The ripples from the 2008 global financial crisis (GFC) were felt all around the world, causing unprecedented strain on national exchequers and on companies’ balance sheets for several years. The COVID-19 pandemic is expected to cause greater economic hardship than even the GFC or the great depression of 1929. Such events often lead to policy makers pushing for aggressive tax regimes aimed at bulking up national exchequers and tightening of regulatory frameworks to prevent leakages from their economies through tax evasion, money laundering and other such white-collar crimes.
In keeping with the global trend, India has, in the recent past, adopted a very strict approach towards offenses such as tax evasion, money laundering and benami transactions. The current pandemic and its economic repercussions are sure to test the regulatory framework as individuals and corporates alike are tempted to push the envelope. Even prior to the pandemic, the Indian Income Tax department had detected approximately INR 37,946 crore worth of tax fraud in financial year 2018-19 and INT 6,520 crore in April-June 2019.
This Article, the first in a series of several, attempts to analyse the regulatory framework put in place to check white-collar crimes such as tax evasion, money laundering and financial fraud. In the remaining series, we shall deal with corporate strategies that companies/ individuals may adopt to mitigate risks arising out of potential violation of the law, while addressing the risk of liabilities of directors and key managerial personnel with respect to such white-collar crimes.
Consideration under tax laws
As is the case worldwide, India has been evolving systems to curb aggressive tax avoidance strategies. Traditionally and internationally it has been upheld that a taxpayer is within his right to organise his affairs remaining within the legal framework such that his tax incidence is minimised. This is recognised as, using tax avoidance strategies. However, when these strategies become aggressive, the thin line between tax avoidance and tax evasion is crossed. And while the tax administrations are weary of and want to prevent tax evasion, their measures could also result in encroaching upon the ability to do tax planning.
The Supreme Court (SC) in the case of A. Raman upheld that a taxpayer may plan/ structure his income prior to its accrual to reduce or avoid tax liability as long as the provisions of the law are not violated. In the case of McDowell, SC held that if a transaction is undertaken within the legal framework, tax planning is legitimate and is permitted. However, it cautioned that colourable device cannot be permitted for the purpose of avoiding tax. This caution has been used extensively by tax authorities to invoke ‘subterfuge or colourable device’ in denying the benefit of reduction in tax incidence when innovative structures are resorted to. In Azadi Bachao Andolan and finally in the Vodafone case, the SC held that tax planning is legitimate if it is well within the four corners of the law. It reiterated that it is only when an artificial structure with the purpose of reducing tax liability is utilised, the transaction becomes illegitimate.
To prevent tax leakage through aggressive tax planning, many jurisdictions around the world have introduced general anti avoidance regulations (GAAR). India introduced GAAR in the Income-tax Act, 1961 (IT Act) in 2012, which became effective from April 01, 2017. Under GAAR, an arrangement may be disregarded if it is an impermissible avoidance arrangement (IAA). The IT Act also has specific anti-avoidance rules (SAAR) in relation to several specified transactions.
While it is too soon for seeing the impact of invocation of GAAR, India has witnessed significant litigation in respect of transfer pricing regulations (TPR), which is also one of the SAARs. Under TPR, Indian has witnessed tax authorities taking aggressive approach, resulting in increased tax litigation. It is disconcerting to note that even in cases where higher judicial forums have upheld a particular tax position and/ or the language of the statute is clear, tax authorities tend to deny the benefit to the taxpayer.
We have seen the tax department issuing notices, demonstrating their aggressive stand on taxability. This creates uncertainty and is viewed as tax terrorism. Where the white-collar crimes are impacting taxation of an individual, it is important to assess the impact of those incidences on tax exposure and comprehensively address the issues.
Regulatory framework to curb white collar crimes
Empirical evidence suggests that white-collar crimes, such as tax frauds, corporate frauds, etc., tend to increase in times of economic pain. The economic effects of the current pandemic may last for years to come. Only time will tell how corporates and individuals are able to find opportunities in challenges and overcome economic turmoil. Desperate situations lead to desperate measures. Moreover, the government’s resolve to curb black money and clean up the system is bound to be tested. Understanding the regulatory framework put in place is essential in understanding whether the Government will be successful in its endeavour to clean up the system.
The Prevention of Money Laundering Act, 1988 (PMLA) was enacted to inter alia prevent money laundering and for confiscation of properties derived from such proceeds of crime. A person would be guilty of money laundering offence if he directly/ indirectly indulged in concealing/ possessing/ using proceeds of crime. The punishment for this can be imprisonment for 3-7 years and fine. The Enforcement Directorate (ED) is responsible for enforcing provisions of PMLA, for investigation and prosecution, including search, seizure, arrest, attachment of proceeds of crime, etc. ED officers are also responsible for collecting, developing, disseminating intelligence relating to violations of provisions of the Foreign Exchange Management Act, 1999 (FEMA), such as cross-border gifts involving non-resident Indians/ persons of Indian origin, investigating hawala transactions, and imposing criminal and monetary penalties. The ED has been very active over the last decade and several corporates and individuals alike have been booked under PMLA provisions.
Person(s) may also be penalised under the IT Act, which imposes penalty on a taxpayer for inter alia laundering money to circumvent tax laws, under-reporting, and misreporting of income, failure to furnish returns, non-compliances with notices, concealment of income, etc. Authorities such as the Economic Offences Wing (which is a special wing of the state police) and Central Bureau of Investigation (CBI) are often involved in investigations in such tax related criminal offences.
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (to curb the unaccounted wealth) (Black Money Act) was introduced as yet another tool to deal with undisclosed foreign income and assets. As stated above, apart from GAAR, the IT Act has several provisions to curb tax avoidance. The transfer pricing provisions are an example of SAAR. In 2012, the transfer pricing provisions were extended to certain specified domestic transactions as well. Further, vide Finance Act, 2017, new restrictions on interest deductibility also known as thin capitalisation rules were introduced.
Following the 2012 Vodafone judgment, provisions were introduced in the IT Act to deal with Indian tax net income arising from transfer of shares of foreign companies if the shares or interest of the offshore entity derives substantial value from assets in India. Further, to curb the practice of closely held companies giving loans or advances to its shareholders, or any concern where a shareholder holds substantial interest, such payments are deemed as dividends for tax purposes and taxed as such.
Benami transactions have also been an infamous method of parking undisclosed income, which is clamped down by the Prohibition of Benami Property Transactions Acts, 1988 (Benami Transactions Act). Such a transaction is one wherein although a property is purchased in the name of one person, the said person neither pays for it nor enjoys the property. Pursuant to the amendment to the Benami Transactions Act in 2016, the authorities have been given more power to curb benami transactions, and can confiscate the property and ensure that the property is not returned from the ‘benamidar’ to the real owner. While benami transactions have been prohibited since the enactment of Benami Transaction Act in 1988, the 2016 amendment has given it more teeth, with the larger objective of cleaning up the system and increasing the tax base. The income tax authorities have been bestowed with the power to initiate action under the Benami Transactions Act.
In addition to the Income Tax department, the ED, and the CBI, pursuing tax evasion through corporate and securities fraud, in 2015, the Government of India established the Serious Fraud Investigation Office (SFIO) under the Companies Act, 2013 ( Companies Act), empowering SFIO to investigate corporate frauds, which has been defined under Section 447 of the Companies Act. SFIO may investigate into the affairs of a company inter alia on receipt of a report by the registrar or on inspection, in public interest, on request by the Central/ State Government. The tax authorities also have broad powers to call for any information and/ or document under Section 131 of the IT Act, which are similar to those vested in a court under the Code of Civil Procedure, 1908. These powers include discovery, inspection, enforcing attendance of any person for examination, compelling the production of books of accounts, etc. Failure to produce document or information is a punishable offence under Section 276D of the IT Act with rigorous imprisonment up to one year. Also, falsification of books of account or document is a punishable offence, under Section 277A of the IT Act with rigorous imprisonment for a period, which may extend up to two years.
Thus, the Government has created sufficient ammunition to tackle the menace of white-collar crimes. Enforcement agencies and tax authorities are expected to be ever more vigilant in assisting the government achieve its objective.
The message is clear!
It can be seen that India has put in place a very strict regulatory framework to combat tax evasion and corporate fraud. The government has made it clear that it is in no mood to tolerate activities that may be detrimental to the economy or short-change the investors or the revenue. Enforcement agencies have been given the licence to be aggressive. Understanding the complex legislative framework and strategies to mitigate risks is becoming ever more important for corporates and individuals alike. Companies and their key managing personnel will have to tread cautiously while not only surviving the economic turmoil, but also in ensuring that they do not fall foul of the regulations. We shall be focusing on such corporate strategies at the level of company as well as individual, to mitigate risks arising out of corporate fraud and tax risks, in the remaining parts of this series.
 CIT v. A. Raman and Co.,  67 ITR 11 (SC).
 McDowell & Co. Ltd. v. CTO, (1985) 154 ITR 148 (SC).
 Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) at p 133.
 Vodafone International Holdings BV v. Union of India, (2012) 341 ITR 1 (SC)
 An IAA is “an arrangement, the main purpose of which is to obtain a tax benefit”
 The act was enacted in January 2003, however the act along with the rules were brought in force in the year 2005
 The said act was enacted in furtherance to the Political Declaration adopted by the Special Session of the United Nations General Assembly held in the year 1998 which required States to enact domestic laws on money laundering
 Section 3 of PMLA, 2002 which reads as “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.”
 Section 4 of PMLA, 2002
 Section 2(9), The Prohibition of Benami Property Transactions Act, 1988