October 19, 2021

Role of tax terrorism in Millionaire Exodus and its effect on the Covid-19 scenario.

 “When the going gets tough, the rich get lurching”

Explaining all the migration of the Richie rich from the country makes sense on the surface when we state it like this. High infection spread rates, no proper health care facilities, no vaccines, lockdowns, and whatnot. We are truly in the end game now. Aren’t we? But here is the question, is it just the pandemic? Are the rich leaving a market of 1.3 billion just because of the virus?

The global market research group New World Wealth, which maintains a database of over 150,000 HNWIs (High-net-worth individuals) across 125 cities worldwide, in its report published on September 2020, stated that the HNWI outflow from India stood at the staggering number of 7000 i.e., 2% of the total HNWI population[1]. However, this is not a new concept, the outflow of large numbers of dollar millionaires has been happening since 2000. The report shows steady growth in the exodus starting from 4000 millionaires moving out in 2015 to 6,000 in 2016 to 7000 in 2017. Implying that the covid situation has no doubt added fuel to the fire, but it didn’t start the fire. So, then what triggered this huge outflow?  there’s no one reason for the multifaced issue. However, we need to analyze the recent trends to determining the major rationale.

Instances of tax terrorism in India

Vodafone case

In 2012 the Indian parliament amended the income tax act[2], making income deemed to be accruing to non-residents through the transfer of a capital asset situated in India, taxable from a retrospective date of April 1, 1962[3]. It is believed that this amendment was brought in specifically for reversing the order passed by the Supreme Court in favor of Vodafone international holding on January 20, 2012.[4] The infamous case in which India imposed a tax liability of 22,000 crores on the multinational company[5], met with a lot of backlashes from not only private companies but also international bodies.

An Investor-State Dispute Settlement (ISDS) tribunal held that the domestic taxation law of India is against the “fair and reasonable” treatment agreement, between the two nations as per the India-Netherlands bilateral investment treaty obligations. Vodafone was claimed to be liable for an act that happened in 2007, which was in no stance illegal back then. Vodafone was a company with large operations in India. Even back then, it had reached a customer count of 100 million in April 2010, just about 4 years after its entry into the Indian market. The act didn’t portray an encouraging picture of India to foreign as well as domestic private investors. Moreover, the government is still likely to contest this decision instead of submitting to vital changes requirements in its tax system.

In alignment with this, the government has been involved in various instances of slamming unreasonable tax demands from foreign investors like Cairn Energy, which is battling a case of $1.4 billion tax bill liability with India.

However, tax terrorism is not just limited to MNCs, it affects all classes of honest taxpayers.

Domestic taxpayers

In the year 2018, a former employee of a multinational company was slammed with a prosecution notice retrospectively[6], by the Income-tax Department under section 276 CC of the income tax act, for failure to file a tax return for the financial year 2011-2012 in time (the assessment year 2012-13). Punishment for the same as per law is fine and rigorous imprisonment of at least 6 months extendable up to 7 years if tax return amount exceeds 1 lakh rupees.[7] The employee had left the job in 2012 and the tax on his salary for 2011-2012 was deducted at source. However, he failed to file for the year 2012 (last date – august 31,2012) because of certain health issues. Since the income tax was time-barred, he filed the return in February 2015 after paying all taxes and interest. The department still moved forward with the prosecution and imprisoned the respondent, who was at a later stage granted bail because of his lawyer. Now, was the respondent a wilful tax evader which the department alleged him to be, or a minor procedural violator? Because he did pay the tax amount due, at a later time wilfully. The IT department neither bothered for the 3 years of default nor it weighed the excessive nature of their action.

In the recently revised guidelines issued for Compounding of Offences under Direct Tax Laws, 2019 by the CBDT, the amount that is denoted for compounding of an offense under S 276 CC is rupees 2000/- per day from the due date for filing return or completion of the assessment, whichever is earlier.[8] This is an unreasonably high amount, which is not in Pari passu with any amount portraying the loss caused to the government, due to the default.

Café Coffee Day

In 2019 when the founder and owner of the largest coffee outlet chain in India committed suicide because of alleged harassment by the former DG of the Income Tax department made to the news, various entities including political parties blasted the policies of taxation.

Tax terrorism and budget 2020-2021

The tax segment has malfunctioned for a long time. The steps of the government are far from mitigating the situation. Neither the budget nor the new developments in the finance sectors have been successful in defusing the situation. In this already complex environment, all eyes were on the budget of 2020-21 for much-needed relief. However, the Finance minister, Nirmala Sitharaman did nothing more than breaking her record for the longest budget speech of the past 70 years and still leaving everyone confused. The bombardment of clarifications began within hours after the speech. But let us not get into the optics of it all, instead, did the budget do anything about the tax burdens on the higher income group?

Niranjan Hiranandani, the MD and co-founder of Hiranandani group in a post-budget meeting stated that “lack of clarity, lack of demand, lack of liquidity and tax terrorism is what the industry has to deal with.”[9]

The whole budget did nothing to address the stringent tax margins, draconian laws, or outflow of high-income groups from India.

The stance of the government

Even if the Income-tax department and the government keep on condoning the actions by giving various arguments in favor of their acts, it’s clear as a day as to how the taxation system in the country is nothing but terrorizing for the taxpayers. Prime minister Narendra Modi when asked by the press regarding tax terrorism, answers that there is indeed tax transparency under his ruling. Individual secluded acts of torment are rare and they only happen because of some black sheep in the department[10]. But the officials can’t be blamed when they are only implementing the already existing draconian and arbitrary taxation laws. Moreover, the strict revenue collection targets by the ministry, explain the overzealous acts by the department officials.

Constant causes of tax terrorism

  1. Retrospective application of laws

“If you can’t win the game, change the rules”

So far in the various cases, it has been observed that this sort of application is doing more harm than benefit. Even though the speech of the finance minister while presenting the union budget for 2014-15 stated that “the power of retrospective legislation is to be exercised with extreme caution and judiciousness keeping in mind the impact of each sure measure on the economy and overall investment climate.”, still it is certainly a dented process. It’s curbing the fairness of the laws for the assessee. The taxpayer’s discretion and deductions can be taken away at any point by any retrospective law and this could be very hard to predict. In the Vodafone case as well, the backlash was reasonable as the government can now make any law at any point to drag the case to its side. Moreover, one retrospective application opens the floodgate to numerous ejusdem generis cases which wastes time and resources of the already overburdened courts and tribunals.

  • Appeals and revisions in frivolous cases without application of basic reason.

It has been seen time and again that in any matter where the monetary stake is high get appealed again and again, even though the merits of the case have already been decided. The CBDT also prescribes that an appeal in a case should not lie merely because the monetary limit fixed in the circular, for not preferring appeal, is exceeded. It should be decided on the merits of the case.

In the case of CIT vs. Sairang Developers and Promoters Pvt. Ltd.[11], the court called out this form of tax terrorism stating in the judgment-

“We do not find how Officers lower down in the hierarchy can take decisions to file Appeals and that too against the decision of the Tribunal. The tendency not to accept any adverse verdict on facts results in frivolous Appeals being filed in this Court. That causes huge loss to the public exchequer and results in wastage of precious judicial time of this Court. All this ought to have been discouraged a long time back…”

The courts and guidelines state the obvious, however, no concrete acts or laws are created to curb such appeals altogether. This is high time to realize that this problem not only wastes the time of the court but it also diverts attention from other important cases. Unless the personnel is incapacitated from appealing in these cases, there shall be continuous such appeals, because of the probability of winning the high finances at stake.

  • Intimidation during search and survey.

It is often seen that the search and survey are done ignoring the privacy of the individuals and with full dramatics as castle raid of doom. In various cases, the statement is obtained by mental torment after long hours or even days of search.

The judgment of Gujarat High Court in the case of Kailashben Manharlal Chokshi vs. CIT[12]  the High Court condemning the acts of the department stated that-

“…the glaring fact required to be noted is that the statement of the assessee was recorded under section 132(4) of the Act at midnight. In normal circumstances, it is too much to give any credit to the statement recorded at such odd hours. The person may not be in a position to make any correct or conscious disclosure in a statement if such statement is recorded at such odd hours…

The CBDT has also come out with instruction vide F No. 286/2/2003 dated 10-3-2003 stating primarily that

The search and survey operations sometimes result in forced confession by the assessee which is later forfeited during the filing of return. This fails the whole operation. Therefore, during these search and seizure and survey operations no attempt to obtain any confession for undisclosed income should be made.

Despite the stances of the courts and the CBDT, the provision as per section 271AAB of the income tax act allows penalty based on admission or non-admission of undisclosed income during the search in statement recorded u/s. 132(4).

Apart from these major problems in the system, problems such as non-granting of a prompt tax refund for reasons as mere as lethargy, lack of notice to assessee while adjusting refund, demands created due to high pitched assessments not being stayed till the decision by higher authorities is made, very high penalties for small offenses, etc, have added to the woes of the taxpayers. These arbitrary measures are one of the main reasons why there is an outmigration of the rich from the country.

Negative impact of millionaire Exodus on the economy before and during Covid-19

The covid-19 situation is not just a haphazard stance where the rich wander off to greener pastures to get exposure to the global market, it is a holistic diversion of wealth and investment to other lucrative countries like Dubai, which offer citizenship in return for investment, Portugal which runs Golden visa programs, Malta, Cyprus, USA, etc which provides not only a better lifestyle but also a relief from red-tapism. The migration of the super-wealthy will harm us even if it’s not permanent. They shall take away their entrepreneurial ability, their income, and wealth from the country, lower their production and reduce employment which shall drain the money in the long run. Following this trend of the millionaires, even the upper middle class is leaving the nation by pulling out their wealth[13]. The trend is showing a humongous impact on the economy of the nation forcing the country to incline towards an export-based revenue generation rather than from investments. This has not only affected the economy but also generated a dip in the Gross National Income of the country.

Even if diversification is the aim of these millionaires, still the remittance of money to foreign is experiencing a drastic increase. According to a May 2017 article in ET, Indians remitted as high as $4.6 billion to overseas as against $1.6 billion the previous year. It again reported on May 20, 2020, that the outward remittance rate of Indians reached an all-time high of $18.75 billion in FY’2020.[14]This graph went down in February next year due to the lockdowns and travel restrictions imposed.[15]

In the recent event of relocation of companies from China between  April 2018- August 2019, out of 56 only 3 came to India. A study by Nomura, a Japanese financial group stated that, countries like India and Indonesia are performing below their potential with regards to FDI in manufacturing. FDI is the indicator of external investor’s confidence and their willingness to invest for long term in India. At present only 0.6% of Indian GDP is manufacturing FDI. India needs to offer tax breaks to foreign investors, make legal reforms, and liberalize the tax reforms to make it favourable for both domestic and foreign potential investors.[16]

Conclusion

“The world is an evil place, the strong prey on the weak, and the rich prey on the poor.”

 Our movies taught us so. Our politicians vilified the rich while advocating for the interest of the commoners, and our tax laws tightened the noose around them. But that backfired. Only 1.46 crore in the country of 130 crore people pay taxes. That is only 1.6% of the country’s adults. Among these, the maximum tax collected is from the higher income group of the country. However, with the proliferating distrust and bad business environment in the nation, this number could decrease substantially soon.

Tax terror and red-tapism have intensified and progressed in frequency. The tax regime of the country is very often criticized even by international organizations and foreign countries but to no effect. The backdrop of this is clear in the economy and the statistics, but the government overlooks the situation and the draconian tax laws prevail even after backlashes. The cherry on top is the dire pandemic the country is stuck in, Covid has resurfaced this problem by proliferating it. The strings attached to the outflow are surely many, but in the current paradigm, most of the strings like better lifestyles offered by other countries, less spread of the virus outside India etc, are out of the hand. Others shall take a long time to pull. However, modification in the domestic taxation laws is the only string that’s easy to pull right now. It’s the time revive our figures and improve our spot in international domain. Without major tax reforms, a big chunk of the economy shall continue to drain to greener alternatives.


[1] https://e.issuu.com/embed.html?u=newworldwealth&d=gwmr_2020

[2] Section 2(14) – defining a “capital asset”; Section 2(47) defining “transfer” and Section 9- defining income deemed to accrue or arise out of India was amended by the 2012 amendment.

[3] Section 9 – This provision defines when income is deemed to accrue or arise in India. – it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share of the interest derives, directly or indirectly, its value substantially from the assets located in India.”

[4] https://www.civilsdaily.com/news/lessons-to-learn-from-vodafone-ruling/

[5] Vodafone International Holdings B.V. Vs. Union of India (UOI), 2009(4)BomCR258.

[6] Moneylife News Bites (2019, August 20) Tax Terrorism: Embedded in-laws and practice . YouTube. https://youtu.be/OrWxolu5H4I

[7] Section 276C of IT act, 1961. The limit of 1 lakh is for defaulters until 30-6-2012, for the further evaders the limit is increased to 25 lakhs rupees.

[8] https://www.pwc.in/assets/pdfs/news-alert-tax/2019/pwc_news_alert_19_june_2019_cbdt_issues_revised_guidelines_for_compounding.pdf

“Compounding fees- · Offences punishable under sections 276CC and 276CCC of the Act. – Default in furnishing return of income within due date under section 139(1) of the Act – Tax on returned income (reduced by tax withheld and advance tax) exceeds INR 25,00,000 – INR 4,000 per day. Any other case – INR 2,000 per day. …”

[9] https://www.moneylife.in/article/budget-20-21-disaster-in-substance-and-optics/59365.html

[10] https://economictimes.indiatimes.com/news/economy/policy/modi-has-a-message-for-growth-ambassadors-tax-black-sheep-10-key-highlights-from-pms-interview/articleshow/70638525.cms?from=mdr

[11] Income Tax Appeal No. 2603 of 2011.

[12] 328 ITR 411 (Guj.)

[13] https://www.cnbc.com/2021/05/07/jetsetgo-ceo-indias-rich-are-not-the-only-ones-fleeing-covid-crisis.html

[14] https://economictimes.indiatimes.com//news/economy/finance/outward-remittances-at-all-time-high-in-march/articleshow/75835690.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[15] https://economictimes.indiatimes.com/news/economy/finance/outward-remittances-slows-down-during-the-pandemic/articleshow/80673004.cms

[16] https://www.livemint.com/industry/manufacturing/why-manufacturers-are-not-rushing-into-india-11570429217983.html

Author– Sikha Suman (School of law, UPES, Dehardun)

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