Pranab Naik* was puzzled when the letter first arrived. It was a show-cause notice from the Income Tax (I-T) department. Naik, who runs an eight-year-old content company, had received the notice for a delay in payment of tax deducted at source (TDS).

Naik admits there was a five-month delay in paying TDS. “It happened around 2016-17, between the demonetisation and GST period,” Naik says. The delay was on account of the company lacking working capital during this time.

“We had no money as we haven’t raised fresh capital for a while, and the working capital failure was compounded by the fact that payments were getting delayed from our clients, and in some cases, clients had just stopped working because they were trying to recover from demonetisation,” he says. “This was specific to us because we are a consumer product company,” he adds.

Even so, the notice was something of a shock. Because though the TDS amount was large—around Rs 1 crore (~$140,500)—Naik had voluntarily deposited the amount along with the late fees incurred almost a year before the tax department put him on notice.

Some Stats

Naik is one of many business owners feeling the heat as the tax department gets increasingly litigious. Of late, there’s been a huge jump in the number of prosecution proceedings initiated by the I-T department. A January 2018 press release by the Ministry of Finance (MoF) states that for FY18, till the end of November 2017, the department filed prosecution complaints for various offences in 2,225 cases. This is a 184% increase from the corresponding period for FY17, where 784 prosecution complaints were filed.

These complaints have been filed on various counts—for offences where the I-T department feels there has been a wilful attempt to evade tax or payment of any tax, a wilful failure in filing returns of income, failure to deposit TDS or delay in doing so.

The crackdown on TDS payment though is a relatively new phenomenon, and one that has very serious implications on the business ecosystem in the country. “TDS was one subject, which until a few years was not really within this structure and notices were never sent this aggressively,” says Rohit Golecha, senior manager at accounting firm Banshi Jain & Associates in Mumbai.

In an October 2018 report by the English daily The Times of India, AA Shanker, principal chief commissioner of Income Tax for the Mumbai region, said that the tax department has been rigorously pursuing TDS default cases. “Since last year, we have filed more than 800 prosecution cases. We are also carrying out investigations, including surveys, to detect TDS default cases,” he said.

The taxman would have you believe that this is all in an attempt to crackdown on black money. However, things are not so cut and dried. “In a lot of cases, we are seeing that voluntary payments are done by taxpayers, but still they are receiving show-cause notices,” says Ashish Mehta, principal associate at law firm Khaitan & Co.

Actions Taken

It goes deeper though. While the Income-tax Act, 1961, requires officials to prosecute people like principal officers, directors, managers, etc. who are liable for the day-to-day affairs of the company, the I-T department has sent notices to all directors of a company—even independent and nominee directors—who generally do not fit this description. “Independent directors wouldn’t even know if a company has defaulted on TDS payments or not, because that’s not their role in the company,” Mehta explains. “We have recently been able to get relief for independent and nominee directors before appropriate fora in such prosecution cases,” he adds.

In the last few months, issues surrounding Angel Tax—where startups have been receiving tax notices for funding raised—have commanded the limelight. But the situation on the ground is murkier. Entrepreneurs and small business owners are dealing with several issues from the tax department. These aren’t just harmful to the free market, but could also hurt the Indian government’s ‘Make in India’ and ‘Startup India’ initiatives.

Interestingly enough, for moves that could hurt two of the government’s most vaunted schemes, they come in an attempt to meet targets set by the government itself.