India’s Law Taxes It All: Taxing Income from Illegal Sources
No matter how income is earned, Indian tax law demands it be reported and taxed even if it comes from illegal sources. This article explores how and why the law treats all income the same and the global take on the same.
We are all well familiar with the concepts of income and income tax, even if not in their full-length legal details but at least in everyday terms. So, naturally the next question as soon as you read the headline would be: does illegal income come under the definition of income? And the answer for that is YES. And that's what this article will be dealing with, the taxing of...
We are all well familiar with the concepts of income and income tax, even if not in their full-length legal details but at least in everyday terms. So, naturally the next question as soon as you read the headline would be: does illegal income come under the definition of income? And the answer for that is YES.
And that's what this article will be dealing with, the taxing of illegal income, the legality, the risks involved, and how Indian law brings it all under the same net.
What is Illegal Income?
In simple layman terms illegal income as the word suggests means income earned through illegal means or anything that is not through lawful means. When it comes to the statutory definition there isn’t one because the Indian laws don’t differentiate between illegal and legal income.
The Income Tax Act, 1961 gives a broad and inclusive definition for income, covering profits, gains, dividends, capital gains, winnings, allowances, perquisites, and many other forms of receipts.
How Indian Law Brings All Income Under the Tax Net
Section 2(24) of the Income Tax Act, 1961, as stated above gives an inclusive definition of what encompasses income and the same has been consistently upheld by courts in several landmark judgements too.
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The Madras High Court in CIT vs K. Thangamani (2008) had observed that "The Income Tax Act considers income earned legally as well as tainted income alike. There is nothing like an illegal income so far as the Tax Collector is concerned. Even if the assessee was prosecuted by Law Enforcing Authorities for commission of an offence, the income earned by the offender still would be an income liable for assessment."
The courts have gone as far as to include the seizure of goods from illegal acts as a loss for assessment. In Dr. T. A. Quereshi vs Commissioner of Income Tax (2006), the Supreme Court held "Once it is found that the heroin seized formed part of the stock-in-trade of the assessee, it follows that the seizure and confiscation of such stock-in-trade has to be allowed as a business loss."
Also Read:Tax Evasion v. Tax Avoidance: Know the Difference as an Income Earner
How Do Authorities Detect Illegal Income?
You might wonder why declare such income and face criminal charges for the same. Why not just not declare it and go your merry way? The issue here lies when the tax authorities detect such income and fine a penalty which can even be 200% of the tax evaded.
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So, how does the tax department even find out? And that's actually quite simple, they spot it by keeping an eye on big bank deposits, expensive purchases, and lavish spending that don’t match with what you officially earn. So if you do earn money from illegal sources, try not to make it maybe too obvious.
They also use advanced data analysis to find anything suspicious and sometimes get tips from other agencies or whistleblowers. If something doesn’t add up they’ll ask you to explain where the money came from.
Is Reporting Illegal Income Self-Incriminating?
Article 20(3) is one of the predominant fundamental rights guaranteed under the Indian constitution which cannot be suspended even during emergencies. Under article 20(3), everyone has the right against self-incrimination and no person accused of any offence shall be compelled to be a witness against himself. However, this article applies only when the person is formally accused of a crime.
Therefore, the right against self-incrimination applies only when there is compulsion by authorities. Filing a tax return is a statutory obligation and not testimonial compulsion, so voluntary reporting of illegal income does not automatically have Article 20(3) protection.
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The Incarceration of Al Capone.
Al Capone is one of the classic examples of how you can dodge crimes but not taxes. He was one of America’s most notorious gangsters during the Prohibition era and operated illegal businesses including bootlegging, gambling, prostitution, bribery, protection rackets and violent activities. Ironically, it was not these crimes that led to his conviction. It was tax evasion charges that ultimately put him behind bars.
Capone was considered untouchable because authorities struggled for years to secure convictions for his other criminal activities. In 1931 he was found guilty of tax evasion and sentenced to 11 years in prison. Demonstrating that even if all the other laws fail, tax can become the ultimate weapon against those untouchable.
Around the World
Most major countries including the United States, Canada, Australia, and the UK all tax income from illegal income on the same basis as legal income. In the United States the tax code originally referred to “lawful income” but in 1921 the word lawful was removed to ensure all income whether legal or illegal is taxable.
Similarly, tax authorities in Canada, Australia, and the UK have defined income broadly so any income regardless of the source must be reported and consequently taxed.
So, whether the income is earned legally or illegally the tax law doesn’t differentiate. Both must be reported and tax must be paid for both. Taxing illegal income is not about legitimizing crime but is to ensure proper and full compliance to fight against crime and corruption.
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