, once prosecution is initiated, the assessing officer must continue to appear in the matter in the civil court, irrespective of a change in posting which is cumbersome.

Tax officers are encouraged to issue prosecution notices mostly to serve as a deterrent, he explained.

Deterrence maybe one reason, but the more overriding one is revenue, said other tax experts.

The law gives tax commissioners compounding powers - powers to accept penalty from a taxpayer - at any stage during the proceedings. For failure to pay TDS, the compounding rate is 3 percent per month, of the amount of tax in default. The prosecution notices have been sent not just to the company in default but also its executive and non-executive directors, Gautam Nayak, tax partner at tax firm CNK & Associates told BloombergQuint.

Prosecution is a criminal proceeding. Imagine, you’re a foreigner on the board of an Indian company and suddenly you get a notice for a TDS default of Rs 1 lakh. Even non-executive directors are getting these notices. So, they wonder what kind of country they’ve come to?
Gautam Nayak, Partner, CNK & Associates

If the company agrees to compound the offence, the penalty amount is recovered from the company and each of the directors the notice was sent to, Nayak pointed out.

Since tax officers have been given yearly revenue targets, they are bound to issue notices, PK Prasad, former income tax commissioner in Bengaluru, told BloombergQuint. Once these notices are issued, the department then pushes taxpayers to pay a penalty to make the prosecution go away, he added.

It’s a kind of purchase of peace by the taxpayer. When you have the budget consideration on your head all the time, the department will issue the notice and then nudge the taxpayer for compounding the offence. 
PK Prasad, Former Income Tax commissioner, Bengaluru

This may earn the government some revenue but it also causes immense inconvenience to the taxpayer and hence the department should issue notices only where prosecution is sustainable and not initiate proceedings indiscriminately, Prasad said.

Interestingly, back in 2013, the Comptroller and Auditor General of India had conducted an audit of CBDT’s prosecution process. In its report, CAG pointed out that the revenue department had failed to use compounding of offences as an alternate dispute resolution mechanism to reduce litigation and realise due revenue and that it had not adequately prioritise prosecution as a means to tackle tax evasion.