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TAX EVASION
By: Bhargav Baisoya, Advocate

Tax evasion is nothing but any activity that aims to hide, understate, or falsely report income to reduce your tax liability. For example, not paying the tax or paying less than what is due is considered to be tax fraud. It is essentially the criminal act of a person or a company attempting to avoid paying their tax obligations. It includes concealing or fabricating income, and falsifying deductions without proof. Another tax evasion example is failing to declare cash transactions, etc.

People utilize various methods to avoid paying taxes, including filing fraudulent tax returns, smuggling, falsifying documents, and bribery. Tax evasion is important because it is considered illegal in India and leads to severe penalties. The penalty for not disclosing income ranges from 100 percent to 300 percent of the tax. But, you should also not ignore the fact that taxes are an essential source of revenue for the government.
In India there are various ways through which people evade tax are Smuggling, evasion of sales and Value Added Tax, Evasion of Income Tax, Evasion of Wealth Tax, Evasion of Customs Duty and Evasion of Excise Duty. Also, officials takes bribery and helps in making fabricated statements instead of reporting to tax authorities. Idealist wilfully fails to file return, submit false returns, submits false certificates to get deduction, exemptions and claim low income, charging personal expenses to revenue, fails to pay dues within due date and so on to evade tax.

Ways of Tax Evasion:

People can resort to different ways to evade tax. Some of the most commonly used strategies include the following:

1.Smuggling instead of paying state border tax, import tax, etc
In order to avoid paying state taxes, import-export taxes, and customs duties, many people and businesses resort to smuggling. Smuggling is a punishable act under Indian law, and tax evasion can result in greater penalties.

2. Filing incorrect income tax returns
Submitting incorrect information like understating your income, overstating deductions, or any other kind of false reporting is a popular income tax evasion strategy. However, this is illegal.

3. Maintaining fake financial statements
Inaccurate financial documents like balance sheets and account books can give the impression of a low annual income. Some businesses also do not keep sale receipts to understate their income and reduce their tax due for the year.

4. Using fake documents for tax deductions
Another tax evasion tactic is getting fake documents made to prove that you are eligible for a tax deduction, such as a disability certificate to claim tax deductions under Section 80.
5. Not showing any income
Many people resort to cash transactions to hide the trail of their earnings. Not having any income on paper implies that you do not have to pay any tax either. Businesses often do not produce invoices for their sales. Similarly, landlords may accept only cash payments instead of bank transfers or cheques for rent.

6. Keeping money outside India
International bank accounts are not under the purview of the Indian income tax department. Some people may maintain a bank account outside the country to store money.

7. Not paying tax
A lot of people may refuse to pay taxes. Then, despite the tax dues, the person does not make the necessary payments to the government.

8. Offering a bribe to an official
Offering a bribe to an income tax official to change the amount of tax due is another way to evade tax. People turn to bribes to lower or eliminate any tax record due under their name.

What is the penalty for tax evasion in India?

The penalty for tax evasion can depend on the fraud committed and the extent of the unpaid tax. Here are some situations and the subsequent penalties levied in case of each:

1.Failing to file your income tax return within the due time
As per subsection (1) of Section 139 of the Income Tax Act of 1961, all taxpayers must file their income tax return during the tax filing period for each financial year. If anybody does not file their income tax return for any reason, they have to pay a late fee. This late penalty fee was ₹10,000 till the financial year 2019-20. However, effective from 2020-21, anybody filing a belated income tax return is charged ₹5,000 as a penalty. In some cases, the assessing officer can also decide the value of the penalty, which can be less or more than ₹5,000.

2. Proving incorrect PAN card number or hiding the pan card number
Failure to furnish accurate information while filing ITR is also a punishable offence. Most employers ask for the employees’ PAN card numbers at the time of employment. This information is used while deducting TDS or the tax deducted at source from the employee’s salary. Here’s the penalty for two scenarios involving a PAN card:

Hiding the pan card number: In the absence of a PAN card number, the employer will deduct 20% TDS instead of 10% TDS.Providing an incorrect pan card number: In case of an incorrect PAN card number, you will have to pay a penalty of ₹10,000.

3. Concealing or misreporting your Income
As per Section 271(C) of the Income Tax Act of 1961, in case of hiding or understating your income, the penalty can be anywhere between 100% to 300% of the amount of tax that was due but not paid. Here’s how the percentage is decided:


A penalty of 10% on the previous year’s hidden or understated income is levied if the taxpayer owns up to the undisclosed income and declares it. Interest may also be charged here.


A penalty of 50% on the amount of income that is hidden or understated, is levied if the reason behind the under-reporting was a bona fide mistake. This refers to a genuine mistake that is not committed with an aim to evade tax.


A penalty of 300% on the amount of hidden or understated income is levied if the mistake was intentionally made to evade tax. This is also known as a mala fide mistake.


Income tax officials may feel compelled to raid a location to find the taxpayer’s undeclared income. Consequently, the penalty will be computed according to Section 271AAB in such instances.

 

4. Not complying with TDS regulations

For businesses or employers who deduct and collect tax at source, having a tax deduction account number (TAN) is vital. Not having a TAN can result in a penalty of ₹10,000. There are two kinds of frauds that can be committed here:

Not collecting tax at source: In this case, the penalty is the same as the tax that was not deducted at the source.

Not filing a TDS return: Just like income tax returns, there is also a due date for filing TDS returns. If the TDS return is not filed within the stipulated time, the taxpayer has to pay tax every day after the due tax until the entire payment is made. The penalty, in this case, can start from ₹10,000 and go up to ₹1, 00,000.
To avoid paying this penalty, taxpayers must file TDS returns before the prescribed due date.

5. Failure to comply with a demand notice
The income tax (IT) department may issue a demand notice if inconsistencies are found in the income tax return. If this happens, the IT department issues a demand notice stating the amount of tax still owed. The taxpayer is offered 30 days to respond to the demand notice from the day of receiving the document. A failure to respond and pay the tax due can result in a penalty.

6. Not paying tax as per self-assessment
Taxpayers who fail to pay entire or a part of their self-assessed tax or interest are considered defaulting taxpayers. Failure to pay tax as per self-assessment is considered to be tax fraud under Section 140A (1). In such a case, the assessing officer can levy a penalty up to the total amount of tax owed to the government. However, if there is a valid reason for not paying tax as per self-assessment, the assessing officer may waive off the penalty.

7. Not getting audited
If an organization does not get itself audited or does not submit an audit report under Section 44AB, they have to pay a penalty of ₹1.5 lakhs or 0.5% of their sales turnover, whichever is more. In addition to this, if the taxpayer does not provide a report from an accountant as mandated under Section 92E, they have to pay a penalty of at least ₹1 lakh or more. To avoid the penalty, the taxpayer must document all domestic and overseas transactions and obtain a report from a chartered accountant in India on or before the deadline. In addition, a penalty of 2% of the value of the transaction (international or domestic) will be applied if any documents required by the Act are not given or attached under Section 92(D)3.

Measures Taken by Indian Government to Curb Tax Evasion:

Several steps as below have been taken by the Indian government to avoid tax evasion. In India, tax evasion is regarded as a crime. Prosecution and Penalties are imposed under different acts by the government. An income tax reward scheme has been introduced by the Income Tax Department which gives rewards to informers about tax evasion. Recently, India has entered into a pact with the US to avoid tax evasion by Americans through Indian financial organizations. Special Bearer Bond Scheme (Immunities and Exemptions Act, 1981) enable persons in possession of black money to invest in special bonds. The voluntary Compliance Scheme (Amnesty Scheme) was another one.
A. The government increased the tax slab,
B. reduced the deduction rate, and
C. increased legal tax avoidance measures.
D. The Tax Administration Reform Commission was set up by the Government to make structural reforms to tax matters to simplify and streamline tax procedures.

Limitations of Indian Tax Structure which result in Tax Evasion:

  1. High rate of taxation:
    High rate of taxation cause a burden to tax payer. So, they find ways to avoid tax.
  2. Failure to curb bribery:
    There should be adequate system to curb bribery and corruption among officials. They help taxpayers to avoid tax by taking an agreed share of profit out of evaded tax.
  3. Lack of simplified procedures:
    Tax structure in India is complex and people find it hard to go to different departments for a single matter.
  4. Existence of large number of taxes:
    Existence of large number of different type of taxes causes burden on taxpayers.
  5. Complex tax laws and loopholes to avoid tax in laws:
    Indian tax law is complex. In the same law, people find provisions to escape from tax liability.
  6. Lack of organized and systematic Administration structure.
  7. Frequent changes in Government and Political instability:
    Frequent changes and political instability is another reason of non-implementation of well-defined tax system. Different governments implement different tax systems and it becomes difficult to follow.

Best Ways To Avoid Tax Evasion:

  1. Reducing tax rates.
  2. Make more simplified laws and simplified systems.
  3. Design a well-organized tax administration structure.
  4. Strengthen anti-corruption policies.
  5. Increase awareness among taxpayers by conducting seminars, conferences and through media.
  6. Design a permanent tax structure.
  7. Ensure the political changes do not affect well defined tax structure. Make tax administration more
  8. independent and autonomous without losing final control of Government.
  9. Audit, tax collection, depositing and filing provisions to be more strengthened and updated.
  10. Make penalty provisions more stronger and avoid its non-implementation.
  11. Encourage taxpayers to pay tax by more friendly schemes.

Conclusion:

Tax evasion is a serious crime in India and should be avoided at all costs. Repeated attempts to evade tax can result in severe punishments. This is why it is extremely important to pay attention to your income tax details, file your returns on time, and ensure that you follow all the rules and regulations laid down by the income tax department and the Government of India.

Having been aware of the ill effects of tax evasion, it becomes each one of our responsibility to support the government by complying with the tax procedures and pay taxes promptly.

As it is rightly said that every drop of water makes an ocean, it can also be said that our small contribution makes a huge difference in the growth of the economy. Instead of expecting for change to happen, let us be the change agents who can bring in a drastic development by just fulfilling our responsibilities promptly.

If each one of us speaks the same language, then there will be least or no scope for us to be exploited by any institution or authority. So let us fulfil our duties first and claim our rights next.