Direct Taxes Enquiry Committee Report

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The money earned by means of violating legal provisions and social conscience or the money which is kept secret and unaccounted for is termed as Black Money .Black Money generally refers to unaccounted/undisclosed wealth/income and wealth involved in transactions suppressed wholly or partly .While tax evasion leads to black money and black money in turn leads to pursuing secretive business practices and further tax evasion.

Black Income has disastrous effect on economy because resources needed for development, are not visible as business is carried in black. Only guesstimates of black economy are available. Black economy is very large .A systematic study of economic framework is incomplete without considering black economy as it affects every aspect of economy and in turn gets affected by it too.

One of the first reports on direct taxes Direct Taxes Enquiry Committee Report,1971 in the country also known as Wanchoo Committee Report made following observations about black economy "cancerous growth in country's economy which ,if not checked in time can surely lead to its ruination".

Theory :

Wanchoo Committee was formed on 2nd March, 1970 by a resolution of Government of India with following objectives:

Committee was supposed to recommend the ways to check avoidance of tax through various legal lacunae, to unearth black money and prevent its expansion through further evasion and to reduce tax arrears.

Examination of exemptions allowed by the tax laws and evaluation of scope for their reduction, modification or altogether withdrawal.

The committee was expected to suggest methods for better tax assessment and improvement in overall tax administration to bring into effect the recommendations made by the committee itself.

This paper studies he contemporary relevance of recommendations made by Wanchoo Committee focusing on methods for control of black economy.

Summary of Wanchoo Committee Report :

Wanchoo Committee report is broadly divided into five sections namely:

(A) Black Money and Tax Evasion.

(B) Tax Avoidance.

(C) Tax Arrears.

(D) Exemptions and Deductions.

(E) Tax Administration.

Since this paper focuses on methods for control of black economy, only sections (A), (B) were found to be relevant for the purpose.Thus the remaining three sections have been kept out of consideration.

(A) Black Money and Tax Evasion :

This committee based its guesstimates for Black income/economy on somewhat modified form of method applied by Nicholas Kaldor in 1956 The committee concluded that assessable non-salary income and actually assessed non salary income for the financial year 1961-62 were Rs.2,686 Crores and Rs.1,875 Crores .Income which escape tax comes out to be Rs.811 Crores. Thus the assessable non-salary income for the year 1965-66 comes ut to be Rs.4,027 Crores .Similarly applying ratios of evaded income to the assessable non salary income pertaining to the year 1961-62 to the year 1965-66 the evaded income for 1965-66 comes out to be Rs.1,216 Crores. Even after making certain adjustments the committee reached at a final figure of tax evaded of Rs.700 Crores for 1961-62 and Rs.1,000 Crores for 1965-66.In an analogous manner if we project the estimates for 168-69 it comes to Rs.1,400 Crores.

Reduction in tax rates: The committee places this as foremost reason for tax evasion as this makes tax evasion so lucrative in spite of large risks.The combination of high tax rates and large scale tax evasion has created a vicious circle. It found that high tax rates are more income gap widening as they make poor even more poorer and rich more rich. For an honest citizen high tax rates act as a disincentive to increased productive effort and higher earning, only solace being in either to stop your earning from increasing after a certain level or avoid/evade tax. Further the committee finds it totally infeasible to have such high tax rates in normal times. Thus leaving little leeway with Government in times of emergency. High rates of taxation also reduce the capacity of an individual to save and invest. High marginal rates of taxation also promote wasteful expenditure.Thus the committee recommended that the maximum marginal rate of income-tax ,including surcharge should be reduced from 97.5% to 75%.It also recommended the reduction in tax rates of middle and lower income levels.The proposed changes the committee insisted should be done in one go to create an impact.

Minimisation of controls and licenses: Vicious circle is made up of controls and black money. Control leads to black market, black market leads to black money which in turn leads to tax evasion. Controls always command premium and premium is often paid and received in cash to avoid detection. In field of import licensing the system of unofficial premium is widespread the indicator of same being regular rates being published in some newspapers by commercial entities. 'Pugree' system in the arena of rent control is also an example of circumventing the laws. The committee said "When controls seek to remedy an evil and in the process generate another , which of the two evil is greater? In a developing economy like ours controls cannot be avoided and in some cases might be necessary and even desirable even at the risk of some abuse". The committee thus recommends formation of committee of experts to check the feasibility of all existing controls, licenses and permit systems and suggest elimination of ones no longer needed. This committee can further suggest ways in which extremely essential controls are administered in a manner so as to give least hardship to the public.

Regulation of Donations to political parties: Committee knew the need to keep political system free from corruption, thus ban on companies donating money to political parties should not be removed. It further recommended that there can be a way devised like that in Germany or Japan i.e. funding of political expenses made by political parties by Government. Even if Government chooses other way round the parties should be asked to get their accounts audited and published annually. As to the additional sources of income, needed by political parties they can be generated by individual donations but in no case should the corporate donations be allowed. These donations should be allowed as deductions from gross total income subject to some restrictions.

Creating confidence amongst small tax payers: Fear of tax department officials and lack of confidence in its fairness also leads to tax avoidance and not filing returns. Disallowing expenses indiscriminately, estimating income in small cases and increased estimates of incomes as a matter of routine were few reasons committee gave for department's bad image. The practice of being too detailed in small cases which involve no substantial revenue should be done away with to pave the way for increase in such returns.

Allowance of certain business expenses: There are some business expenses related to entertainment and guest houses which need to be done regularly in view of commercial expediency. If these expenditures are not allowed to be deducted in arriving at total income, they prove to be a tax burden on assessees. Though curbing personal and non-business expenses is feasible overall disallowance of entertainment expenditure was found extremely harsh and poses undue hardships to earnest tax payers by committee. Committee recommended the allowance of entertainment expenditure incurred primarily for furtherance of tax payer's business and directly related to business conduct subject t ceilings prescribed under sub-section (2A) of Sec.37 of Income Tax Act,1961.

Changes in penal provisions: Committee found that "penalty serves its purpose so long as it is within reasonable limits". A penalty based on income hits small assessees more severely. Committee suggested that the amount of penalty imposed should be based on tax evaded rather than on the basis of income concealed. Further minimum penalty should be tax sought to be evaded and maximum penalty should be twice the amount of tax sought to be evaded. Tax sought to be evaded is difference between tax assessed in respect of total income and tax that would have been payable had the income other than concealed income been the total income. Intangible additions made in earlier years wherever declared as the source of income in subsequent years, these assets or intangibles should be considered in arriving at concealed income. Where a return has not at all been filed and the ITO is sure of taxable income .It should be deemed that assessee has concealed his income. Penalty for concealment of wealth should be made only in those cases where there is total omission of an asset in the return of net wealth. To avoid gross under valuation Government can acquire properties which are grossly undervalued. The penalty for wealth tax evasion should also be on amount of tax sought to be evaded rather than on concealed wealth. Having policy of statutory minimum of penalties has worked till now and should be continued.

Vigorous prosecution policy: To make citizens more tax law abiding and inculcate a sense of fear and respect for tax laws in them a vigorous prosecution policy was recommended by committee. The power of compounding of offences should be used in rarest cases. Cases of ax evasion committed by persons in high income bracket should be perused. Some magistrates and judges should b given the powers to try prosecution cases related to direct tax laws. For early and expeditious hearing and disposal of these cases.

Intelligence and investigation: While voluntary tax compliance should be encouraged measures should be devised to discourage seasoned tax evaders. Increased fine tuning and sophistication of tax evasion techniques forces an urgent re-orientation in department's approach to intelligence and investigation. To tackle tax evasion efficiently the machinery of intelligence and investigation should be overhauled and streamlined, major shortcomings of intelligence wing relates to its organizational pattern. The top down approach in guidance and control seems neither effective nor feasible. Duality of control over wing by Commissioners of Income Tax and Directorate of Inspection (Investigation). Intelligence and investigation should receive exclusive attention of a senior member of CBDT the member should freed from all other obligations for undivided attention towards intelligence and investigation. This member should lay down the policy related to matters connected with intelligence and investigations and provide overall guidance and supervision to officers working in this field and proper channelisation of their efforts.

Time limit for reopening cases of tax evasion: A status quo in the time limit for reopening of cases of tax evasion has been recommended by this committee.

Taxation of agricultural income: The committee recommended taxing agricultural income providing instances where no taxation of agricultural income was being used for converting black money to white money. When tax payers are in need to explain certain deposits, investments or expenses not disclosed to department by their returns explain it partly through agricultural incomes. These claims are not new and cannot be refuted as its hard for income tax department to verify the agricultural income and people with substantial agricultural income tend not to file income tax returns at all. Committee thus suggests an urgent need for uniform and progressive taxation of agricultural income. This will not only end the agriculture as means of tax evasion but also provide a common base for equity and distributive justice. The committee thought that a small tax would actually force farmers to increase their agricultural produce by adoption of improved technology.

Unexplained Expenditure: Unexplained money or any unexplained investment, jewellery or any other valuable item if not recorded in the accounts or partly recorded and the source of such transaction being unexplained, the committee found that these valuables cannot automatically be treated as the income of the assessee. There should thus be special provision to deal with the problem. This provision should highlight the use of examining expenditure; give statutory recognition to treating unexplained expenditure as income from other sources. It should also fix by statute the year in which such income would be assessed. However the committee feels that this provision should not be used by tax department to harass small tax payers by making them explain petty items of expenditure.

Substitution of sales tax by excise duty: Committee felt that evasion of sales tax is profitable for both seller and buyer and it further leads to evasion of income tax as well. Therefore to deal with sales tax evasion sales tax on various commodities should be replaced with additional duty of excise. But great care ought be exercised in selection of these commodities so as to minimize cascading effect on prices. Further a better co-ordination between sales tax department and income tax department like exchange of information ,collection of intelligence about evasion of taxes and taking preventive measures to check evasion will help in checking tax evasion.

Compulsory maintenance of accounts: Committee recommends that there should be a statutory provision requiring compulsory maintenance of accounts by all persons in profession and in business where income from business exceeds 25,000 Rs. or turnover or gross receipts are in excess of 2.5 lakh Rs. in any one of the preceding 3 years. If the business is new provision will apply if the income is likely to exceed said limits. Law should provide for preserving ledgers and cash books for a period of 16 years and other accounts and books for 8 years. There should be monetary fines in law for failure to maintain accounts in prescribed manner or to maintain them for prescribed time.

Permanent account number: Absence of uniform system of indexing for all tax payers has helped tax evasion. Thus there should be a permanent numbering system which will facilitate use of computers, adoption of modern methods of accounting and cross verification of information. The committee gave recommendations for code formulation like length of code should be minimal, there should be sufficient room for expansion ,the code should be permanently assigned should be continued historically to facilitate data processing operations .The code should have fixed number of characters. The code should be numeric. In initial stages the code will be available only to taxpayers whose names figure in register of department or who come into the register subsequently. The numbers allotted once should not be changed as long as the entity exists.

Power of survey: The committee in this regard suggests introduction of a provision to enable ITO to visit premises of assessee for counting cash, verifying stocks and inspecting accounts, documents which may be required or available at the place. For purpose of making proper assessment he may obtain any additional information and record statement of any person found at the premises. Powers of survey should be conferred even to the Inspecting Assistant Commissioners.

Increasing survey operations: Committee recommends setting up of adequate number of survey circles so that comprehensive and continuous survey on rotational basis is made possible. An officer of the rank of Assistant Commissioner should be placed in control of survey operations under Commissioner's charge, along with holding charge of Special Investigation Branch. ITO in-charge of a survey circle should have territorial jurisdiction. Bringing people in the departments tax registers who have their taxable income/wealth will be responsibility of ITO's.

Collection, collation and dissemination of information : There should be a programme laid down and targets fixed for each year by CBDT as regarding collection, collation and dissemination of information. Sources to be tapped should b decided at national level at the beginning of the year and should be strictly implemented at all levels. General standards of performance should be laid down for all levels of staff which will make it easier to judge the requirements of manpower and adequacy of output.

Co-ordination between banks and the income tax department: The committee recommended quoting of PAN number for transactions above Rs5,000 in cases like bank drafts, mail transfers, telegraphic transfers. With an amendment in Banking Regulation Act suspicious transactions above limit of Rs.25,000 should be reported to RBI. Officers of the department should be empowered to take information of general nature from banks.

Changes in the form of income tax return: If the total income exceeds Rs15,000 some additional information should be extracted like exempted income, net worth, personal expenditure and other outgoings.

Reintroduction of expenditure tax: Introduction of consumption expenditure is supported by the Committee.

Uniform accounting year: There should be a uniform accounting year for all tax payers which should ideally coincide with budget year. There should be only one previous year in case of all business being carried on by a single person.

Checking under-valuation of immovable properties: The committee recommended compulsory acquisition of property in cases where sale deed does not reflect the property's fair market value or in cases of under estimation of their construction cost too.

Ownership flats : Committee recommended that flats for all purposes should be treated as immovable property and their transfer should be brought under the purview of Transfer of Property Act,1882 and their transfers should be registered under the Indian Registration Act,1908.

'Pugree' payments: Pugree payment is generally the lump sum paid at the time of change of tenancy rights this is equal to difference between market rent and standard rent fixed under the rent control act. Being illegal pugree payment is generally kept outside the books and made out of unaccounted money. The committee recommended to limit the operation of Rent Control Act from both residential and non-residential buildings to just residential buildings.

Tightening provisions of the stamp act: Committee found that understating the sale/purchase consideration received/paid while buying or selling an immovable property results is three types of tax evasion namely wealth tax, income tax and stamp duty evasion as regards wealth tax and income tax recommendations have already been made by the committee but it found that Indian Stamp Act,1899 provides for impounding and penalty for instruments not duly stamped and for insufficiency of stamps. Thus having a mechanism in which the valuation of suspected cases can be done at present market rates is desirable .It further recommended "in addition to indicating date of sale, name and address of the purchaser the stamp vendors may be required to state on the stamp paper the purpose for which the paper was purchased and also the names of the parties to the transaction sought to be recorded thereon."

Foreign Exchange violations : Foreign Exchange violations are of large size. A team constituted by GoI found that the extent of leakage of Foreign Exchange is about Rs.240 Crores yearly. Foreign Exchange violation are possible only by illegal dealings they result in evasion of Income and other similar taxes. Government is proposing to start necessary remedial measures in this regard including some amendments to FERA.

Tax treaties for exchange of information relating to tax evasion: Tax evasion is not only done within national territory over/under invoicing in import and export business, secret foreign bank accounts, smuggling of precious articles into/out of India. Entering into comprehensive tax treaties with other countries specially with those with whom we have elaborate economic relations and trade on extensive scale. Committee recommended GoI should enter into agreement with foreign nations for avoidance of double taxation of income and also for checking fiscal evasion of taxes. Our existing agreements should be revised for exchange of routine information and market intelligence, also for extraction of specific information in individual cases to facilitate investigation in cases of evasion and recovery of taxes. Mutual assistance in cases of tax fraud and investigation should be covered in the agreement.

Tax evasion in film industry : A lot of black money transactions are done in film industry, which leads to chain reaction in case of producers, financiers, exhibitors etc. while committee recognized the need for liberal tax treatment for film artiste keeping in view their uncertain working life and need to support lavish lifestyle. It recommended that if a producer instead of paying the money in lump sum pays the artiste in form of irrevocable deferred annuities, bought in favour of the artiste .Artiste should be taxed each year to the amount of annuity received ,the committee thought that such tax treatment would help the artistes in declaring their true income. Committee further recommended that wherever the payment being made to the artiste exceeds Rs.5,000 a copy of the agreement should be statutorily supplied to respective ITO's of producer and artiste within one month of execution of such an agreement.

Payment by crossed cheque or crossed bank draft: Committee recommended the formation of a new readily transferable bank instrument in line with bank drafts and cheques with following features:

Should be without the name of payee and should be equivalent to bank draft or pay order.

The name of the payee is entered by the payer at the time of making the payment.

Instrument should be marked 'account payee only ' by the issuing bank.

'Hundi' loans: Committee found that till some time back hundi loans used to be effective way of profitable investing and utilizing black money. Committee recommended that PAN no should be quoted on all hundi papers and all monetary transactions related to hundi should be made by account payee cheques only.

Checking tax evasion amongst contractors: Committee recommended maintaining a register in a prescribed form for contractors as well as for sub contractors to record daily receipts and payments. Committee further recommended that payments made to sub contractors by contractors shall only be permissible as deduction in computation of their incomes if only they are made through account payee cheque. The law should be amended and it should be made compulsory for all contractors who take up contract for construction of building or for supply of gods and services in connection with it to furnish the details of contract undertaken within a to the ITO. Committee recommended that contractors who have been penalized/convicted for concealment of income/wealth should not be awarded contracts for period of three years.

Blank transfer of shares: Committee recommended for amendment of law related to transfer of shares before the transfer instrument is presented to the prescribed authority it should bear the name, number of shares, value of shares, signature of transferor and the requisite stamp duty. The authority should either cancel the stamps on presenting them or endorse the transfer date on them. The instrument should be valid for 2 months from the date its presented to authority. For shareholders who want to borrow funds from banks keeping shares as security this instrument should be valid for the period the shares are held by the bank as security.

Benami investments: The recommendations made by Administrative Reforms Commission were found to be sufficient by the Committee and were seen as step taken in the right direction.

Denial of credit facilities to tax evaders: Committee recommended that credit facilities above Rs25,000 should be available to any person only on furnishing an affidavit to the effect that he has not been subject to any penalty or prosecution for concealment of income/wealth during preceding three years subject to some exceptions.

Tightening up vigilance machinery: The committee was satisfied that appointment of Lokpals and Lokayuktas after passing relevant legislation shall address adequately the question of corruption at higher levels of administration and public grievances.

Arousing social conscience against tax evasion: The committee recommended that persons who have been penalized or convicted should be barred from following things:

Getting national awards

Holding any public elective office for a period of six years .

Becoming director of a limited company for a period of six years .

Senior Government officials and Ministers should be barred from attending functions sponsored by known tax evaders. Tax education should be given in our schools as part of civics course. List of tax payers along with income declared, income assessed and tax payable should be published by Government in official gazette local papers and put up on notice boards at Income Tax Offices. Regular and honest tax payers should be treated by department as starred tax payers.

(B) Tax Avoidance :

The tax avoidance has been criticized all over but same is not the case with tax avoidance according to one view the difference between the two is on of degree only, as both result in loss of revenue. It was noted by committee that the tax avoiders shift their legal burden of tax burden to others. But it has been found that tax evasion erodes morality among tax payers in general.

Measures to check diversion of income: Committee suggested that for such purpose in calculating total income of an individual all such incomes arising directly or indirectly to the spouse of such person by way of salary, commission or fees from a concern in which such person has substantial interest should be included.

Measures to check avoidance of wealth-tax: Committee also suggested some ways of checking wealth tax evasion :

Diversion of assets for checking wealth tax liability is pretty high, amendments to check indirect transfer of assets must be made in wealth tax act.

Where parent-in-law or paternal grandparents transfers assets directly or indirectly to daughter-in-law or minor grandchildren for inadequate consideration value of such transferred assets. should be included in the net wealth of parent-in-law or paternal grand parents.

Revaluation of immovable properties held by closely held companies should be made so that balance sheets of such companies represent the fair market value of their assets.

Measures taken by Government for proper valuation of properties was found to be adequate however the committee finds no reason to ask for revaluation before 5 years of last revaluation.

Committee however finds 'market' value as better base for levy of wealth tax.

Measures to check avoidance of gift-tax and estate duty: The committee gave following recommendations :

Mere book entries will not be considered as gift it should be substantiated by physical transfer of cash.

Gifts made by a person from year to year should be aggregated .However gifts up to a limit of Rs1,000 can be exempted per year.

(C) Tax Arrears:

It's hard to believe now but tax arrears were a very big problem in those days. The tax arrears rose from a figure of Rs.24 Crores in 1944 to Rs.840 Crores in 1970's. These arrears were due on 16Lakh assessees. Recommendations of committee on this issue are however out of scope of this paper.

(D) Exemptions and Deductions: Recommendations made by the committee on this issue are out of scope of this paper.

(E) Tax Administration: Recommendations made by the committee on this issue are out of scope

of this paper.


In this section we will critically examine some key recommendations made by Wanchoo Committee in light of literature written on 'Black Income'.

Black money versus black income:

Wanchoo Committee report uses the terms 'Black money' and 'black income' interchangeably. However NIPFP Report on Aspects of black Economy, 1985 treats them as two very different things. According to NIPFP Report a part of black income is consumed called the black consumption and the rest of it is saved called the black wealth. The latter is 'black money', which is a stock concept unlike black income which is a flow concept. Using black money instead of black income as was done by Wanchoo Committee leaves the black consumption out of purview of estimation of black income, thereby presenting a false picture of economy as a whole.

2. Donations to political parties:

Wanchoo Committee Report has been of this view that funding of political parties should be done either by Government, as in Germany and Japan, or by individuals. However the Wanchoo Committee was against the corporate funding of political parties. Committee also recommended strict auditing of accounts of political parties.

Government funding however is no recourse, according to Prof. Arun Kumar. The arguments put forward by him in his book 'Black Economy in India', 1999 are as follows:

Irrespective of the way in which the funding is done the quantum of money needed for election campaigns continues to be high. The Government funding of election expenditure is not a solution because given the official limits on election expenditure ,Government would hardly be able to meet 20% of the same. Apart from this since money is also needed for activities like booth capturing, employing muscle men, setting up alternative candidates and bribing the voters etc, they cannot form a part of election expenditure, given the illegality involved. Thus the extent of Government funding , in reality, turns out to be even lesser than 20%.

Taking the annual audit of the political parties into consideration, even this cannot be held as one of the criteria for checking the use of black incomes for election campaigns. This is because when these audits could not deter small businesses from making black money, expecting them to bring the needful in case of political parties is not rational.

The suggestion for the same as given by Prof Arun Kumar is democratization of politics the parties and people's representatives are put under direct public scrutiny.

High Tax Rate Hypothesis:

Committee recommended high tax rate as foremost reason for tax evasion as this makes tax evasion lucrative in spite of large risks. High marginal rates of taxation also promote wasteful expenditure. Thus the committee recommended that the maximum marginal rate of income-tax, including surcharge should be reduced from 97.5% to 75%.

In view of Prof .Arun Kumar lowering the tax rate is no remedy. To substantiate his view he has shown that though the tax rate was reduced from 97.5% in 1970-71 to 30% in 1998-99 yet the black income generation has increased. High tax rate hypothesis if it actually works is effective for upper 3% of the Indian population. Given the particular tax rate, black incomes can be high because of political corruption, ineffective implementation of the laws and other such reasons, irrespective of whether a person considers the tax rate to be high or low. So, even if there exist a relation between the tax rate and the black income generation, it is hard to test.


The Direct Taxes Enquiry Committee was formed with the following resolution in Parliament "This house is of opinion that Government should constitute a committee consisting of experts and members of parliament to go into the failure of the Central Board Of Direct Taxes, Ministry of Finance in the timely collection of taxes and to suggest remedial measures for improving the collection system". The language of the resolution expresses the great concern and urgency for formation of committee. The committee being one of the first committees in the field of direct taxes was reviewing a tax system which was distressed and was at a very nascent stage. Thus recommendations given by the committee are very broad based. The committee has touched a large area of economy in its enquiry. The recommendations made by committee were relevant in the contemporary time frame, but in today's context they are not very feasible as a lot of changes have already been incorporated in our tax system, some of them have been made due to recommendations made by committee itself.