The possibility of prosecution and imprisonment will soon become more real for tax offenders, thanks to the new guidelines issued by the Central Board of Direct Taxes (CBDT). The new rules, effective 17 June, plug a loophole in a tax provision that allowed tax evaders to escape imprisonment by paying up a little extra.
The new rules are expected to make it tough for tax offenders to take undue advantage of the “compounding of offence" provision, under which any alleged tax evader could voluntarily accept the charges and offer to pay the due tax along with penalty in order to avoid prosecution which could lead to imprisonment. However, in doing so, the department has ensured that naive defaulters do not bear the brunt by creating various categories depending on the severity of the offence.
The new CBDT guidelines will be applicable to all offenders who opt for the compounding of offence provision on or after 17 June.
We tell you what the compounding of offence provision entails and the changes made to it.
“Compounding of offences enables a defaulter to settle a case and avoid a cumbersome trial by paying tax, interest and compounding charges," said Rakesh Nangia, managing partner, Nangia & Co. LLP, a chartered accountancy firm.
A tax defaulter who avoids or neglects rules that result in tax evasion is first charged an interest on the due tax amount. A further penalty may get added if the person fails to pay tax along with the interest within the specified period. If the defaulter does not pay the penalty either, the department can initiate prosecution proceedings, which may lead to imprisonment of up to seven years. The person against whom court proceedings are initiated for alleged tax evasion can appeal to the income-tax department under the compounding of offence provision. In the appeal, the person can admit to tax evasion (either wilfully or by mistake) and eventually pay all the due tax along with penalty to avoid further prosecution.
“To ‘compound’, in its context, means to come to a settlement or agreement," said Nangia. The concept of compounding of offences was brought about as a measure to avoid the long-drawn process of prosecution, and to save time and cost in exchange of a payment of penalty, he said.
“The board, in its revised guidelines, has made it clear that compounding of offences is not a matter of right. The offences may be compounded on satisfaction of prescribed conditions. The prescribed authority while dealing with the application for compounding of offence may consider various factors, i.e., conduct of applicant, nature and magnitude of the offence, etc. to dispose of the application," said Naveen Wadhwa, deputy general manager, Taxmann, a tax service provider.
Who can apply? The new guidelines broadly classify tax-related offences into three categories based on their severity—Category A, Category B and Others. The third category involves offences that will not be typically compounded. “Category A includes offences like failure to deposit or collect tax deducted at source or TDS, failure to furnish income-tax return (ITR), failure to pay TDS, tax collected at source (TCS), tax payable under other sections to the government and failure to comply with provisions of 269SS/269T (which deal with cash payment and repayment of loans and deposits). Category B includes in its ambit offences such as wilful evasion of tax, failure to produce books of accounts or falsification of books of accounts," said Nangia. If the defaulter falls under Categories A and B, he or she will be allowed to appeal under the compounding of offence provision.
Who can’t apply? Those under the third category cannot file an appeal under the provision. For instance, “cases where it has been proved that a person has enabled others in tax evasion or cases of money laundering or offence relating to undisclosed foreign bank accounts or assets", said Nangia.
Other cases where compounding may not be allowed include offences related to the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, or the Benami Transactions (Prohibition) Act, 1988. “There are certain other offences for which no compounding is allowed like offences committed by a person for which he was convicted by a law of court," said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP, a chartered accountancy firm.
The provision will also not be allowed if the offence includes violation of an order issued by the assessing officer under Section 132(3), which deals with orders related to search and seizure of financial documents and assets, not allowing income-tax personnel to inspect books of account or other documents and removal, concealment, transfer of property to prevent tax recovery.
Filing an appeal: The guidelines restrict the number of times a person can file a compounding application for the same offence. “Category A offences are those offences which are not compounded on more than three occasions. Category B offences can be compounded only if such offences have been voluntarily disclosed by the person before its detection by the department and such offences have been committed prior to the date of issue of notice or launching of prosecution," said Wadhwa.
A person can file compounding application on her own or may take help of tax experts. But there is a time limit within which one needs to file the compounding application. This time limit can be extended on payment of a higher compounding fee. “The person seeking compounding of offence should file the application within 12 months if any prosecution complaint is filed against him. This period can be relaxed up to 24 months but the compounding fee will increase to 1.25 times of the fee application to the offence," said Maheshwari. Along with such application, “the person will need to pay all the due taxes, interest and penalties and would need to give an undertaking for payment of compounding charges and withdrawal of appeals", he added.
The charges: Under the new guidelines, the compounding charges—including compounding fee, prosecution and litigation expenses such as the counsel’s fee—have been revised for different categories of offences. “Whereas upper limits have been set for trivial offences, the rates have been enhanced for serious offences such as the offence involving a wilful attempt to avoid tax," said Nangia.
The old guidelines prescribed a compounding fee of 100% of the tax amount wilfully evaded. The new guidelines prescribe a rate of 150% of the tax sought to be evaded where the amount of tax evaded exceeds ?25 lakh and 125% in cases where the evaded amount is less than ?25 lakh, said Nangia.
Compounding fee has also been increased in offences related to failure to file and to pay TDS. In case an assessee fails to file her ITR on or before the due date prescribed under Section 139(1), which is typically 31 July of an assessment year, the compounding fee will be ?4,000 per day if net due tax exceeds ?25 lakh; if it is less, a charge of ?2,000 will be levied. However, “if the difference between tax payable and taxes already paid is less than ?1 lakh, the compounding fees will be restricted to the difference in amount subject to a minimum of ?10,000", said Wadhwa.
In case a person wilfully evades tax by not paying TDS on time, the compounding fee has been increased from 100% to up to 150% of the amount of tax sought to be evaded, if such tax amount exceeds ?25 lakh and 125% for any amount up to ?25 lakh.
With the new guidelines, the tax department has made it clear that evaders will not only have to pay higher charges for filing an application under the compounding of offence provision, but will have to face prosecution in case of serious offences.
Also keep in mind that while appealing under the compounding of offence is not an offender’s right, and whether it is accepted or rejected depends on the tax department’s discretion.