Should we all file income-tax returns?

May 24th, 2011

In my last post, I had mentioned about one of the various methods of tax corruption which is rampant in India. In fact, there is an interesting issue the government needs to understand. Whenever we sit down to discuss tax evasion, the government starts to give a long lecture on various mechanisms it has put in place to check the returns of income filed by tax payers. These are also known as the scrutiny guidelines.

What the government misses in this processs is that a large part of the income-earning population in India does not file its return of income at all. So if there is no return filed, the government has no document to scrutinise. That seems the safest way to get out of the scrutiny guidelines. It may sound funny, but it is the truth, the government has very little knowledge of this section of the income earning population. The case of Hasan Ali (the master swindler) is an eye-opener.

The Comptroller and Auditor General’s report said despite the meteoric rise in income, Khan did not file his tax returns for five years. He filed his returns for these years only after getting a notice from the Income-Tax Department in February 2007, after search operations at his premises. CAG has added Rs 4,056 crore more to the Rs 71,874 crore tax demand raised against Hasan Ali, who is currently in the custody of Enforcement Directorate on charges of money laundering. The additional tax liability of Rs 4,056 crore was added after CAG found several irregularities in the assessments of Hasan Ali and his associates. There were cases of under-taxation totalling Rs 3,370 crore and three cases of over-taxation of Rs 305 crore. After assessments were complete in December 2008, Hasan Ali’s taxable income was assessed at Rs 529 crore in 2001-02; Rs 5,404 crore in 2002-03; Rs 2,444 crore in 2003-04; Rs 10,495 crore in 2005-06 and Rs 54,268 crore in 2006-07.

This is an amazing story and people have refused to believe it, but unfortunately it is true. Whenever I narrate this story, I also narrate the story of an honest tax payer who earned a salary income of Rs 14 lakh and had all his tax deducted at source by the employer who issued a Form 16. He was a happy individual till he received a notice from the I-T department stating that he had not paid taxes on Rs 18,546 of interest income. Besides the tax, he was also asked to show cause as to why a penalty of Rs 6,000 should not be levied on him for wilfully concealing taxable income. It is virtually impossible for me to explain to him the virtues of being an honest tax payer in India.

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