Tax defaulters can’t escape prosecution by just paying a stiff fine
HIGHLIGHTS Several categories of tax defaulters will now not be able to compound their offences (which is a process of paying a stiff compounding fee, in lieu of prosecution) Revised guidelines, issued late on Friday night by the Central Board of Direct Taxes, will come into effect from today
The government is tightening the prosecution noose around several categories of tax defaulters, such as those who stash black money offshore. These categories of taxpayers will not be able to compound their offences (which is a process of paying a stiff compounding fee, in lieu of prosecution). Revised guidelines, running into 30-plus pages, on ‘Compounding of offences under the direct tax laws’, were issued late on Friday night by the Central Board of Direct Taxes (CBDT).
Sandeep Bhalla, partner, Dhruva Advisors, points out: “The earlier CBDT guidelines permitted compounding of offences relating to undisclosed foreign bank accounts and overseas assets, if the taxpayer has cooperated and paid the taxes. The Anti-Black Money Act of 2015, which was subsequently introduced, did not permit compounding. This Act had provided a limited window within which people could come clean against payment of a flat 30% tax and stiff penalties. The revised guidelines have taken this forward and compounding is not permitted both for cases covered under the Anti-Black Money Act and all offences relating to undisclosed foreign bank accounts or assets.”
“Compounding shall also not be available where it is proved that a taxpayer enabled others to evade tax, such as through entities used to launder money. The bar also applies where a taxpayer generated bogus invoices of sales or purchase or provided accommodation entries. Offences under the Benami Transactions Prohibition Act, too, cannot be compounded,” says Gautam Nayak, tax partner at CNK & Associates.
“Typically, accommodation (bogus) entries are routed through shell companies, as share capital, in order to evade tax. Or to launder money, fake loans are shown in account books by a business entity,” explains an I-T official. While compounding is not the ‘right’ of a taxpayer, this option can be exercised, subject to approval of the application by the competent authorities.
During the eight-month period ended November 2017, a thousand-odd cases had been compounded; whereas prosecution complaints were filed for various I-T offences, in double the number of cases. With revised guidelines, there is likely to be a spike in number of prosecution cases in coming months. The revised guidelines do provide that the finance minister may relax restrictions from compounding, in deserving cases, based on CBDT’s report on the matter.
The revised guidelines continue to classify offences in two categories. Category A defaults carry a lower compounding fee, related to offences such as failure to deposit the tax deducted at source (TDS) or failure to file the I-T return. Category B includes offences such as wilful evasion of tax, failure to produce books of accounts or falsification of books and documents.
“CBDT has provided for stringent conditions and limitations for compounding of offences. Offences like non-deposit of TDS is compoundable on not more than three occasions, whereas several other offences relating to wilful attempt to evade taxes can be compounded only if it was a first-time offence,” explains Bhalla. While the compounding fees have been increased in many cases, there is a relaxation when it comes to delays in deposit of TDS. Here, it has been reduced to 2% per month (from 3%), if the defaulter has applied for compounding prior to the default being noticed by the I-T authorities. “The new rules have also provided for a cap on the compounding fee, which cannot exceed the TDS amount plus interest if the TDS amount involved in the default is less than Rs. one lakh,” explains Nayak.
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