What Income Tax Department's Warning On Fraudulent Claims Means For Salaried Employees

In the Budget speech, Finance Minister Arun Jaitley had appreciated the contribution of salaried taxpayers towards annual tax revenues by way of taxes. As per the statistics presented by Mr Jaitley, in the Assessment Year 2016-17, the salaried individuals had paid average tax of Rs 76,306, in contrast to average tax of Rs 25,753 paid by the individual businessmen including professionals. The salaried taxpayers are always considered honest taxpayers. However, a recent advisory issued by the Central Board of Direct Taxes (CBDT) - the apex policy-making body of the Income Tax Department - to salaried taxpayers is in contradiction with this impression.

The CBDT has issued the advisory to employees to warn them against using any fraudulent practices of inflating the income tax refunds by filing wrong claims in the income tax returns. The advisory issued by the CBDT is a clear message that the Income Tax Department is aware of all fraudulent practices adopted by them. The department has advised the salaried taxpayers not to fall prey to false promises or wrong advice of tax professionals, otherwise it would be treated as a case of tax evasion.

How is the amount of tax refund inflated?

Income under the head salary is subject to TDS (Tax Deducted at Source) under Section 192 of the Income Tax Act. Tax to be deducted every month from the salary of the employees is calculated by dividing the amount of total tax by the total number of months of employment with current employer. An employee is given an option to declare all other income and deductions to the employer, who shall calculate the annual tax liability and tax to be deducted per month from the salary of the individual.

The CBDT has observed that salaried employees are claiming refund of tax deducted from salary income by reducing their income tax liability. The income tax refund is wrongly generated due to under-reporting the income by inflating the tax deductions or by wrongly claiming the tax-free allowances. Tax consultants are misguiding the employees to lodge false claims in income tax return or if returns are already filed, they are advising them to revise the returns with false claims so as to get the refund of tax deducted by the employer.

The CBDT has claimed that all the ITRs are processed by the Centralized Processing Center (CPC), Bangalore without any interaction with or enquiry from the taxpayers. The processing of ITR by CPC-Bangalore is done by an automatic programme to ensure hassle free services and timely issuance of refunds. The CPC just validates ITRs and points out apparent mistakes in the ITRs, i.e. calculation mistakes, income found in Form No. 26AS but not reported in ITR etc.

The CPC-Bangalore doesn't have any mechanism to detect any under-reporting of income or inflated claims made. Thus, if ITR is complete in all respect, even though with fraudulent claims, the CPC will issue the tax refunds.

In contrast, the CBDT has an extensive risk analysis system aimed at identifying the persons who are non-compliant or tax evaders. In case any fraudulent claim is noticed, the Income Tax Department may initiate penal and prosecution provisions of the Income Tax Act, 1961 against taxpayer. The department may also prosecute the tax professionals who are advising taxpayers on various fraudulent activities.

Section 270A of the Income Tax Act deals with penalty provisions in case of under-reporting of income, and attracts a penalty of 50 per cent of the tax payable on under-reported income. However, if under-reported income is in consequence of any misreporting by the taxpayer, the penalty shall be equal to 200 per cent of the amount of tax payable on under-reported income.

Besides, the taxpayer is also liable to be prosecuted under Section 276C for a period of six months to seven years in case tax sought to be evaded exceeds Rs. 1 lakh, and three months to three years in all other cases.

(Naveen Wadhwa is DGM at Taxmann.com)

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