In this blog post, Kanika Sharma, a student at Campus Law Center and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses on Capital Gains Tax and How is it calculated? 

In this blog post, Himanshu Agrawal, a student pursuing an MBA at IIM Lucknow and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes how tax evasion is a menace to society.  

Introduction

Remember the last time you purchased something without asking for a bill from the shopkeeper? While it seems trivial, it is one of the most elementary of the steps for tax evasion. It allows the shopkeeper to not show the amount as part of the income with tax authorities and in turn avoid paying taxes on this much amount. Now think about the whole lot of people who do not care or purposefully doesn’t demand a bill from shopkeeper and do the math; voila; too much money for the shopkeepers without paying any taxes, isn’t it?

The loss however is to the Government and in turn the people of the state as the money so collected through the taxes would have been utilized for development activities to make our life better

Tax Avoidance vs. Tax Evasion

Whether you are an individual (be it Sole Proprietor or a Salaried profession) or an entity (be it Company, Partnership or an LLP), taxes are one of the major components which decide the bottom line of your financial performance

The Income Tax Act in India allows for multiple opportunities to reduce the tax liabilities in accordance with the law. For individual, it might mean for e.g. income tax saving on Home Loan, House Rent Allowance etc. For a Business, it could be allowing for the depreciation of the plants and machinery or amortizing the investments on new Software. Utilizing such avenues allowed by the law to reduce the tax liability is termed as Tax Avoidance (1)

In contrast to Tax Avoidance, Tax Evasion is an illegal activity where the intent is primarily to hide income and avoid paying the true tax liability (2)

Tax evasion and tax avoidance are sometimes misunderstood considerably. While a Government allows various avenues in its tax structure through which an individual or an entity can save on their tax liability, purposefully trying to show income lower than actual in order to reduce the tax liability is a crime to the state and their people. Tax evasion is a crime as per every state law, including India and can attract severe penalties (3)

Known methods of Tax Evasion

As the laws are advanced to control the menace of tax evasion, the tax evaders are devising new methods to cut corners with the loopholes they are still able to find in the tax laws. Some of the most common methods in practice with the tax evaders are (4)

• Nonpayment of the dues – willingly or unwillingly not paying the due taxes to the Government is a form of tax evasion. In India, this is one of the most common scenario in rural and suburban areas

• Inaccurate financial statements, fake documents, false returns – a rather more sophisticated way of tax evasion is by forging documents, submitting inaccurate/incomplete information to the authorities to showing lower tax liability than the true payable

• Smuggling – this form of tax evasion is in use when the goods are moving from one place to another across state or country borders. For e.g. Gold.

• Bribery – Corruption within the Government system is one of the subtle reasons for tax evasion so rampant in the society. Some tax evaders use this method to make their income disappear and thus prevent being taxed upon

• Tax Havens/Offshore Wealth – Recent news on Panama papers leak is a classic example here. Tax evaders tend to utilize the tax havens, countries which have lower taxes and which do not disclose the account holder’s whereabouts to the home country. This way the home country is deprived of collecting the actual tax dues from the taxpayer

Over time, as the laws have changed, the tax evasion has also evolved to become more sophisticated. This along with the current tax setup (although some of this is going to change with the rollout of the Goods and Services Tax, GST, in the near future) in India, which includes taxation at multiple junctures in form of indirect taxes, provides multiple avenues for possible tax evaders to devise ways to reduce their actual tax liabilities

Penalties for tax evasion in India

The Income Tax Act, in India, identifies penalties for the taxpayers for various acts of omission, willful neglect and purposeful evasion of taxes due in any financial year. For corporate, it also identifies penalties for lapses in maintaining the right documentation and compliance requirements in a financial year. Below are some of the examples and relevant sections of the identified penalties (5)   

1. Section 270A of the act makes the taxpayer liable for penalty if the taxpayer tries to reduce the tax liability by reducing the reportable income (under reporting the income). The penalty can be up to 200% of the tax payable on the unreported income
2. Section 271A imposes a penalty of Rs. 25000 to a taxpayer in case of failure to maintain the book of accounts as per the requirements in section 44AA
3. Penalty can be imposed by an assessing officer for default in payment of taxes from a taxpayer, as per section 220 (1), 221 (1) of the income tax act

The Hasan Ali case

Hasan Ali Khan (6), born c. 1954, is an alleged money launderer and Hawala trader; accused of stashing multibillion USD into Swiss accounts (tax haven), thereby evading taxes from Indian Tax authorities to the tune of c. 910 billion USD.

Legal cases

Hasan was arrested in March 2011, after Supreme Court intervened and asked the then Government and Enforcement Directorate on the reasons for not acting against Hasan despite sufficient evidence against him on allegations under Hawala transactions from 2007 onwards. ED charged Hasan under the Prevention of Money Laundering Act, 2002, with allegations of helping an arm dealer to launder USD 300m generated through arms dealing, through his UBS account.

Hasan denied all the charges on him and a legal battle with the Government of India and ED ensued. The ED has cited Rs. 34000 Crores as the taxes due from Hasan for his income in 2007-08.

Latest developments in the case

In February 2016, the Income Tax Appellate Tribunal (ITAT) has brought down the tax liability for Hasan from Rs. 34000 Crores to c. 3 Crores now. The IT department has failed to substantiate its claim on Hasan’s income and thus the tax liabilities. The reassessment notice have been sent to the assessing officer (7)

Following this, Hasan have been granted bail (upon 14th attempt), while ED continues to struggle to prove the allegations levied against Hasan in the charge sheet. Hasan’s lawyer has thus claimed that he have been false implicated into the case and had suffered due to this.

Inferences

Money Laundering is something which needs to be prevented. It is very hard to be cured. As it is defined, the laundered money is so very well integrated within the economy that it is very hard to detect, let alone prove the origins. As with the above case, though it remains to be proven that ED’s allegations are true or not, however, proving anything of such a scale was always a challenge. As quite evident, ED seems to be quite helpless on proving their point and thus may be proved wrong in the end

Impact of GST on Tax Evasion

Goods and Services Tax (GST) is a major indirect tax reform in India which is under implementation currently. Upon implementation, it would mean a single tax on the supply of goods and services, right from the manufacturer to the end user. It would reduce the number of indirect taxes being paid at multiple points and thus make the tax system more transparent and streamlined

One of the many advantages of GST would be avoidance of tax leakage. The GST is designed in a way to incentivize the traders to be tax compliant to seek benefit on the tax credits in the supply chain. This along with the comprehensive IT systems enabling GST compliance would certainly put a check on tax leakage, tax evasion and under reporting. GST also proposes a dual monitoring mechanism led by the Central and the State Government. So, even if one set of tax authorities overlooks or fails to detect evasion, there is the possibility that the other overseeing authority may not. GST also mandates a paper trail for the tax compliance which would certainly improve the overall tax compliance within the country.

The other important aspect on the rollout of the GST would be the overall reduction of the tax rates and thus liabilities due to systematic efficiency gains and prevention of leakages. This would further encourage the increase in tax base for the country

It remains to be seen in the near future on how GST would help in increasing the overall tax base in India, reducing tax evasion in the tax system and put India on a progressive path (8)

Works Cited

1. [Online] [Cited: 9 26, 2016.] http://www.businessangel.ca/2013/02/tax-tips-save-your-time-your-money-your-taxes/.
2. [Online] [Cited: Sep 26, 2016.] http://www.investopedia.com/terms/t/taxevasion.asp.
3. India Filing. [Online] [Cited: September 26, 2016.] https://www.indiafilings.com/learn/penalties-income-tax-evasion-india/.
4. [Online] [Cited: Sep 26, 2016.] https://www.bankbazaar.com/tax/tax-evasion.html.
5. [Online] [Cited: September 28, 2016.] http://www.incometaxindia.gov.in/Tutorials/28.%20Penalties.pdf.
6. Wiki. [Online] [Cited: September 28, 2016.] https://en.wikipedia.org/wiki/Hasan_Ali_Khan.
7. Indian Express. [Online] [Cited: September 28, 2016.] http://indianexpress.com/article/india/india-news-india/in-9-yrs-hasan-alis-tax-liability-drops-from-rs-34k-cr-to-rs-3-cr/.
8. GST. [Online] [Cited: Sep 28, 2016.] http://www.gstindia.com/.

In this blog post, Sudhanshu Jatav, a fourth-year B.A. LLB (Hons.) student at Gujarat National Law University, Gandhinagar, describes the position of India with respect to child abduction and the Hague Convention.

Introduction

Child abduction. When we talk about Child abduction, we connect it directly to “kidnapping”, that is a basic aspect of it and there are laws dealing with such incidents. The situation becomes much more tricky when international law finds its place into it. So, the problem of Child Abduction that being addressed here occurs mainly between the parents who are divorced or are in the process of getting divorced. Mostly, the divorcing mother or father of the child takes away the child and move to a different country and the battle for that child’s custody becomes an issue which affects not only the parents but largely that child.

To properly deal with this issue, to be more specific, The Hague Convention on the Civil aspects of International Child abduction was signed on October 25, 1980, which came into effect on December 1,1983 having 94 signing parties which do not include India.

Objectives

The scope and the object of the convention were established in Art 1 & 2 of the convention

Article 1 The objects of the present convention are :

• to secure the prompt return of children wrongfully removed to or retained in any Contracting State; and

• to ensure that right of custody and of access under the law of one Contracting State are effectively respected in other Contracting State.

Article 2 Contracting States shall take all appropriate measures to secure within their territories the implementation of the objects of the convention. For this purpose they shall use the most expeditious procedures available.

The above mentioned articles talk about the prompt return because if we want to solve this problem of kidnapping the focus should be on the return of the child to the earlier domicile without any delay and after that the adjudicatory body can get into deciding the proper origin of the Child because the period of time for which the abducted child stay in an alien domicile affects the psychological condition of the child, this issue was properly addressed in the Convention.

Furthermore, it was decided that the convention should apply to the children who are under the age of 16 years. The same is provided in Article 4 of the convention the decision to keep the children who have attained the age of sixteen years out of the ambit of the convention was taken assuming that they cannot be kidnapped or abducted against their own wishes. The age restriction is subject to Article 4 of the convention which only covers those cases where there have been instances of the violation of rights of custody, this violation may include violations of judicial decisions or binding agreements or if any interference is made by a parent in the custody which exists by the power of the operation of law.

This leads us to the question that in a scenario where there exist an order of judicial custody that why would there be a need for a convention ? This is when Private International Law enters the scene and makes everyone’s life difficult, for instance, a person domiciled in U.S have the order for the custody of his child but since we have the concept of ‘Sovereign Nation’, one nation cannot interfere in the law enforcement or the legal system of another nation. Generally, a state’s jurisdiction only extends to its own borders going beyond it will raise the question of breach of jurisdiction hence, it is not binding on another state to recognize U.S court’s order unless a convention like the Hague Convention makes it binding on the state to do so. In these kinds of scenarios, one can see the glimpse of the problems that arise when in the cases of child abduction India is not the part of the convention but more to it at a later stage.

Inclusion of a Central Authority

Article 6 “A Contracting State shall designate a Central Authority to discharge the duties which are imposed by the Convention upon such authorities.

Federal States, States with more than one system of law or States having autonomous territorial organisations shall be free to appoint more than one Central Authority and to specify the territorial extent of their powers. Where a State has appointed more than one Central Authority, it shall designate the Central Authority to which applications may be addressed for transmission to the appropriate Central Authority within that State”

Art 6 of the convention provides for the appointment of a central authority. The established authority will be there to entertain applications regarding the child abduction. It is not necessary that the application is to be filed only with the central authority of the state of origin. The same can be done in any of the central authority of a contracting state for assistance.

Since ultimately the aim is to provide a secure and prompt return of the child any delay the convention under Art 7 asks the central authorities to cooperate with each other and promote co-operation among the competent authorities.

Instances for not returning a child

Art 13 of the draft provides for some grounds, the establishment of any of them can take away a state’s obligation to return the child. If the opposing state can establish that the parent who was earlier having the custody does not have the custodial rights of the child at when the child was removed out of the possession of that parent or that there exists the grave risk of harm to the child either physical or mental.

In situations when the child has attained the age of maturity which is 16 years and is himself/herself opposing the return the court is supposed to take the the child’s view into account. Another point that can be looked into while deciding whether the child is to be returned is looking into the habitual residence of the child.

‘Habitual residence’ in a nutshell is the state where the child has spent most of his time or where the child naturally belongs. For instance, a 10-year-old Indian born who has spent 9 years of his life in America since birth and he was taken to India. Now even though he was born in India his habitual residence will be America.

In the case of Surya Vadanan v. State of Tamil Nadu, 2015, Husband and Wife who were married in Chennai went to England and acquired domicile there. Due to a marital dispute wife came back to India along with the child and filed for divorce, in consequence to that Husband in UK court filed for a writ of Habeas Corpus which was denied by the Madras High Court and laid down grounds for the same which were to first look into the nature and effect of the interim order passed by the foreign court then if there exists and special reason for repatriation and lastly the social and cultural harm that can happen to the child after repatriation.

The court in its discussion found out that the paramount consideration in these kinds of cases should always be the welfare and to decide after looking into the best interests of the child. It was further discussed that in such cases a summary inquiry or an elaborate inquiry to happen to decide that such return will not be harmful to the child.

It was similarly discussed in Art 17 of the Convention which talks about the responsibilities of the administrative and the judicial authorities to look into the reasons for repatriation.

Why hasn’t India yet signed the convention?

Even though there has been a lot of pressure on India to sign the convention but India has managed to be in the club of the  major countries that chose the other road and did not sign the convention. And the reason for not to do the same also are correct to an extent.

When we look into the number of cases where the child ultimately is takes back to India are negligible in numbers comparing to those who were returned back to India. Also when we look at Indian society the structure of the society is such that a woman in a marriage is not in a position to earn a life for themselves. Signing the treaty would mean that the government will have to send back women, who have escaped bad marriages abroad and brought their child along with them to India, back to the country of their father’s residence and stripping them of the protective cover they had in their own country.

On the other hand, the 218th law commission report provides for a reason to sign this convention. When it comes to the Indian judicial system they do not have a uniform pattern to addresses a similar kind of situation similarly all over the country, by signing the convention there will be a central authority established to that can be directly approached to deal with the matters of this nature.Moreover, when it comes to the matters which involves a child of Indian-origin foreign judges dealing with those matters become skeptical while providing the custody to a person who is coming to India.