Frauds against the Revenue

AuthorB.V. Kumar
Publication Date01 Apr 1999
Frauds against the Revenue
B. V. Kumar
Journal of Financial Crime Vol. 7 No. 2 Taxation
Economists who have studied the economics of crime
and other illegitimate activities have pointed out that
criminals behave according to economic axioms and
tend to evaluate the marginal costs and marginal
benefits of such activities. Criminals, as economic
agents, consider the probability of capture, convic-
tion and penalisation as costs of the process of
criminal activity. These rational individuals often
recognise that these probabilities are quite low, at
least in many countries, and crime occurs as a result.
Fraud against revenue in its elementary form
would manifest itself as tax evasion (in direct and
indirect taxes) and fraudulent claims in the form of
refunds, rebates and subsidies. Tax evasion is deter-
mined by a mix of a country's economic structure,
tax structure and social milieu. In the case of develop-
ing countries, tax evasion is linked to the economic
structure, low level of monetisation and small tax-
payer units. The lower the monetisation and the
smaller the tax-payer units, the more the tax evasion.
A tax structure that is complex or is perceived to be
unfair by the public is likely to result in higher tax
evasion. Furthermore, a weak and inefficient tax
administration spurs evasion.
Tax evaders employ various modus
to achieve
their objective. In direct taxes, they include:
non-reporting or under-reporting of income and
over-reporting expenses
fragmenting income to reduce tax liability
non-reporting or under-reporting of sales and
maintaining illicit financial accounts
claiming excessive tax credit
corporations, particularly multinationals through
'transfer pricing', 'tax farming' or inappropriate
exchange rate transactions (where exchange
restrictions apply), may avoid or evade taxes.
Fraud against the Revenue is not only a Revenue and
a moral problem. The potential and propensity for
tax evasion varies for each sector and it has pervasive
economic effects on demand and supply of various
goods and services, savings and investment. Savings
and investment tend to flow to sectors where evasion
is easier and where potential for evaded income is
A few examples will illustrate the point.
Non-reporting or under-reporting of
income and wealth
Specific information was received that one of the
large manufacturers of chewing tobacco based in
Calcutta suppressed his income and did not disclose
such income to the income tax authorities. Infor-
mation received further revealed that he kept his
concealed income in the form of fixed deposit
receipts of small denominations and kept them in
safe-deposit lockers in one of the banks. On the
basis of the above information, officers of the
Directorate of Revenue Intelligence carried out
searches of the residential premises of the manu-
facturer. They did not find any incriminating
documents or cash, but found a safe-deposit locker
key of a bank. When the safe-deposit locker was
opened it did not contain anything except a bunch
of keys of safe-deposit lockers in the same bank.
With the help of these keys a number of lockers
were opened. The lockers contained hundreds of
fixed deposit receipts of denominations varying
from Rs 3,000 to Rs 5,000, in the names of fictitious
persons. On the reverse side of the fixed deposit
receipts, signatures of the fictitious persons were
affixed and such signatures were duly attested by
the bank manager of the same bank. The idea was
that when the fixed deposit receipts matured the
identity of the owner would be duly verified by
the manager, to facilitate payment. The value of
the fixed deposit receipts was more than Rs 10m.
The collusion of the bank manager was apparent
in as much as he attested the signatures of all the
fictitious persons on the reverse side of the fixed
deposit receipts to facilitate encashment. The tax
evade was Rs 4m and in addition the person was
liable for various penalties for concealing income
and wealth.
Journal of Financial Crime
Vol 7 No 2, 1999, pp 175-178
© Henry Stewart Publications
ISSN 0969-6458
Page 175

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