Unmasking Tax Terrorism

There is a rising perception in the society that Tax Officers harass the citizens to collect
Revenue. A new word ‘Tax-Terrorism’ was coined and first used by the then Finance
Minister in 2014 primarily used in the backdrop of a clarification in the nature of
amendment to the Income Tax Act by Finance Act 2012 to retrospectively tax Vodafone.
Recent few months have suddenly seen many articles on Tax Terrorism.

In the articles written, it is portrayed that Tax Terrorism is due to both the legislature and
the executive. It is alleged that the political executive frequently modifies the Tax Acts,
sets higher and has kept higher taxation rates for evasion of tax, sets unreasonable
revenue collection targets and even uses tax agencies as a political tool. To achieve these
pre-determined targets, the executive i.e. the Tax administrators implement the tax laws
harshly, launch prosecutions for minor tax evasions or procedural violations, send out
bulk notices without adequate legwork, conduct frequent surveys to harass the
businessmen. These overzealous acts of the Tax Collectors have allegedly earned them
the title of Tax Terrorists. Some authors also postulate that tax evasion in India is
pandemic and therefore the acts of Tax Collectors appear overzealously harsh.

Perspective of a Tax Collector

But understanding of Tax Terrorism will be incomplete without perspective of a Tax

Collector. The most common canard to allege Tax Terrorism is that Revenue authorities
issue notices at discretion without any ground work. Frankly, such people do not know
the technology being used and the systems in place to capture and process the vast
amount of data from multiple sources. Issuance of notices is primarily electronic, based
on predetermined algorithm and analysis of data. And it is only in miniscule number of
cases that the notices are sent manually. Even in such cases, there are adequate
safeguards to prevent its misuse. Even selection of a taxpayer for conduct of search or
survey action is done after a very exhaustive analysis of the data. This is evident from the
fact that almost every search or survey action reveals huge evasion of tax. It is not
surprising that such tax evaders cry out Tax Terrorism and the voice is getting resonated
now with the increasing proactivenes of the Revenue Department, big data, enhanced
information exchange between the enforcement agencies, massive data breaches by
Whistleblowers that have taken place, increased international tax treaties leading to
sharing of information and establishment of best practices from around the globe. Those
tax evaders, who were till recently sitting cocooned safely are suddenly feeling
vulnerable.

Second grouse is that current Tax acts, especially Income Tax Act, is very cumbersome
with sub-sections, provisions & explanations and a simpler Tax code should be enforced.
Let us understand how these provisions and explanations become part of tax acts taking a
recent act as an example. Benami Transactions (Prohibition) Act, 2016, a very simple
and lucid act, has come into force in recent past. The newness and simplicity of the Act is
actually a source of uncertainty and numerous questions are being raised by the public,
the legal fraternity as well as the Officers. Slowly cases will reach the Higher Judiciary
and interpretations will be crystallized. That will lead to incorporation of suitable
amendments in the Act. This cycle keeps on repeating to make the once simple Act
bulky. Same is the situation with the current Income Tax Act 1961 whose precursor was
Income Tax Act 1922. UK has rewritten and implemented a new Income Tax Act in
2007. This act has a massive 1038 Sections (compare with the 298 Sections in Indian
Income Tax Act) while its earlier Act of 1988 had 845 Sections. So, introduction of a
‘simpler’ code may infact be the beginning of a new litigation phase where possibly there
will be even more uncertainty.

Law abidance in India

A common solution given to reduce perceived harassment is to do away with scrutiny

assessments and Search/surveys when more than 85% of the taxes are collected through
Advance Tax and Self Assessment Tax. This solution is akin to doing away with traffic
lights or breath tests. Just image the scenario where there are no traffic lights and
citizenry being informed that there will be no breath tests! Indians in India have not
reached that level of law abidance where things can be left to themselves. But Indian
settled abroad or while travelling abroad are very law abiding. Does anything needs more
to be said about the fear of strict implementation?
It is an unfortunate reality in India that Tax Evasion is the norm. We as a society, appear
to have become quite pessimistic about improving the situation and skeptical about the
conduct of Tax Officials. Tax officers have tough choices to make. If a Tax Officer
collects taxes as per the statute, she is perceived as harsh, pro-revenue and anti tax-payer
and if she is soft & empathetic with the taxpayers, she is seen as colluding with the
taxpayers! Same is the case of filing of further appeals after the order of the Tribunals. If
you file further appeal, you are increasing litigation and if you don’t, you may have
colluded with the Taxpayer! Imagine a diligent and thorough Tax Officer passes an order
levying tax of Rs 5 crores and the taxpayer complains twitters and shouts High Pitched
Assessment on Facebook. What will be the first thought of the readers? The answer to
this question perfectly explains the current scenario. Despite good work, that Tax Officer
will have a lot of explaining to do. Have we created a conducive and supportive
environment for good work?

Tax Terrorism and Tax criminals - a global perspective

Now, let us review the word ‘Tax Terrorism’ from global perspective. Is there any
parallel of usage of the word Tax Terrorism around the world as it is used in India? None.
In fact, whenever this word ‘Tax Terrorism’ is used, the meaning ascribed to is absolutely
opposite. Dr Māris Jurušs, Asstt Professor in Riga Technical University published a
research paper in April 2017, where ‘Tax Terrorism’ referred to tax evasion by organized
groups of persons for criminal purposes and when such activities create significant losses
in government revenues.

Tax evaders are called Tax criminals in US, a word unheard of in India. In India, even
after tax evasion is confirmed by the Higher judiciary, are we prosecuting the Tax
Criminals? Contrary to the popular perception these days, criminal provisions of the
Income Tax act are rarely invoked. Her Majesty's Revenue and Customs (HMRC)
Department of UK launches much more prosecutions as compared to India. Tax related
convictions in US as per United States Sentencing Commission website (www.ussc.gov)
were 648 in 2015, 584 in 2016, 584 in 2017, 517 in 2018 and 494 in 2019. And as per
Fordham Law Review journal published in 1958, the conviction figure in USA for
income tax evasion was more than 500 even during the 1950s. India is not even 10% of
that figure. For optimal collection of taxes, there has to be balance between the soft
approach and fear of penalties and prosecution.

Way Ahead

The whole approach and meaning ascribed to ‘Tax terrorism’ raise some very pertinent
and important questions. Is India setting an absolutely wrong paradigm by referring to tax
laws and tax collectors as tax terrorism and tax terrorists respectively? Will not the
terminology coined to boast the morale of the business apparently actually dent the
efforts of diligent and honest tax officers?

Lakhs of students preparing for Civil Service Examinations are being taught that Tax
Terrorism is undue exercise of power by tax authorities to levy taxes using legal or extra-
legal means or putting illegal pressure on the taxpayers to extract tax. Should we not
actually be teaching Tax evasion as Tax Terrorism? Even in Indian context, the term Tax-
Terrorism was coined to convey the specific instance of using the legislative route to
undo a judicial interpretation of the Income Tax Act. Initially, in no way the term
connoted to the implementation of the Act by the Executive through tax-officers. 

The question that requires pondering is whether there are systemic flaws in the system
itself? Or the fault is more deep rooted and the basic education system and societal values
imbued from the beginning in the society are faulty? And when taxes are so important,
basic tax education should be imparted from childhood that tax is the founding stone for
country’s development. And a mindset needs to be built that taxes are a right of the
Government, its evasion a criminal offence entailing prosecution apart from penalties.

The Revenue Departments are leveraging the technologies to create applications for e-
filing of returns, automated refund processing, pre-filing of Tax Returns, creation of
faceless e-assessment facility – all to provide a seamless and hassle free service to the
citizens. This article in no way claims that everything is hunky dory with the Revenue
Departments. There are black sheep within the department, as there are in other spheres
of administration. However, to paint the majority with the same brush will be a travesty
of justice. And the author admits that there are some technical shortcomings in various
portals like for filing of ITR and GSTR. But the critics should remember that Rome was
not built in a day. Revenue Departments are aware of the shortcomings in the
applications and are constantly striving to make them perfect.

And lastly, many of the Tax Officials were going to Offices even during the lockdown to
ensure that the citizens got their refunds expeditiously. But there is not a word probably,
of commendation in the news for these silent Covid warriors.

‘Arthashastra’, the India’s oldest treatise on politics, economic policy, revenue

collection and military strategy composed in 3rd century BC also mentions that the
Revenue is the backbone of the administration. Maybe it is the time to shed our cynisim
towards Revenue Officers and realize their importance in nation building.

(About the Author: Lalit Mohan Jindal is an IRS Officer. He has done Dual Degree from
IIT Delhi and LLB from Delhi University. The views expressed are personal)