Bribes gradually becoming legal for the Indian taxman

The Indian tax authorities are gradually moving towards an amoral approach towards bribery and illegality.

R Jagannathan June 09, 2012 12:22:19 IST
Bribes gradually becoming legal for the Indian taxman

Slowly, silently, the ethical norm that bribery should be illegal is giving way to the pragmatic idea that if you can't avoid it, try and look the other way or even seek to gain from it.

That, at least, is the approach the taxman seems to be taking in India.

Last year, the Income Tax Appellate Tribunal (ITAT) ruled that four Jharkhand Mukti Morcha (JMM) MPs, who took cash bribes from the Congress to save PV Narasimha Rao's government in a 1993 confidence vote, need not pay taxes on their ill-gotten money. (Read here).

As Firstpost noted at that time, "what the ITAT has done is buy the fiction that the money received by JMM members for voting with the government was in the nature of a 'political donation.' Since political donations are tax-free (one wonders why politicians need bribes then), the crores paid out by the Congress are thus tax-free."

Now, another ITAT bench has ruled that bribes paid abroad for contracts secured can be deducted as costs incurred by a company. According to a report in The Economic Times on Saturday, ITAT's Kolkata bench has said that these costs can be set off against income since the Indian company concerned did not know its money was being used to bribe people.

Says the report: "The explanation to section 37 (I) of the Income-tax Act does not allow tax benefits for illegal payments. Yet, the ITAT justified its decision by holding that there was no material to suggest the taxpayer company, Rajarani Exports, was aware that the payment it made would end up as kickbacks."

In short, if a company has plausible deniability on illegal acts, it can claim a tax benefit on money that may finally have gone to pay a bribe.

In the Rajarani case, it seems that the company had exported tea to Iraq under the UN's oil-for-food scheme when that country was under sanctions. But an independent inquiry discovered that Rajarani had exported its consignment using a Jordanian company called Alia Transportation. Alia was paid a commission to enable the transaction. This commission ended up in Iraqi hands like a bribe.

ITAT took a lenient view of Rajarani's indirect bribery, though it is a moot point whether companies willingly pay commissions without knowing what the money is intended for are all that innocent. It's no different from the companies who happily invested in YS Jaganmohan Reddy's companies and claimed these were commercial decisions with no quid pro quo. But the CBI still thinks it has a strong case.

Bribes gradually becoming legal for the Indian taxman

If a company has plausible deniability on illegal acts, it can claim a tax benefit on money that may finally have gone to pay a bribeReuters

More recently, the taxman has done deals with Swiss account holders in pursuit of revenues over what could be criminal or illegal stashing of wealth abroad.

In November, Firstpost noted how the Mumbai tax department had asked taxpayers to make "voluntary disclosures" on their HSBC accounts in Switzerland and pay their taxes. No criminal prosecutions were apparently pursued.

The taxman got a list of Indian account holders with HSBC from the French government, which, in turn, had obtained the list from a former bank employee who stole the data in 2008.

Once again, despite the big political debate on how we should treat offenders who had money stashed away in Swiss accounts, the taxman has done his own thing. He has got around the illegality of it by merely taxing the money disclosed.

In practice, it seems, the ITAT and the tax authorities in general seem to be moving towards an amoral view of bribery and illegal wealth - from petty money to big money.

Last year, the finance ministry's Chief Economic Adviser, Kaushik Basu, raised eyebrows when he suggested that small-ticket bribes should be legalised. In a paper titled 'Why, for a class of bribes, the act of giving a bribe should be treated as legal', Basu said the Prevention of Corruption Act treated both bribe-giver and taker as equally guilty. While this may be true when bribes are given for mutually beneficial reasons, everyday bribery takes the form of harassment of citizens when bureaucrats, or people in a position to block or delay what you are entitled to, demand speed money."

Basu said in his paper: "Harassment bribery is widespread in India and it plays a large role in breeding inefficiency and has a corrosive effect on civil society. The central message of this paper is that we should declare the act of giving a bribe in all such cases as legitimate activity. In other words, the giver of a harassment bribe should have full immunity from any punitive action by the state."

Basu's views have been supported by no less than that paragon of corporate ethics, NR Narayana Murthy of Infosys (read here).

And in the latest budget, Pranab Mukherjee has quietly inserted provisions that will enable the taxman to take his bite on "unexplained" sources of income at the top rate.

The explanatory memorandum to the budget says this provision is being made because even though section 68 of the Income Tax Act allows unexplained money to be taxed, the courts have said that the onus of proof to show the money should be taxed need not be entirely with the assessee. The finance minister clearly wants to change that.

In fact, the budget's provisions go farther and say that you may be taxed for unexplained incomes even if your tax rate is below the limit for taxation.

Says the memorandum: "Under the existing provisions of the Income-Tax Act, certain unexplained amounts are deemed as income under section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and are subject to tax as per the tax rate applicable to the assessee. In case of individuals, HUF, etc, no tax is levied up to the basic exemption limit. Therefore, in these cases, no tax can be levied on these deemed income if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate."

If you want to tax people below the tax-free level, you are really going after people like the office peon or small-time fixers. This suggests that even petty bribes may now be taxable, even though there is no mention of giving the bribe-taker immunity from prosecution.

The Indian tax system appears to be slowly working out a compromise solution with bribery instead of trying to eradicate it.

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