Tax evaders: FinMin plans velvet glove before iron fist

“FinMin to write ‘polite letters’ to tax defaulters” said a headline of an article published in the Business Standard today.

Those who have defaulted on service tax, customs and excise duty will get “polite letters” asking information about their pending liability and any suspicions on dealings by them, possibly with black money, said the article.

The idea is to send non-intrusive letters asking clarification about certain financial transactions which are either red flagged by economic intelligence agencies as black money, or may be these transitions were seen as attempts to avoid paying taxes.

“These (sending letters) would be a very useful first step,” a finance ministry official has been quoted as saying.

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A draft of the letter, which contains the summary of financial transaction, has been approved by the Finance Minister. The finance ministry feels that sending these letters will help check tax evasion and result in more voluntary filing of returns by such dodgers.

As of now only the income tax department will send such letters to tax defaulters. Going forward, the Directorate General of Central Excise Intelligence the (DGCEI) will send the letters to service tax and excise duty defaulters, the Directorate General of Revenue Intelligence (DGRI) will send them to Customs duty evaders.

So, by sending polite letters, looks like the authorities want to improve people’s faith in tax authorities.

So what’s the logic behind sending polite letters by FM?

We think the logic behind the polite letters is simple. Before giving an outright notice to the defaulters, the finance ministry is sort of sending an indirect message to defaulters that you are being watched.

And, a letter like this would possibly lead many defaulters to voluntarily pay their overdue taxes. So, in a way, we could say it’s like a bank sending you a polite SMS about your overdue credit card bill, before they actually start recover process.

However, a chartered accountant said the initiative does not make much sense.

“If you could recover dues by sending letters, everybody would have sent letters and got their money. At the most, this will show that the defaulters are on the radar and only a few of them are likely to pay up,” he said.