Jail time for tax evaders creates social deterrence
The Supreme Court-appointed Special Investigation Team's recommendation to the apex court that tax evasion be made a predicate offence has the potential to be gamechanger. Hopefully, the Supreme Court will forward it to the Government which, in turn, must consider it in all seriousness. If the recommendation is implemented, and the Prevention of Money laundering Act, 2002, is accordingly amended by Parliament, it will go a long way in not just discouraging tax evasion but also coaxing foreign Governments to better cooperate in Indian tax investigations.
At present, tax evasion is a primarily civil offence in India, meaning those who are caught defrauding the state are only expected to pay up their dues and some additional penalties — they are not put behind bars. However, if the SIT's recommendation becomes the law, then those who do not pay their taxes will have to face jail time. This is already the case in many Western countries, and it is high time that India also treat its tax evaders strictly.
Moreover, the possibility of incarceration should serve an especially effective deterrent in this country because, as in elsewhere in the world, such blue collar crimes are committed by otherwise ‘respectable' people — from small business owners to MNC chiefs and industry captains. For them, it is one thing to pay a fine or face a tax audit but quite another to spend time in a prison cell with rapists and murderers. That said, effective deterrence can only be established if there is strict implementation of the law. let us not forget that the Income Tax Act of 1961, for example, stipulates jail time for various offences relating tax fraud but these are hardly enforced.
In India, tax evasion is rampant and it is estimated that, annually, the country loses trillions of rupees in unpaid taxes. In other words, every year trillions of rupees that could have been used to build roads and highways, fund poverty alleviation programmes and provide better education and healthcare to the people do not even make it to the public treasury.
This is, indeed, a national crime and it is only fair that stringent punishment be given in such cases. Moreover, the money that is illegally ‘saved' is also rarely used for productive activities. Because the money has not been declared to the authorities, it is extremely difficult to re-invest it in legitimate business through legal channels. In such cases, the money is either spent on under-the-table consumption (such as high-end designer clothing that cost lakhs of rupees and is paid for in cash) or siphoned out of the country and parked in a safe haven abroad.
Note how this fuels a vicious circle of black money and financial fraud, both within the country and internationally. To understand the gravity of this problem and see how it often subsumes even honest and upright citizens, one only has to look at India's real estate industry. Anybody who has ever tried selling a house in this country will testify that it is almost impossible to get the entire sale price on the record. A large chunk of the actual transaction value is exchanged in cash, while a ridiculously small amount is shown on paper. Those who refuse to accept bag loads of currency have to settle for a much lower price. It is no coincidence then that the SIT has also recommended a Rs15 lakh ceiling for cash-in-hand.