This Article is written by Anshumi Maloo, a student of United world School of Law, Karnavati University, Gandhinagar. In this article, she explained the Consequences and evidence of Tax evasion in India.
Tax Evasion in India
Tax evasion is characterized as any criminal activity or act of dishonesty punishable by civil penalties with the purpose of reducing taxation incidence, and it is affected by economic and tax systems, income forms, and social attitudes. The basic theoretical model of tax evasion is a straightforward application of individual choice under uncertainty, and the problem an individual faces is determining whether or not to evade any portion of his legal tax obligation, given the risk of being caught if he does so.[1]
Taxes are said to be the most important means of funding goods in today’s society, and they are one of the most effective instruments for the growth of economic and social activities in the economy, as well as for reducing wage inequalities. Income tax, corporate tax, property tax, and inheritance tax are all examples of taxes that are either classified as direct or indirect tax.[2]
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Individuals, companies, trusts, and other organisations participate in tax evasion when they use unlawful and unjust strategies to avoid paying taxes. When people deliberately conceal their earnings or a portion of their income from the tax authorities in order to limit their tax liability, this is known as evasion. As a result of evasion, funds intended for the advancement of social and economic programmes are now used for other anti-social and economically damaging activities. Black money and tax evasion enable or promote undesirable groups in the country to gain leverage over financial power.[3]
Out of book purchases, parallel books of accounts, manipulation of books of accounts, manipulation of sales/receipts, under-reporting of production, manipulation of expenditures, and other forms of financial statement manipulations all result in tax evasion. With the easing of foreign exchange controls, many new opportunities for tax avoidance arose, and as a result of globalisation, money began to flow in and out of the world, resulting in the development of tax havens. As a result, the government’s willingness to adopt a financial policy that enhances tax enforcement is evident. [4]
Tax evasion’s origins and reasons
There are three primary causes of tax evasion.
- Exorbitant tax rates
- Poor tax transparency/ simplicity
- Corrupt government administration.
In India, companies try to stop paying taxes in order to retain some black money for deals with government agencies and hirelings. Since tax rates are so high, experts suggest not paying taxes in order to save money for the future. Politicians and other lawmakers, for the most part, escape indictment because their salaries are mostly dependent on bribery and fraudulent methods.
Individual citizen conduct and social norms on the supply side, and inadequacies in tax administration on the interest or demand side, all lead to tax evasion. To begin with, the tax system must be seen as fair and egalitarian across various classes of people. Similarly, if marginal rates are exceedingly high, people can find ways to stop paying taxes.[5]
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METHOD OF TAX EVASION
1] When such goods are shipped from one place to another, whether through foreign or state boundaries, a tax or fee may be levied. Some people, on the other hand, may transfer these goods in secret in order to avoid paying the taxes or to avoid paying the tax altogether.
2] When a person files taxes, they can provide inaccurate or incorrect information in order to minimise or avoid paying the tax that they are expected to pay. This is also tax avoidance because the full picture isn’t given, and they may be paying less than they should.[6]
3] The taxes that a person or an entity must pay can be calculated by the financial transactions that occurred during the assessment year. The tax may be reduced if incorrect financial statements or accounting books are submitted, reporting earnings that are less than what was actually received.
4] To ensure that certain strata or members of society have a little more financial independence to advance, the government could have given certain exemptions and privileges. In certain cases, members who do not qualify for such benefits may have paperwork produced to justify their membership in the category, enabling them to claim exemptions where they are not eligible.
5] This could be considered one of the most common ways of tax evasion. Individuals would actually not disclose any income they earn during a fiscal year in this situation. They don’t pay any tax because they haven’t declared any revenue, so they have successfully evaded all taxes.[7]
EFFECTS OF TAX EVASION
1] Its most negative effect could be on equity. A blue-collar assembly-line worker is subject to taxes. A restaurant worker who earns the same wage but collects a portion of his salary in tips does not mention it when filing taxes. On these lines, one employee benefits at the expense of another. Horizontal inequality or inequity is what this is.
2] Tax evasion distorts the economy’s productivity. There will be more spending in industries that are less subject to the director’s inquiry. That may be one reason why some administration-related activities, such as construction firms, have expanded so rapidly as organisations move across national borders in a globalised world economy.
In the same way, the unorganised sector can try to escape taxes much more easily than the organised sector. Small tax payers have remained difficult to evaluate and maintain a clear presence in regulatory corner.
3] Tax evasion decreases a sector’s functional capability, performance, and effectiveness, as inequity and inefficiency may result in lower government revenue. Since assets are less available, capacity is maintained. The effect may very well be a rise in tax rates or the imposition of distortive charges, resulting in an endless cycle of inequity and inequalities.[8]
4] Underreporting of pay for tax evasion means an underestimation of GDP and all of its proportionate large-scale economic implications. The proportion of evaluation to GDP, the financial deficit to GDP, and the open duty to GDP are both over-evaluated since the denominator is under-evaluated.
5] The growth of the economy has been hampered by tax evasion.
6] The direct consequences of tax evasion are a reduction in income and a rise in inflation.
7] Hidden channels have been used to move funds or black money between India and other foreign countries, adversely impacting the country’s image around the world.[9]
8] As the rich get richer and the poor get poorer, there will be an inequality in the world.
9] As a result of tax avoidance by the economy’s elite, the government is forced to raise tax rates every year in order to increase revenue.
10] Causes bad living conditions for the BPL because the government lacks adequate revenue to enforce welfare initiatives.
MEASURES FOR TAX EVASION
1] The government’s versatility for taking extra assets in the middle of the crisis is limited due to the existing high rates of tax collection. The overall marginal rate of tax should be lowered to have an effect; the tax collection rate should be reduced in one fell swoop.
2] The practise of being unnecessarily vigilant in small cases where there is little opportunity for benefit has harmed the division as a whole. The guidelines released by the Central Board of Direct Taxes on the current framework for assessing small income cases are a bold departure from the past, and are likely to yield more meaningful results than previous small income schemes.
3] Up to the section 37(2A) of the Income Tax Act, 1961, entertainment expenses incurred for the advancement of a taxpayer’s business that is directly associated with its dynamic direct must be allowed to be deducted.
4] Penalty is required in equal measure as long as it is held within acceptable limits. Once it reaches that point, it is more likely to intensify the citizen’s inflexibility rather than change him. Small taxpayers are struck harder by a levy levied on dependent income rather than revenue.
5] To respond to the increasing refinement and innovation of tax evasion procedures, the division’s intelligence and investigative strategies must undergo a complete reorientation. To adequately tackle the possibility of tax evasion, the intelligence and investigation machinery must be fully revamped and streamlined.
6] Agricultural income, which is actually excluded from central taxation, offers simple cover for black money, and it should be subjected to a uniform tax that is more or less on par with other incomes to reduce evasion opportunities.[10]
PENALTIES FOR TAX EVASION
1] When revenue is not disclosed, 100 percent to 300 percent of the tax is paid.
2] If you don’t pay your taxes, the assessing officer will give you a levy, but it can’t be more than the amount you owe in taxes.
3] If a person fails to file tax returns within the allotted period, a penalty of Rs. 200 per day may be levied for each day the returns are not filed.
4] The penalty for concealing information of one’s income or other taxable fringe benefits will vary from 100 percent to 300 percent of the tax due.
5] A penalty of Rs. 25,000 may be imposed if an individual or a company fails to maintain their accounts properly as directed by section 44AA.
6] A penalty of Rs. 1.5 lakhs or 0.5 percent of the sales revenue, whichever is less, can be levied if a company fails to have itself audited or fails to provide a report of said audit.
7] A fine of Rs. 1 lakh can be imposed if an accountant’s report is not issued as directed.
8] If a corporation fails to deduct tax as it is expected to during expenses, the penalty may be the payment of the tax owed.
These are only a few of the fines that the Income Tax Department will impose, and they can be very expensive in certain situations, so the safest thing to do is make sure that all taxes are paid on time.[11]
CONCLUSION
Knowing the negative effects of tax evasion on our economy, it becomes everyone’s responsibility to assist the government by following tax procedures and paying taxes as soon as possible. Our small commitment will have a huge impact on the health of our economy, so let us be the ones to bring about change for the betterment of all. If we take the proper steps to tackle tax evasion, we will absolutely eradicate it, easing the payment burden on current taxpayers. It is also important to continue to educate the public about Indian tax laws and to promote an atmosphere in which everybody pays their taxes on time and feels proud of their contribution to the economy.
References:
[1] https://link.springer.com/referenceworkentry
[2] http://www.ijbmi.org/papers/Vol(8)1/Version-3/M0801037276.pdf
[3] Alm, J. (2012). Measuring, explaining and controlling tax evasion: lessons from theory, experiments, and field studies, (August 2010), 54–77. https://doi.org/10.1007/s10797-011-9171-2
[4] Deva Rajappa. (2017). TAX EVASION IN INDIA: A STUDY OF ITS, (September), 134–138
[5] Kang, M. (2016). A psychological perspective on tax avoidance: Deferential avoidance vs. defiant avoidance, 14(1), 235–246.
[6] Supra 3
[7] Supra 4
[8] Spicer, M. W. (1974). Xerox University Microfilms DEL OF INCOM E TAX EVASION. The Ohio State University, Ph. D., 1974 Economics, finance.
[9] Tarun, G., Jasmin, K. S. S., Sciences, T., & Sciences, T. (2018). A Study on Tax Evasion in India, 119(17), 219–225
[10] https://dea.gov.in/annual-reports/annual-reports-archive – Audit report, Ministry of Finance