At the heart of the problem is a recent Central Board of Direct Taxes (CBDT) circular that gives additional powers to the taxman to initiate prosecution against those evading taxes. Prosecution notices make such cases equivalent to criminal offences and give income tax officers powers akin to those of the police, said experts, adding that taxpayers could seek relief only from a magistrate’s court in such instances.
New taxation rules mean unlike earlier, any expatriate in a company whose tax deducted at source (TDS) has not been paid by the company, would face prosecution by the revenue department. The problem, claim several industry experts, is a procedural one and tough for several companies to tackle.
When an expat was to join India office, he would usually come down and test the waters for a few months before deciding whether to move in on a long-term basis. During this short stint, he would pay taxes in India even as his payroll is still out of his home country. Towards the end of the financial year, the Indian subsidiary would typically deposit the TDS and pay interest or penalty if applicable, say tax experts.
“Due to practical difficulties causing delay in decision to move payroll of expats to India, the TDS paid by the Indian company may be delayed, but unlike earlier, the company and its India director would face prosecution,” said Sandeep Bhalla, a partner at Dhruva Advisors.
Under earlier regulations, companies could get away with “compounding”, wherein they would pay any additional taxes to the department to avoid legal issues. Under the revised guideline, the taxman would have an option to trigger prosecution if the delay in payment was either discovered by him before the company disclosed it, or if it had happened thrice earlier.
This is where the problem lies. Often, the directors of MNCs who would face prosecution would be expats, and they would have to declare it to their respective stock market regulators and tax authorities.