The government's move to make tax evasion a criminal offence has drawn strong criticism from former policymakers and commentators, who say if such a move is implemented it will hurt economic activity, undo years of tax reforms and increase harassment.
A panel headed by Central Board of Direct Taxes chairman Prakash Chandra, which held its first meeting on Thursday, will examine the proposal. The proposal appears to have been made because of the pressure on the government for corruption, but experts feel that it has not been thought through.
Similar proposals have been suggested in the past but were withdrawn in the face of public opposition and because the realization dawned that this would be a throwback to the erstwhile Foreign Exchange Regulation Act (FERA) a law that was repealed because it was open to abuse and led to harassment.
"The government is trying to overdo things. The government is constantly under pressure and is over-reacting," said former finance minister Yashwant Sinha under whose stewardship wide-ranging tax reforms were ushered in and the dreaded FERA was abolished.
"Any law that the government is drafting has to be carefully thought through and clear distinction should be made between minor evasion and major evasion of ill-gotten wealth. There should very careful consideration of all facts before any law is drafted," he said.
The UPA government is under pressure on the issue of black money and has faced criticism for its failure to tackle the issue and has taken several steps, including the setting up of the committee under Chandra. Experts said there are enough provisions within the current laws to deal with the issue of evasion and any new provision will only add bureaucratic layers. Successive governments have taken steps to simplify and make the tax laws less intrusive. The new proposal would be reversing the process.
"Simplifying tax laws will lead to better compliance. Bringing real estate under the ambit of the proposed Goods and Services Tax (GST) will knock off the generation of black money. The way forward is tax reforms and not new draconian laws," said a former finance secretary who did not wish to be identified.
"Such a provision will lead to harassment and potentially discourage people carry out legitimate economic activities. It will be a return to the old FERA days," he added.
Tax expert Gokul Chaudhri pointed out that the direct tax law in India has an entire chapter devoted to offences and prosecutions. "These deal with punishment which involves not just fines but also rigorous imprisonment in circumstances of wilful attempt to evade tax. The scope of these provisions is sweeping," Chaudhri, a partner at BMR Advisors said, adding that new laws are not required.
"The penal punishments under tax laws are already quite onerous. Making these harsher will be tossing the baby out with the bath water," he said.