Even before football fans recovered from the news that Lionel
Messi will no longer play for Argentina, they were in for another shock. The
Spanish tax department sentenced Messi and his father Jorge Horacio to 21
months in prison apart from fining them a few million Euros for tax fraud.
It appears that both avoided Spanish income tax on his image
rights by using shell companies in various countries. However, both may not
have to spend time in prison since, as per Spanish law, prison sentences below
two years are suspended - meaning they can be served anywhere including on a
football field. It is apparent that the sentence was given for 21 months only
to ensure that this benefit is availed.
Sports stars being penalised by the tax office is not a new
phenomenon - Maria Sharapova and her father had their share of tiff with the
tax department. Tax jurisdictions abroad may not arrest popular stars but they
will not stop shy of naming and shaming them. This leads one to think aloud as
to what would the tax office in India do with tax defaulters?
Sports stars in India may have the money but not the
intention to defraud the tax office. Recently, there were reports of some
arrests by the tax department but they were quickly denied. As with many things
in India, the truth will never be known.
A strategy paper prepared by the department has some news in
store for tax defaulters. In order to cripple and check (strong words these!)
the activities of tax defaulters, the Income Tax Department has decided to
block the Permanent Account Number (PAN) of such entities, get their LPG
subsidy cancelled and take measures to ensure that they are not sanctioned
loans. The taxman will block PAN in such a way that these defaulters are not
sanctioned any loans or overdraft facility by public sector banks, as the same
is bound to become non-performing assets.
With the objective of disincentivising the defaulters, it
would recommend that the LPG subsidy which is directly credited to the bank
accounts of the said defaulters be annulled. The taxman also proposes that the
identities of such blocked PANs be circulated to the Registrar of Properties
with a request not to allow any registration of immovable properties where such
PANs are involved. Such defaulters' information has also been recommended to be
circulated across tax offices so that their activities, loans or government
subsidy can be plugged countrywide.
The department has also decided to subscribe to the Credit
Information Bureau Limited (Cibil) data to check out the financial activities
of defaulters and undertake action against them for recovery and freezing of
assets. The department, beginning last year, also started to "name and
shame" large tax defaulters by publishing their names and other
credentials in leading national dailies and on its official web portal.
Beginning this financial year, it has decided to publicly
name all categories of taxpayers who have a default of Rs 1 crore and above.
While all these strategies are bound to draw attention, whether the tax
department can curb the fundamental rights of a taxpayer to seek loans/LPG
subsidy is a basic question that is bound to land up in the courts.
Amidst all this, an Income Declaration Scheme (IDS) is
operational with effect from June 1, 2016. The government has been going on a
marketing blitz in an attempt to get people to embrace the scheme. Sets of
Frequently Asked Questions (FAQs) have been issued and IDS also found a mention
during the prime minister's "Mann ki Baat" airing. The scheme will
run for four months.
Undisclosed
sum
The declared income and related assets will be taxed at an
effective rate of 45%. The undisclosed sum can be held either in the form of
assets or in any other form. If the taxpayer is holding undisclosed income in
the form of an asset, the market value of the asset as on June 1 shall be used
to compute the sum of undisclosed income.
It has also promised that those declaring undisclosed income
or assets would not be subject to further enquiry or scrutiny. If our friendly neighborhood
tax office discovers any undisclosed income or assets after the scheme closes,
the offender can be assured of a tough time.
The IDS scheme may, at best, meet with a lukewarm response
because of the high rate of tax at 45% and also the need to pay tax on assets
at market value as on June 1. One of the examples given in the FAQs illustrates
that tax will have to be paid on cash remaining on hand out of the undisclosed
income - a concept unheard of by the Indian tax payer and which will certainly
make him wary of going for the scheme.
At best, the tax office should get some limited comfort that
those who declare any income/assets under this scheme will not be able to
short-change them again. It is possible that the scheme may be extended beyond
October but the response would increase only if a few sweeteners (such as a tax
rate that gives comfort) are thrown in.
Over the years, the Indian taxpayer in general and the
defaulting one in particular, has become a war veteran in fighting his battles
with the department. Unless there is something in the deal for the taxpayer by
way of an incentive, he is not going break into a sweat over the moves being
proposed by the department or the income declaration scheme. It should not come
as a surprise if a person with five undisclosed properties discloses only three
under the IDS scheme and keeps the remaining two in stock for the next scheme
to be announced in a couple of years.
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