Tax departments search and seizure operations have revealed manufacturing to be a big tax evader in 2008-09, just behind the real estate, indicating that the sector may have acquired a bigger play in the black or the cash economy.
Gems and jewellery, the other sector hit hard by the global demand slump, has also seen a sharp increase in the quantum of undisclosed income declared in searches.
There was an over 200% jump in undisclosed income admitted to by the manufacturing sector in 2008-09, though in absolute terms it still remained well behind the real estate sector.
The searches relate to evasion of direct taxes, mostly unaccounted income.
Real estate sector is always seen as a big generator of black money, as transactions values are often depressed to evade stamp duty and also absorb cash. This is largely the reason why the maximum number of evasion cases relates to the real estate sector 123 in 2008-09.
Not just direct taxes, the manufacturing sector has also been on the radar for excise evasion. Excise duties, a tax levied at the factory gate, have not grown at the same rate as the growth in manufacturing. Excise collections had peaked at Rs 1.23 lakh crore in 2007-08 and are budgeted at Rs 1.06 lakh crore in 2009-10.
In contrast, manufacturing has grown at over 9% in the four years to 2007-08. In 2008-09 growth had dropped to 2.8%.
The proposed goods and services tax or (GST) is expected to check evasion and help plug losses. However, in the case of direct taxes, the authorities have no option other than carrying out search and seizure operations based on generation of intelligence gathered through various sources.
IT and financial services sector are generally dominated by multinationals and large Indian companies that have gone global and thus have high transparency standards. Manufacturing, which is still evolving in terms of global trends, still needs to work on transparency aspects, said Vikas Vasal, Partner, KPMG.
Lot of manufacturing is in the unorganised sector, which also makes tax evasion easier. Interestingly, Chandigarh and Lucknow have emerged as non-metro cities where high incidence of tax evasion has been reported.