tax evasion as white collar crime draft 9 sem

8/10/2019 Tax Evasion as White Collar Crime Draft 9 Sem

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Introduction :-

WHITE COLLAR CRIME AND TAX EVASION

In McDowell & Co., Ltd., vs. Commercial Tax Officer1, Justice Reddy says, "The shortest

definition of tax avoidance that I have come across is "the art of dodging tax without

breaking the law". Tax avoidance, it seems, is legal; tax evasion is illegal"

The term white collar crime has been since it genesis, considered as a crime by the upper class,

the corporate class, high class officials private , governmental. The term "white collar crime" has

evolved since its genesis in identifying criminal behavior in the upper class milieu. Today,

although there is no single definition of the term, it is generally defined as any illegal act

"committed by nonphysical means and by concealment or guile, to obtain money or property ...

or to obtain business or personal advantage."2.

There are a number of lenses through which we can observe white-collar criminality. We can

examine these behaviors in terms of motivations, victims, or the schemes that are employed.

One of the categories is that of personal or ad hoc crimes. The offender here is pursuing some

individual objective and usually has no face-to-face relationship with the victim. Examples

would be personal income tax violations, frauds against government entitlement programs, and

credit card frauds. Within the occupational or avocational crime, includes the tax evasion. The

motives here are usually simple greed, or very serious real or perceived need. Willfully cheating

on taxesactivities that are grouped here under the term evasion is a white collar offense.

Evading taxes does not involve violence or a threat of violence, and its goal involves a transfer

of property. But, Further, tax offenders are motivated by a desire for pecuniary gain, to inflate

their wealth by avoiding payment, in one way or another, of taxes owed. While tax evasion

inflates the perpetrators wealth, it also imposes a pecuniary loss on others. The government is

directly harmed by losing revenue, and fellow citizens are indirectly harmed as they absorb a

higher tax burden to compensate for the evaders unpaid taxes.

1AIR 1986 SC 649.

2HERBERT EDELHERTZ, THE NATURE, IMPACT AND PROSECUTION OF WHITE COLLAR CRIME 3(1970)


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Under this definition, willfully cheating on taxes - activities that are grouped here under the term

"evasion" - is a white collar offense. Evading taxes does not involve violence or a threat of

violence, and its goal involves a transfer of property. The right to taxes that are owed is a

property right, even when the government is foreign. Further, tax offenders are motivated by a

desire for pecuniary gain, to inflate their wealth by avoiding payment, in one way or another, of

taxes owed. While tax evasion inflates the perpetrators' wealth, it also imposes a pecuniary loss

on others. The government is directly harmed by losing revenue, and fellow citizens are

indirectly harmed as they absorb a higher tax burden to compensate for the evader's unpaid taxes.

The purpose of punishing criminal tax offenses is similar to that of other white collar crimes, to

punish and deter socially undesirable conduct.

The theory of criminal law posits two justifications for punishment: to extract retribution for

undesirable, immoral, and harmful conduct of a specific offender and to deter future crimes by

potential offenders..

The awareness of the common man towards these crimes is dismal or there is a relatively

unorganized resentment of the public' towards such crimes as the violations in such cases can be

appreciated only by experts, secondly due to the complexity of these crimes they cannot be easily

presented as news and probably because these agencies of communication are owned by

businessmen involved in the violations of many of these laws. White-collar crime, it is stated,

goes undetected because it transcends the visibility of ordinary cheating practices of small

merchants. It can however, be gathered from reports of investigating committees or from

conversation with intimate friends.

In the words of the Supreme Court, the right to be paid money has long been thought tobe a

species of property. 3In Pasquantino v. United States, Canadas right to uncollected excise

taxes . . . is property in its hands.4The right to taxes that are owed is a property right, even

when the government is foreign.

The obligation to pay income taxes applies to income from whatever sources and is not limited to

that from a legitimate occupation. Indeed income earned outside the occupational context from

3United States v. Griffin

,


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investments and rentals is most likely to be involved in the tax evasion. The federal or central tax

laws require taxpayers to file a timely return, report tax liabilities accurately and make a timely

payment of taxes due; employers are additionally required to withhold the appropriate amount of

the taxes from their employers. Non- compliance with the tax laws is a major problem in many

countries.5In United States, the Internal Revenue service estimates that about one-fifth of

individual income tax due to the federal government is not paid, adding up to $300 billion, which

is very serious. Tax evasion as defined by IRS as an act involving deceit, subterfuge and

concealment is illegal. But the arrangement of tax payers affairs to minimize tax liability is legal

(Burnham 1989, Thurman and vose,2001). Thus, there is a complexity in distinguishing between

tax evasion and tax avoidance or between fraudulent and aggressive tax planning. One study of

tax evasion suggests that a complex pf factor, including opportunity, convenience and

interpretations of law is often involved in tax evasion. The tax law themselves refer often

complex, onerous , arbitrary, confusing and illogical and to a certain extent promote evasion.

According to one study, the way an individual perceives tax evasion the more is he inclined

towards committing tax evasion. Thus a prominent response of the IRS is to target especially

prominent Americans for criminal prosecutions, thus such inevitable publicity will have a

deterrent effect on ordinary tax payers. Like many white collar offenses, the balance in tax

crimes tilts toward the goal of deterrence. The pursuit of tax crime, which is calculated to

induce prompt and forthright fulfillment of every duty under the income tax law, safeguardsa

more specific public interest. The purpose of the criminal tax enforcement program is to protect

the public interest in preserving the integrity of this Nations self-assessment tax system by

punishing the wrongdoer and thus deterring other potential tax violators.6

Differences between Tax Avoidance and Tax Evasion

Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage, to

attempt to reduce the amount of tax that is payable by means that are within the law whilst

making a full disclosure of the material information to the tax authorities. Examples of tax

avoidance involve using tax deductions, changing one's business structure through incorporation

or establishing an offshore company in a tax haven.

5Trusted Criminals: White Collar Crime In Contemporary Society, By David Friedrichs

6TAX DIV., U.S. DEPT OF JUSTICE, CRIMINAL TAX MANUAL 1.01*4+ (2008),

http://www.usdoj.gov/tax/readingroom/2008ctm/CTM%20Chapter%201.htm#TOC2_4.


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By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other

entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers

deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to

reduce their tax liability, and includes, in particular, dishonest tax reporting (such as under

declaring income, profits or gains; or overstating deductions).

Tax avoidance may be considered as either the amoral dodging of one's duties to society, part of

a strategy of not supporting violent government activities or just the right of every citizen to find

all the legal ways to avoid paying too much tax. Tax evasion, on the other hand, is a crime in

almost all countries and subjects the guilty party to fines or even imprisonment. Switzerland is

one notable exception: tax fraud (forging documents, for example) is considered a crime, tax

evasion (like under declaring assets) is not.

Tax resistance is the refusal to pay the tax for conscientious reasons (because they do not want to

support the government or some of its activities), sometimes breaking the law to do so. Some

donate their unpaid taxes to charity, while others (at least in the US) take creative "deductions"

such as not paying a percentage of tax equal to the defense budget. In either case, they typically

do not take the position that the tax laws are themselves illegal or do not apply to them (as tax

protesters do) and they are more concerned with not paying for what they oppose than they are

motivated by the desire to keep more of their money (as tax evaders typically are). Some have

suggested the term tax avoision for people who adopt the techniques of tax avoidance in the

service of tax resistance, thereby doing tax resistance legally.

In the landmark case7, Justice Reddy emphatically said, "But, surely, it is high time for the

judiciary in India too to part its ways from the principle of Westminster and the alluring logic of

tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have

to be respected and met. We must recognize that there is behind taxation laws as much moral

sanction as behind any other welfare legislation and it is pretence to say that avoidance of

taxation is not unethical and that it stands on no less a moral plane than honest payment of

taxation. In our view, the proper way to construe a taxing statute, while considering a device to

avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor

whether the transaction is not unreal and not prohibited by the statute, but whether the

7Supra note-1


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transaction is a device to avoid tax, and whether the transaction is such that the judicial process

may accord approval to it.

Tax evasion in India

In India, the Santhanam Committee report for the first time attached great importance to the

emergence of offences and mal-practices known as white-collar crime, which was also

acknowledged by the 29th Law commission report in 1972. The Santhanam Committee report

recognized the emergence of mass society' with small controlling elite, encouraging growth of

monopolies and the deviance from ethical behavior which led to growth of white-collar and

economic crimes. The report expressed its concern towards such crimes by opining that this

The unsanctioned or black market economy is created due to evasion of both direct and indirect

taxes, undervaluation of properties, antisocial activities like smuggling, foreign exchange

racketeering, underinvoicing and over-invoicing of foreign trade, remittances from abroad

through illegal channels, etc. Since tax, by definition, is a payment without direct quid pro quo, it

involves some type of compulsion because the taxpayers derive no direct benefit in paying taxes

except the negative advantage that they would not be punished for violating the taxation laws of

the states.1 Since taxpayers are required to make tax payments fixed by the government

regardless of their individual dispositions in the matter, every taxpayer wants to pay the

minimum of taxes.

Emergence of The Problem

In the early days of the operation of income tax in India, the rates of taxes were comparatively

low and the temptation to conceal income was, therefore, limited. However, in the thirties of the

twentieth century, a large number of wealthy and clever taxpayers started adopting ingenious

methods of understating their incomes. The second world war created conditions that gave

tremendous impetus to tax avoidance and evasion. The situation did not improve even afterIndependence, the malady became deeper. To overcome the problem of shortages, different types

of controls were imposed but such controls in practice generated black markets. The licensing

policy of the government offered fresh avenues for the black market. Professor N. Kaldor was

invited by the Government of India in 1956 to suggest improvements in the Indian tax system,

and on his suggestion the integrated system of taxation was introduced with the hope that if a


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taxpayer evaded tax on one base, he would be subjected to tax on some other base. However, this

did not prove effective. This was partly due to the fact that up to '973-74, the general trend was

towards increasing the rates of taxes which made gains from evasion very high. With the passage

of time bribery and corruption became more rampant and the Indian electoral system became

more expensive. Today, things have reached such an extent in India that a NHT (No Harassment

Tax)8has to be paid to get right things done in the right 2 A number of complex provisions were

added to the tax laws in an attempt to plug the loopholes and curb evasion which made the

already complex Act more difficult to administer. There were also no serious attempts to

introduce principles of scientific management in the administration of taxes. Continued and

persistent inflation since the beginning of the Second Five Year Plan added fuel to the fire. In

fact, black money and inflation have cause and effect relationship with each other. The existence

of black money nullifiesthe effect of controls and increases conspicuous consumption and this

adds to inflationary pressures. At the same time, inflation results in steep appreciation of

property values in monetary terms though not in real terms. As a result, both capital and income

are taxed at higher rates. 'Thus, inflation has the double effects of increasing the tax liability in

terms of both rate and amount and at the same time reducing the softening effect of exemption

limits.'9

India loses 14 trillion rupees ($314 billion) from tax evasion annually, depriving it of funds for

investment in roads, ports, and power, says Arun Kumar, author of The Black Economy in India.

General government tax revenue is an estimated 18 percent of Indias $1.5 trillion in gross

domestic product, the lowest among the four BRIC nations, International Monetary Fund data

show.

Constitutional Provisions :

The Indian constitution vests the Parliament with plenary legislative powers to impose taxes

on matters specifically enumerated in the Union List and all the power of making any law

imposing a tax not mentioned in Concurrent or State Lists, as provided by Article 248(2). Tax

on income is defined in an inclusive manner by Article 366(29) under which the expression

includes a tax in the nature of an excess profits tax. Corporation tax is defined by Article

8No Harassment Tax is the amount of'on money' or illegal money that the taxpayers generally pay to the tax officials for not

being harassed in their tax assessments and getting things done in a smooth manner 9Economic Administration Commission Report (EACR), no. 4 26, para. 4.


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366(6) Under entry 82 of the Union List, the Parliament has exclusive power to make laws

with respect to Taxes on income other than agriculturalincome.The expression agricultural

income as defined under clause (1) of Article 366 means agricultural income as defined for the

purposes of the enactments relating to Indian income-tax.

The existing provisions relating to tax evasion have been listed separately'. Broadly speaking,

provisions against evasion can be classified into--

(i) Provisions which enable the taxing authority to assess income, etc., which has escaped

assessment;10

(ii) Provisions which empower such authority itself to impose a penalty;11and

(iii) Provisions which create offences for which a prosecution can be instituted in the criminal

courts.

Penalties under the Income Tax Act

There are different penalties leviable under the Indian Income Tax Act for defaults under the

various provisions of the act committed by an assessee. There are many provisions under which

the penalties are leviable under the act. There are some penalties that are mandatory in nature

while in most of the cases penalty is leviable at the discretion of the Assessing Officer (AO). The

major penalties that are imposed under the act along with their nature of defaults are given as

under:

1. Default:Concealment of Income or furnishing inaccurate particulars of income.

Minimum Penalty: 100% of tax sought to be evaded.

Maximum Penalty: 300% of tax sought to be evaded.

2. Default: Failure to keep or maintain books as required u/s 44AA.

Minimum Penalty: Rs. 25,000/-

3. Default: Failure to get accounts audited or furnish report u/s 44AB.

10SECTION-147 TO 153 OF INCOME TAX ACT , 1961 ; REFER 29

THLAW COMMISSION REPORT PAGE- 57

11SECTION-273 OF INCOME TAX ACT, 1961


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Minimum Penalty: % of the total sales, turnover or gross receipts.

Maximum Penalty: Rs. 100,000/-

4. Default: Taking/Repaying or accepting any loan or deposit in contravention of the provisions

of section 269SS /269T (Loan taken or repaid above Rs. 20,000 in cash).

Minimum Penalty: Amount of loan/deposit so taken or accepted or repaid.

5. Default: Failure to furnish Return of Income.

Minimum Penalty:Rs. 5000/-

Nowadays GAAR has become one of the most discussed and talked about topic in Indian Tax

Environment. GAAR or General Anti- Avoidance Rules are expected to have long term and

widespread effect. GAAR is targeted at curbing the practice of 'Tax Avoidance'. GAAR was

introduced with the introduction of Finance Bill of 2012. One of the main areas of concern for

investors is that GAAR empowers Tax authorities to declare an arrangement as invalid, if it is

entered into by the assessee with the objective of obtaining a tax benefit. Therefore, under

proposed provisions of GAAR, power given to tax officials is subjective in nature and tax

officials have wide-ranging powers to declare any arrangement as 'an impermissible avoidancearrangement'.Secondly, under GAAR provisions, onus to prove is on the assessee that tax benefit

is not the main purpose of an impugned arrangement. An anti-abuse provision that shifts the

burden of proof on the assessee goes against the fundamental principle of 'innocent unless

proven guilty'.

Prosecution is not the only method of checking evasion. The real remedy lies in various

other non-penal measures, such as a proper tax structure, adequate strength of officers, increased

civic conscious-ness, creation of cordial relations with assessees, and prompt action under the

existing laws.

Vodafone case

Vodafone acquired certain rights and entitlements from Hutchinson, such as, inter alia, licences

to operate in the telecommunications sector in India, a control premium, the use of any rights of


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the Hutchison group. In September 2007, the tax authorities issued a notification to both

Vodafone international holdings and VEL in respect of failure to withhold taxes at source on

payment made to Hutchinson and thus possible violation of Indian tax law. w. In the Income

Tax Act (ITA) (1961)12, there is an obligation on the part of the seller to withhold and pay to the

Revenue a percentage of the contract price on the sale of a capital asset in respect of Indian

entities.

On 3 December 2008,31 the Bombay High Court dismissed the Vodafone appeal, and stated that

the tax authorities had reason to scrutinize the transaction as there was sufficient evidence for an

infraction of Indian Law.

Vodafone filed a special leave petition32 before the Supreme Court. On 23 January 2009,33 the

Supreme Court dismissed the petition and remanded the case to the tax authorities and asked the

tax authorities to determine whether or not there existed a right to issue a notice for subjecting a

second level transaction to taxation in India.

13

After a detailed study of the transactions effected between Hutchinson and Vodafone Group, the

tax authorities, on 31 May 2010, reaffirmed that there was a clear breach of Indian tax law, as the

obligation to withhold tax had been ignored. This resulted in a writ of August 2010 filed by

Vodafone before the High Court of Bombay. On 8 September 2010, the High court gave its

decision , which prompted Vodafone to file yet another petition to the supreme court . From a

consideration of the Supreme Courts ruling, the following two factors are an especially relevant

test in analyzing a transaction:

(1) the duration of the structure prior to the transaction being effected; and

(2) the continuity of the JVs activity with regard to the same business conducted after the

transfer of shares has been completed.

It is interesting that the Supreme Court recognized the right of any entity or group to arrange its

business, and, therefore, to choose the most advantageous tax structure, provided that this does

not involve abusive practices, in accepting as evidence that the structure had been operational for

many years without being questioned by the tax authorities. The Supreme Court considered that

the application of

article 9 of the ITA (1961) could not be used as a lookthrough provision. In this respect, it

should be noted that the Indian tax system does not contain any CFC rules

14

, so the ruling of theSupreme Court appears to be accurate in not broadly interpreting the law, otherwise it would

create hardly justifiable legal uncertainty in India

12Income Tax Act, 1961, National Legislation IBFD

13See Mukundan & Ajinkya, supra n. 28, at p. 1926.

14Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial

deferral of tax by using offshore low taxed entities.


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N.B:-Shortly thereafter, the Finance Act, 2012 introduced Explanation 5 to Section 9(1)(i)

of the Income-tax Act, 1961 (ITA), clarifying that an offshore capital asset would be

considered to have a situs in India if it substantially derived its value (directly or

indirectly) from assets situated in India. The amendment is currently retroactively

applicable from 1961.To counter the judgment, the government amended the Income Tax

Act retrospectively to bring Vodafone-like cases under its ambit under General Anti

Avoidance Rules (GAAR). It has created lot of uproar and noise esp in the international

market giving perhaps a false impression as if Indian tax laws are against the multinational

corporations. Following up on the grievances, the introduction of GAAR has been deferred

by two years (to April 1, 2015) and investment made before Aug 2010 will be

grandfathered.

Economic and Social impact :

The concealed income goes to enhance the wealth, tax evaders carry on huge transactions in the

black market, pile up stocks of goods and thus bring about artificial scarcity in the open market

resulting in higher prices. Inflation affects adversely the standards of living of employees who

then clamor for higher wages and resort to go-slow policies, strikes, etc. to enforce their

demands. This inevitably leads to strained employer-employee relations, loss of man-days and

ultimately a decrease in national income. Black money comes in the way of government's efforts

in bringing down prices. In fact, black money and inflation go hand-in-hand and have more or

less a cause and effect relationship. Because of this money the open money market is always

tight and the money supply has to be increased to meet credit requirements in the busy seasons.

Since tax revenue does not grow fast enough to match the developmental and non-developmental

expenditures, government has frequently to resort to deficit financing which accentuates

inflationary pressures further. Thus, black money reduces flexibility of the tax system and

undermines its equity. Further, the large volume of black money which passes through different

hands does not contribute much to national welfare. It diverts resources from productive uses and

greatly helps in smuggling and encourages wasteful consumption expenditure. Owing to evasion,

the burden is heavier on the salaried class and honest taxpayers who feel frustrated as they have

to pay more taxes because their fellow men in other professions are evading taxes. Thus, in the


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case of higher income group people, honesty becomes the first casualty and discourages work-

effort or encourages evasion. Black money also destabilizes monetary policy.15The social

consequences of evasion are disastrous. Black money has created in society two clear-cut groups:

(i) the Haves, and (ii) the Havenots.While the Haves are becoming richer day by day, the Have-

nots are becoming poorer. This has created social unrest. Black money has encouraged the

payment of huge dowries and extravagant expenditures at the time of marriage. The effect is

badly felt by middle-income group people who, many a time, do not find suitable matches for

their daughters as they cannot afford to pay good dowries. Further, with the help of black money

some people have become pseudo-patrons of education, art, religion and other social disciplines.

Checking tax-evasion

To check tax avoidance, it is necessary that the Income Tax Act, 1961 be amended and the

concepts of income should be made comprehensive in such a manner that all incomings are

brought to tax, subject to specified exemptions. This necessitates the adoption of the concept of'

net worth increment' in money terms. This would bring about equity because all accretions to

economic power would be taxable. A lot of tax avoidance takes place through the diversion of

income to the spouse and minor children. We feel that the scope of section 64 of the Income Tax

Act, I961 should be extended so as to tax even income arising out of income generated out of

assets transferred from husband to wife. However, we think that the long-term remedy lies inclubbing the incomes of husband and wife and treating the family as one unit of assessment. It is

really surprising that the Wanchoo Committee which discussed the problem of tax avoidance at

length in its Report did not favour (by a majority of three to two) the adoption of the family as a

unit of assessment. The principal argument against such a step is that it might disrupt the families

and would cause undue hardship to middle-income families where women resort to employment

to supplement family income.

The Indian Government has tried several voluntary disclosure schemes16

from time to time tounearth black money.

15

16Under the Voluntary Disclosure Scheme, the taxpayers are generally granted immunity from penalty and prosecution if they declare their

undisclosed incomes or wealth within the stipulated date. They have to pay only the rate of tax announced under the Scheme and the tax

officials do not ask for the details regarding the sources of such disclosed income or wealth. Thus, such schemes provide an opportunity for

tax evaders to convert their black income or wealth into white income or wealth.


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One suggestion which is often advanced in India to deal with tax evasion is liberalization ofallowances on expense account and a reduction in tax rates. In a marginal relief to the individualtaxpayers, Finance MinisterArun Jaitley increased theincome tax exemption limit from Rs 2lakh to Rs 2.5 lakh for citizens up to 60 years. For senior citizens the limit was hiked to Rs 3 lakh

The Income Tax department had launched criminal proceedings against Jayalalithaa and Sasikala

for allegedly not filing returns in their individual capacity for the assessment year 1993-94. The

lower court sentenced them to jail, without granting bail. Subsequently , high court too rejected

the bail. But , the Supreme Court finally after giving strict ultimatum to their counsels, allowed

them to be released on bail till January 30 and had directed the lower court to complete the trial

in four months.

Conclusion

The concept of tax evasion is a general phenomenon the world over, from developed to emerging

economies. The Tax Justice network in its 2011 reported that countries like the U.S., Brazil,

Italy, Russia, Germany, France, Japan, China, U.K. and Spain faces the most severe losses due

from tax evasion.A study17drew from tax professionals perspective to determine the factors

primarily responsible for tax evasion by economic agents. Findings revealed that the most

significant elements were deficiencies in the existing tax structure; financial and/or economicfactors on the part of tax payers and tax governance administrative issues. The importance of

regulations, legal and accounting issues in taxation also cannot be overemphasized. In order to

reduce these barriers to effective taxation, the leadership must take active steps to ameliorate

the situation. Tax evasion should be prevented in a scientific manner, using less human factor

with e-government in taxation. Tax payers must be educated about the importance of

bookkeeping and accounting records keeping, using professional accountants. Tax institutions

could also provide support by setting up procedures to train taxpayers on how to prepare

financial records and accounts based on tax laws. This could be supported by the government

enacting laws issuing licenses only if such trainings are successfully completed. Taxpayers must

be provided with cultural grounds to emphasize the importance of keeping financial records.

Students should be trained in collaboration with the Ministry of Education and other groups

17http://www.hrpub.org/download/201310/ujaf.2013.010201.pdf
http://economictimes.indiatimes.com/topic/Arun%20Jaitleyhttp://economictimes.indiatimes.com/topic/income%20taxhttp://economictimes.indiatimes.com/topic/income%20taxhttp://economictimes.indiatimes.com/topic/Arun%20Jaitley


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with the Ministry of Industries, Commerce and the Ministry of Science and Technology.

Licenses could also be issued after passing training courses by self-employed individuals who

own entrepreneurship businesses. Tax officials must be educated on etiquettes of good tax

culture. They must learn the basic principles and values like respecting citizens, following rules,

being trainable and organized as well as having conscience and keeping workplace ethics.

tax evasion as white collar crime draft 9 sem

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