Ethical considerations from the tax payer‟s angle and the steps taken by the Government to counteract ethical failure on the part of the tax payers:
Now, let us proceed to study the ethical considerations from the tax payer‘s angle. The tax payer‘s ultimate goal is minimization of tax liability. However, ethical considerations should not be compromised for attaining this goal since an honest mistake can always be explained but the intentional error cannot. There are two roads to the taxpayer‘s final destination of minimizing tax liability – one is through legitimate tax planning and the other is through tax avoidance or tax evasion, which is against the law. In India, where the tax system is based largely on voluntary compliance, the taxpayer’s standards of tax ethics are extremely important. The tax payer should always declare true particulars about his income, wealth, turnover or receipts and disclose correctly all material facts in the prescribed returns. He should provide correct information and furnish authentic records to the revenue, whenever statutorily required to do the same. He should not resort to concealment, misrepresentation or willful omission of any portion of his income, wealth, turnover or receipts.
There are many instances where the tax payer has compromised on compliance with these standards and this has prompted the Government to plug the loopholes which have led to erosion of tax revenue. The Government has attempted to do so by incorporation of clubbing provisions, transfer pricing provisions in relation to international transaction and specified domestic transaction, introduction of new taxes, provision of mechanism for enforcing furnishing of annual information return, increasing the scope and enforcing compliance of tax deduction provisions etc. Some of the provisions which have been incorporated in the tax laws to counteract ethical failures on the part of the tax payer are discussed hereunder –
(i) Incorporation of clubbing provisions
Clubbing provisions have been enacted to counteract the tendency on the part of the tax – payers to dispose of their property or transfer their income in such a way that their tax liability can be avoided or reduced. For example, in the case of individuals, income-tax is levied on a slab system on the total income. The tax system is progressive i.e. as the income increases, the applicable rate of tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability.
(ii) Incorporation of transfer pricing provisions
Transfer pricing provisions were brought in by the Finance Act, 2001 with a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of multinational enterprises carrying on business in India, whose profits can be controlled by the multinational group, by manipulating the prices charged and paid in intra-group transactions, which may lead to erosion of tax revenue. Thus, noncompliance of ethical tax practices by multinational companies led to introduction of transfer pricing provisions. The transfer pricing provisions have been now extended to apply in case of certain specified domestic transaction. Therefore, the transfer pricing provisions have to be kept in mind by the assessee while entering into an international transaction or a specified domestic transaction.
(iii) Imposition of new/alternate taxes
(a) Minimum Alternate tax (MAT) was imposed on companies consequent to the substantial increase in the number of zero-tax companies and companies paying marginal tax, inspite of having earned substantial book profits and having paid handsome dividends.
Alternate minimum tax (AMT) has been imposed on all persons other than companies claiming profit-linked deduction under Chapter VI-A or under section 10AA or investmentlinked
deduction under section 35AD. The provisions of AMT are on similar lines as of MAT, however, the tax base for computation of AMT is adjusted total income and not book profits as in case of MAT.
In recent years, several new taxes have been introduced with the objective of checking income-tax avoidance or establishing an audit trail.
(b) Securities Transaction Tax was introduced by the Finance (No.2) Act, 2004, on the value of taxable securities transaction i.e., purchase or sale of equity shares in a company or units of an equity oriented fund, entered into in a recognized stock exchange. This tax has to deducted at source and consequently, an assessee cannot escape paying this tax in respect of a transaction entered into in a recognized stock exchange.
(c) In the sales tax system, there was a huge revenue loss on account of a large number of instances of unaccounted transactions. State-level Value Added Tax has been introduced with effect from 1.4.2005 to check this evasion and reduce the cascading effects of taxes. It has increased the revenues of the State exchequer as the coverage of this tax extends to value addition at all stages of sale in the production and distribution chain. VAT is a simple and transparent tax on the final consumption of goods/services and ultimately borne by the customer, although collected at every stage of production as well as distribution and tax credit granted at each stage for tax paid earlier in the chain of transfer/sale of goods and services. Due to the inherent transparency and accountability in the system, VAT leads not only to a better tax administration but also higher levels of compliance and lesser evasion.
Tax evasion is a grave problem in a developing country like ours as it leads to a creation of a ‘resource crunch‘ for developmental activities of the State. Reputed international institutions like the World Bank and IMF point out that the VAT regime prevents tax evasion and boosts revenues to help cash starved Governments to come out of their debt-trap. Under the VAT regime, the traders and dealers, in order to claim credit, demand invoices from the vendors thereby putting an end to the unaccounted transactions and unethical practices on account of the same.
(iv) Provision of mechanism for enforcing the furnishing of a statement of financial transaction or reportable account
Section 285BA provides a mechanism for enforcing the furnishing of a statement of financial transaction or reportable account by any assessee who enters into any specified financial transaction. This mechanism has been enforced for unearthing black money and counteracting unethical tax evasion by tax payers.
As per section 285BA(1), specified persons, who are responsible for registering or maintaining books of account or other document containing a record of any specified financial transaction or any reportable account as may be prescribed under any law for the time being in force, are required to furnish a statement in respect of such specified financial transaction or reportable account which is registered or recorded or maintained by him and information relating to which is relevant and required for the purposes of the Income-tax Act, 1961 to the income-tax authority or such other authority or agency as may be prescribed
Penalty@ Rs 100 per day of continuing default is attracted for failure to such statement on or before 31st August following the financial year. Further, penalty@` 500 per day of continuing default is attracted for failure to furnish such statement within the time specified in the notice under section 285BA(5).
(v) Enforcing compliance of TDS provisions
This has been enforced by denying deduction of expenditure to an assessee in case of failure to deduct tax at source or remit such tax deducted within the prescribed time. However, such expenditure would be allowed as deduction in the year in which such tax is deducted and paid. This provision is to prevent loss of tax revenue on account of failure of the assessee to deduct/remit tax. The introduction of this provision is one step to encourage ethical tax practices by assessees.
Further, TDS provisions under section 194C are attracted where the value of the contract exceeds Rs 30,000. The tax payers resorted to splitting up large contracts into contracts of smaller value to escape tax deduction. In order to prevent such unethical practice of splitting up composite contracts into contracts valued at less than Rs 30,000 to avoid tax deduction, this section requires tax deduction at source where the amount credited or paid or likely to be credited or paid exceeds Rs 30,000 in a single payment or Rs 75,000 in the aggregate during the financial year.