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MB0012 – Taxation Management-Set-1

MB0012 – Taxation Management-Set-1

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Published by Pankaj Chourey

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Published by: Pankaj Chourey on Jun 14, 2011
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 Sikkim Manipal University - MBA - MF0012 Taxation Management
 Semester: 3 - Assignment Set: 1=======================================================
PANKAJ CHOUREY Reg. No. 521036344 Page 1 of 20
Tax evasion is a menace to the people, economy and the country. In thewake of recent Swiss bank account scandal give your views on the following:a.
How does it affect the Indian economy and the growth prospects?b.
Does black money cause Inflation?
In view of the facts set out so far, it becomes necessary to look at the extent ofcompliance of tax laws in India. Though many estimates of black money have beencoming forth, an attempt was made to determine the extent of tax evasion in theMumbai Income Tax charge, which collected about 35% of the Income Tax collections ofthe country and 43% of the corporate tax collections. The study was made on the basisof results of the survey and search cases for all the years covered by such cases. Itcame to light that none of the taxpayers concerned declared for taxation purposesanything more than 25% of their true incomes after 1999. The figure arrived at wasgiven to the press specifying the basis on which it was so calculated. Not a singleprotest was received from any of the taxpayer, including companies. The said figurewas thereafter cited for some more time, and even thereafter no protest was received.There was, therefore, every reason to believe this estimate. However, there appears 10to be higher tax evasion in the case of companies. Some of the companies have showntheir entire capital as having come from the countries regarded as Tax Havens.Considering the extent of Indian monies stacked in Swiss Bank Accounts, and bankaccounts of the developed countries, and comparing the same with the annual incometax collections of the Central Government, it appears that the real income admitted fortaxation purposes is less than 25% . The extent of evasion appears to be very muchhigher in the case of companies as the companies have resorted to evolution of taxevasion devices in the accounts and such methods have not yet been properlyinvestigated by the Income Tax Department. There are companies which havecamouflaged their capital investments and shown it in the books as if it is explainedcapital for income tax purposes.
The Indian Scenario - Peculiar problems of tax evasion :
It will be appropriate at this stage to highlight some of the key problems from the viewpoint of computerisation in India:
(a) Investments in Real Estate:
The one field where black monies have been investedon the largest scale is that of real estate properties. Lands were sold for only 20% oftheir real values and the balance 80% given in cash out of the tax evaded monies, eversince 1947. But later on when the tax rates were lowered to 30% for individuals and35% for companies, the black portion got reduced to 40% . It may be a difficult task totrace such black transactions through the computer system, suggested for adoption onthe U.S. pattern for India. But it is common knowledge that the black monies invested
 Sikkim Manipal University - MBA - MF0012 Taxation Management
 Semester: 3 - Assignment Set: 1=======================================================
PANKAJ CHOUREY Reg. No. 521036344 Page 2 of 20
in land have been reinvested in bank accounts, shares and in other properties, apartfrom real estate property. It is now confirmed knowledge that in regard to buildingsconstructed, only 40% of the cost is shown to income tax. It is possible to detect suchinvestment by analysis of the data obtained from the trade and industry governingcommodities used for construction of buildings. Further, as all the transactionsrelating to sale of real estate properties are now recorded in computers maintained bythe Registration Offices all over the country, and if the same data is brought on thecomputers of the Income Tax Department, it should be possible to know many ownersof property who have not filed their tax returns at all so far. In India, there are only 3corers of tax assesses at present, and thus a large number of people with taxableincome have evidently chosen not to file income tax returns.
(b) Gold and Jewellery Holdings:
India is having the largest private holdings of goldand diamond jewellery among all the countries of the world. In the searches conductedby the Income Tax Department, huge unaccounted cash balances and gold anddiamond jewellery have been found in the bank lockers maintained by tax payers inbogus names and in their own names. At current market rates, purchases of gold,silver and diamonds may now reach about Rs. 80,000 crores a year. Gold and diamondtraders are mostly keeping their transactions outside bank accounts. They are alsogiving vouchers to the effect that raw gold has been given by the customers, though; infact, it would have come from the traders themselves. Therefore, it is necessary tointroduce a law requiring them to transact only through bank cheques and issuecomputerized bills, to facilitate proper flow of information to the computer system ofthe tax department.
(c) Shares, Mutual Funds, etc :
There are vast investments in shares and debentures,travelers’ cheques, mutual funds and the primary bonds issued by the Reserve Bank ofIndia. The data regarding company shares and other investments mentioned can beeasily transferred to the computer system of the Income Tax Department. The MumbaiStock Exchange is having a separate computer system with complete data on dailytransactions and the Income Tax Department has so far not made use of such data.There is also the data generated in the computers of the organizations in charge ofdemat of shares. Like-wise, the data on post office savings and other accounts is easyto be brought on the computers of the tax department for verification with theindividual returns, which are available with the Government itself.
d) Undisclosed Stock in-trade held by companies and traders :
Many firms andindividuals have also a tendency to keep undisclosed business assets like cars andprivate assets, unaccounted cash holdings etc., They have ability to give extensivebribes to protect business and other interests. All such practices would varnish oncefear is caused among the tax payers about the use of computerized data for taxationpurposes.
 Sikkim Manipal University - MBA - MF0012 Taxation Management
 Semester: 3 - Assignment Set: 1=======================================================
PANKAJ CHOUREY Reg. No. 521036344 Page 3 of 20
(e) Benami Investments :
Benami investments are typical of the Indian economy. Evenbig companies have indulged in such practices to impart total secrecy to theirundisclosed accounts. It may be difficult to determine whether the investment found inthe computers of the income tax department is benami or not, and benami shares willhave to be traced sometimes by extensive studies to be conducted by teams of revenueofficers. This problem requires comprehensive study because it is peculiar to theIndian Taxation System.
(f) Swiss Bank and other undisclosed bank accounts held abroad:
Swiss Bank Accountsare shrouded in secrecy and hence no information will be available to the computersystem of the Income Tax Department. The amounts in Swiss Bank Accounts, whichare held in foreign currency, have been utilised by big companies and other taxpayersin India to import huge machineries at vastly underinvoiced prices. Such practicesenable payment of secret trade commissions in foreign currency and unaccountedfunds in Indian currency to those contesting general elections. Several majorcompanies have converted Swiss Account holdings into benami shares and debentures.The large amounts of Swiss Bank deposits have, thus, been utilized and every year,there are additions to the Swiss Bank Account holdings.
 b. Does black money cause Inflation?
Illegally earned money is called black money. It is the result of hoarding, smuggling,tax evasion and dealing in immovable property for which the consideration is paid inblack. It has been beyond the control of the Government. The black money has alreadycreated a serious problem in our country.The Indian economy stands badly shattered because of the huge amount of this taintedwealth lying in the coffers of the rich. It has given rise to parallel economy operating inthe country. As a result, the prices continue to rise in spite of all government efforts tocontrol them. The poor go on becoming poorer while the rich go on becoming richer.The gap between the haves and the have nots is widening every day.Black money is used by the rich in various evil activities. They use this money forcorrupting and demoralizing social and political life. They display it in ostentatiousliving and wasteful luxuries. They bribe Government officers and lead them tocorruption and dishonesty. They purchase political bosses and control the strings of theGovernment. Thus the entire social structure comes to be badly polluted.It is difficult to form an exact idea of the amount of black money in circulation in thecountry. Searches and raids by Income Tax authorities are conducted from time totime. Such raids yield crores of rupees. But the people are, at times, cleverer than the

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