In October 2020, Prime Minister Narendra Modi said that he is optimistic about India becoming a USD 5 trillion economy by 2024. India’s gross domestic product (GDP) in 2020 was USD 2.66 trillion.Though there was a decline in GDP of 7.3% from 2019 primarily on account of the pandemic, the economy has since shown remarkable resilience and the GDP growth has picked up pace over the last year and a half. However, the target of a USD 5 trillion economy is still some distance away. Since such growth would need substantial government spending, a sustained growth in tax revenues would also be required.
What is Tax Evasion:
Corporations hold trillions of dollars hidden in tax havens. The most shocking tax evasion statistics show such strategies cost governments worldwide billions of dollars. While plenty of countries struggle with this issue, the United States suffers the most.
Tax evasion refers to the illegal and deliberate attempt to avoid paying taxes by underreporting income, overstating deductions, or failing to disclose assets. Tax evasion is considered a serious crime and can result in hefty fines, penalties, and even imprisonment.
An example of tax evasion is when a small business owner intentionally fails to report a portion of their income to the tax authorities. For instance, suppose a restaurant owner earns $100,000 in sales but only reports $50,000 to the tax authorities. In that case, they are committing tax evasion by underreporting their income and not paying the appropriate taxes on the full amount. This practice can result in a criminal investigation, financial penalties, and potentially, imprisonment if found guilty.
Similarly, if a company installs an air-conditioner at the residence of a vice-president and falsely treats it as fitted in the quality control section to raise the amount of depreciation and reduce profit unlawfully, it is also a case of tax evasion.
Fiscal policy of an economy has four main components:
✓ public expenditure,
✓ debt and
✓ deficit financing.
Maximum part of the revenue to the government comes from taxation.
OVER VIEW OF THE BODY OF THE ARTICLE.
In taxation itself, direct tax constitutes the major part. The problem arises when individuals/corporate don’t pay their taxes, or reduce their tax liability fraud fully. It lessens the government revenue and directly or indirectly harms the public utility services. Individuals adopt tax avoidance or tax evasion to reduce their tax liability. Tax avoidance is legal reduction in tax liability, using the loopholes of income tax provisions; tax evasion is fraudulent method of reducing tax liability.
Data and Facts:
The State of Tax Justice report
Regarding India, the report said USD 10.3 billion, or 0.41 per cent of the USD 3 trillion GDP, is lost in taxes every year to global tax abuse.
Of this, over USD 10 billion is lost to tax abuse by multinational corporations (MNCs) and USD 200 million to tax evasion committed by private individuals.
The social impact of the lost tax is equivalent to 44.70 per cent of the health budget and 10.68 per cent of education spending.
It further said India is most vulnerable to illicit financial flows in the form of outward FDI and listed Mauritius, Singapore and the Netherlands as the trading partners which are most responsible for this vulnerability.
Tax to GDP ratio:
Source: Tax justice network
Tax evasion prevention provisions:
Tax planning, tax avoidance, and tax evasion are terms that fall within the parlance of the Income-tax Act, 1961. However, tax evasion is illegal and Chapter XXII of the Income Tax Act, 1961, is clear about penalties.
Income Tax Act:
The Income Tax Act has introduced several penalties for individuals attempting to evade paying income taxes. The penalties for such acts are severe, ranging from 100% to 300% of the tax for undisclosed income.
Tax evasion is illegal and carries penalties under Chapter XXII of the Income Tax Act, 1961.
In summary, tax evasion involves fraudulent practices that occur after tax liabilities arise, whereas tax planning and tax avoidance are legal means of minimizing tax liabilities.
Various Forms of Tax Evasion and the Consequent Penalties in India:
Filing of Income Tax Returns after the Deadline:
Failure to file income tax returns in accordance with the relevant provisions of the Income Tax Act, 1961 can lead to penalties of up to Rs 5,000 as imposed by the assessing officer.
Concealment of Income to Evade Taxes:
A taxpayer attempting to conceal actual earnings or income is liable for a penalty between 100% and 300% of the amount of tax evaded under Section 271(C).
Non-Compliance with Account Auditing:
As per Section 44AB, taxpayers are required to conduct account audits and provide audit reports. Failure to comply with these regulations results in a penalty of 0.5% of total sales, turnover or gross receipts or Rs 1,50,000, whichever is greater. Failure to present an accountant`s report under Section 92E attracts a penalty of Rs 1,00,000 or more.
Non-Compliance with TDS Rules:
Failure to obtain a Tax Deduction and Collection Account Number (TAN) while deducting or collecting tax at source can result in a penalty of Rs 10,000. For delays in filing tax deducted at source (TDS) or tax collected at source (TCS) returns, a penalty of Rs 200 per day is imposed, not exceeding the TDS amount. The tax authorities may also impose penalties for inaccurate information or non-filing of TDS or TCS returns before the due dates. The penalty can range from Rs 10,000 to Rs 1,00,000.
Wilful Tax Evasion:
As per Section 276C, if a taxpayer willfully attempts to evade tax or under-report income with an amount exceeding Rs 25 lakh, it results in a jail term of at least six months to seven years along with a fine.
Incorrect PAN Details or Non-Furnishing of PAN Card Number:
It is punishable to provide inaccurate information, including PAN details, when filling an Income Tax Return (ITR). All tax deductors, including employers, are required to obtain PAN card numbers to deduct TDS from payments. There are two types of penalties in two scenarios: providing an incorrect PAN result in a penalty of Rs. 10,000 while not providing PAN leads to higher TDS deduction (e.g., 20% instead of 10%).
2018-19:India is a country known for cultural, religious and linguistic diversity. Invoke the doctrine of "pious obligation" as well as blend principles of behavioural economics with spiritual norm to tackle tax evasion and wilful defaults, suggests the Economoic Survey.
Tax evasion remains a major challenge in India
GST data analytics to be used to identify potential tax evasion cases
Use of technology and third-party data to tackle tax evasion
Cash withdrawal tax to be levied on withdrawals above a certain threshold
Benami transactions prohibition and a dedicated agency to enforce the law
Measures to reduce tax litigation and improve dispute resolution mechanisms
Steps to promote voluntary tax compliance through a reward-based system
Tightening of penalties for non-compliance with tax laws
Increase in the number of direct tax assesses through digitization and automation
In order to increase deterrence among tax evaders, Sitharaman proposed to provide no set off, of losses, against undisclosed income detected during search operations. Underlining the existing ambiguity, Sitharaman said that set off, of losses, are brought forward against undisclosed income detected in search operations to avoid payment of tax.
The government of India formed a Special Investigation Team (SIT) to look into Black Money issues ordered by Supreme Court.
The Income Tax Department has implemented a tax evasion reward scheme, which compensates those who report tax avoidance.
India and the United States recently signed an agreement to prevent Americans from evading taxes through Indian financial institutions.
Persons in possession of black money can invest in special bonds under the Special Bearer Bond Scheme (Immunities and Exemptions Act, 1981).
The government raised the tax bracket, lowered the deduction rate, and tightened lawful tax avoidance techniques.
Joining the Multilateral Competent Authority Agreement in Respect of Automatic Exchange of Information (AEOI) and having an information-sharing arrangement with the United States under the Foreign Account Tax Compliance Act (FATCA) are examples of global initiatives to combat tax evasion and black money.
Both India and Switzerland have agreed to speed up work on the Automatic Exchange of Information (AEOI) in order to make it possible by 2018.
Lok Sabha passed the Benami Transaction Bill 2015, which was primarily an anti-black money policy with the goal of seizing unknown property and prosecuting people involved in such activities.
The Government has established the Tax Administration Reform Commission to undertake fundamental reforms to tax concerns in order to simplify and streamline tax procedures.
Centralised Communication Centre (CCC) for prompt communication with taxpayers.
E-assessment scheme for faceless assessment and e-proceedings.
Identification and monitoring of high-risk transactions through Annual Information Returns (AIR).
Launch of Operation Clean Money to scrutinize cash deposits post-demonetization.
Implementation of Benami Transactions (Prohibition) Amendment Act, 2016 to curb benami transactions.
Enabling taxpayers to verify their transactions through Form 26AS.
Data Analytics and Business Intelligence tools for data mining and risk analysis.
Promoting voluntary compliance through the Pradhan Mantri Garib Kalyan Yojana (PMGKY).
Exchange of information with foreign tax authorities to prevent tax evasion and avoidance.
Strengthening legal and penal provisions to deter tax evasion.
Finance Ministry Measures:
Introduction of e-assessment to promote faceless assessment and reduce physical interaction.
Mandatory PAN-Aadhaar linkage to detect and prevent duplicate PANs and shell companies.
Implementation of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) provisions to increase tax compliance.
Expansion of the scope of Annual Information Return (AIR) to collect more data on high-value transactions.
Launch of Operation Clean Money to identify suspect bank transactions and curb black money.
Implementation of the Benami Transactions (Prohibition) Act to confiscate benami properties and deter tax evasion.
Introduction of a Goods and Services Tax (GST) regime to streamline indirect taxation and reduce tax evasion.
Increased use of data analytics and artificial intelligence to detect tax evasion and improve compliance.
Implementation of the Centralized Processing Center (CPC) to process tax returns and refunds efficiently.
Introduction of Taxpayer Service Centers to aid taxpayers and promote voluntary compliance.
Tax evasion in India can be attributed to a variety of reasons, including:
High tax rates: High tax rates create a disincentive for taxpayers to fully disclose their income and pay their taxes. This is particularly true for individuals and businesses operating in sectors with low profit margins.
Complex tax laws: The Indian tax system is complex, with multiple layers of taxation and numerous exemptions and deductions. This complexity can make it difficult for taxpayers to comply with the law, and also makes it easier for tax evaders to find loopholes and evade taxes.
Weak enforcement: Weak enforcement of tax laws and a lack of political will to tackle tax evasion has allowed tax evaders to operate with relative impunity. This is compounded by the fact that tax administration in India is heavily centralized and understaffed, which makes it difficult to conduct effective audits and enforce compliance.
Corruption: Corruption is endemic in India, and tax officials are often seen as being complicit in tax evasion schemes. This has eroded public trust in the tax system and made it more difficult to combat tax evasion.
Lack of awareness: Many taxpayers, especially those in the informal sector, may not be fully aware of their tax obligations or the penalties for non-compliance. This lack of awareness can make it easier for tax evaders to operate without fear of detection.
Another area of concern is the leakage of revenue, particularly in the micro, small and medium enterprises (MSME) sector, caused by the blurring of the distinction between personal and business expenses that leads to claims of excess deductions, as also the tendency to leverage the continued prevalence of cash transactions by falsely claiming tax-deductible payments where the money is brought back in cash. These leakages are largely going unchecked due to inefficient administrative processes of verification.
The problem of revenue leakage is not confined to direct taxes but also pervades the domain of indirect taxes. According to official data, in FY 2019–20 alone, the government detected fraud of about INR 408,530 million (USD 5,237 million), out of which only INR 184,640 million (USD 2,367 million) could be recovered.7
Fraudulent activities under GST are generally related to fake invoicing where taxpayers claim input tax credit to reduce outward liabilities or to claim refunds. Further, in many cases, fake invoices are used not only to evade GST but also to inflate turnover for bank loans or to book fake invoices to avoid income tax or even to divert funds.
Effects of Tax Evasion:
Tax evasion has numerous ill effects on the payer, society and total revenue.
It is most unfavorable influence maybe on equity. A blue-collar assembly-line laborer pays tax. A restaurant worker whose salary is the equivalent yet who gets some portion of his salary in tips does not uncover it during payment of tax. Along these lines, one worker gains to the detriment of others. This is horizontal disparity or inequity. A salaried employee in a company earns the same, as their incomes appear to be equivalent for tax purposes.
The tax evasion misshapes economic efficiency. In sectors, that are less subject to the director’s investigation, there will be more investment. That may be one motivation behind why certain administration sector-activities for example, construction companies have developed so sensationally as the organization moves crosswise over national boundaries in a globalized world economy. Similarly, the unorganized sector might try and avoid taxes much more easily than the organized sector. Small taxpayers have stayed extremely hard to assess and keep up a steady presence in regulatory corners.
The functional capacity, efficiency, and effectiveness of a sector suffer because of tax evasion as inequity and inefficiency can lead to lower government revenue. Capacity endures because of lower accessibility of assets. The outcome could likely be an increase in tax rates, or the burden of distortive charges, in this manner starting an endless loop of inequity and disparities.
Tax evasion being under revealing of pay suggests underestimation of GDP and all its proportionate large scale economic ramifications. Since the denominator is under-evaluated, the proportion of assessment to GDP, the financial deficiency to GDP, and open obligation to GDP are all over evaluated. The perceived higher GDP proportion prompts false solace, yet overstated deflationary action might be made to rein back an overstated financial shortfall or public debt ratio.
Tax evasion has had a reducing effect on the economy’s growth.
Reduction in revenue and increase in inflation are the direct effects of tax evasion.
There has been transferring funds or black money between India and other foreign countries through secret channels, affecting the country’s reputation all around the world.
There would be disequilibrium in the country as the rich get richer and the poor become poorer.
Due to tax evasion by the rich society of the economy, the government is forced to increase tax rates to increase the outcome of revenue every year.
This leads to poor standards of living for the BPL as the government does not have enough revenue to take welfare measures.
The measures that can be taken to fight tax evasion in India:
Reducing tax rates: High tax rates are a major reason for tax evasion, so reducing the maximum marginal rate of tax could discourage evasion.
Minimization of controls and licenses: A committee of professionals could evaluate and eliminate unnecessary permit systems and controls that hinder the economy and public.
Regulation of donations to political parties: Political parties must be kept away from corruption through regular account checks and limiting donations to each party based on suitable criteria.
Creating confidence among small taxpayers: small income taxpayers must be given fair treatment and guidelines should be issued to make evaluations easier for them.
Allowance of certain business expenses: Entertainment expenses directly related to business must be permitted to be deducted.
Changes in penal provisions: Penalties must be within reasonable limits and should depend on income rather than tax, to avoid hitting small taxpayers more harshly.
Intelligence and investigation: The tax department must upgrade and streamline its intelligence and investigation machinery to handle evolving methods of tax evasion.
Taxation of agricultural income: Agricultural income, which is currently not taxed, must be subjected to a uniform tax to eliminate the scope for tax evasion.
Permanent account number: All taxpayers should be indexed on a permanent basis to reduce confusion and difficulties.
Punishments for evasion:
The Income Tax Act, 1961 provides for both civil and criminal penalties for tax evasion.
Penalty: The penalty for tax evasion can range from 50% to 200% of the amount of tax evaded, depending on the severity of the offense.
Prosecution: In cases where tax evasion is found to be willful or deliberate, the offender can be prosecuted under the Income Tax Act. If convicted, the offender can face imprisonment for a term ranging from 6 months to 7 years.
Fine: The offender can also be fined, in addition to the penalty and prosecution.
Blacklisting: The offender can be blacklisted and barred from doing business with government agencies.
Seizure of assets: The tax authorities can seize the assets of the offender to recover the tax dues.
Disqualification: The offender can be disqualified from holding public office or from being a director of a company.
Publication: The names of the offenders can be published in the media, to serve as a deterrent to others.
Cancellation of registration: The registration of a business can be cancelled in case of persistent non-compliance.
Debarment from availing tax benefits: The offender can be debarred from availing any tax benefits or exemptions for a certain period.
Debarment from international travel: In certain cases, the passport of the offender can be impounded, to prevent them from leaving the country.
In conclusion, tax evasion in India is a major issue that requires a multi-faceted approach to tackle. It is essential to reduce tax rates, minimize controls and licenses, regulate political party donations, create confidence among small taxpayers, allow certain business expenses, make changes in penal provisions, strengthen intelligence and investigation, tax agricultural income, and implement a permanent account number system. These measures can help to create a system that is fair, efficient, and conducive to compliance, thereby reducing the burden of tax evasion on the Indian economy. By implementing these measures, the Indian government can not only increase its revenue but also promote a culture of honesty and transparency among taxpayers. It is time to take bold steps towards combating tax evasion and building a better future for India.
TAX EVASION IS ILLEGAL AS WELL AS IMMORAL: HE WANTS CITIZENS TO TAKE VOW TO PAY INCOME TAX HONESTLY : PM MODI
AUTHOR & LEGAL EXPERT
CHAIRPERSON (THE PRESIDING OFFICER) STANDING APPELLATE COMMITTEE OF AICTE, GOVT OF INDIA.
SENIOR STANDING COUNSEL, MADRAS HIGH COURT FOR INCOME TAX DEPT, MINISTRY OF FINANCE, GOVT OF INDIA.
SENIOR STANDING COUNSEL – SUPREME COURT OF INDIA & DELHI HIGH COURT FOR EdCIL, MINISTRY OF EDUCATION, GOVT OF INDIA.
ADDL GOVT PLEADER (AGP) MADRAS HIGH COURT, FOR GOVT OF PUDUCHERRY.
THE AUTHOR CAN BE REACHED AT MAIL: email@example.com
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