Tax Evasion in India

What is Tax Evasion?

• Tax evasion is an activity that aims to hide, understate or falsely report income to reduce your tax liability. It comes under Tax fraud which consists not paying tax, paying less than what is due, not declaring cash transactions, fabricating income, falsifying deductions without proof etc.
• 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% - 300% of the tax. But, you should also not ignore the fact that taxes are an essential source of revenue for the government.

The difference with Tax Avoidance

• Tax Avoidance means avoiding paying taxes by lawfully complying with the provisions.
• But Tax evasion is to avoid paying taxes through fraud and unfair practices.
• If one aims to avoid paying taxes, they can use the loopholes in the provisions to their advantage, but if you choose to evade paying taxes, you must employ unlawful practices with minified intentions.
• Tax Avoidance is a means of Tax planning performed before tax liabilities arise and Tax Evasion is a blatant fraud performed after the tax liabilities arise.

How do people evade tax?

• Through smuggling instead of paying state taxes, EXIM taxes and Customs duties. It is a punishable act under Indian law.
• Filing incorrect income tax returns like understating your income and overstating deductions.
• Making fake financial statements and fake documents.
• Keeping money outside India.
• Bribing the officials.

Why do people evade tax?

• When the tax rates are high compared to their incomes.
• When tax authorities are not vigilant and law enforcement is not strict, people can evade taxes since there are no consequences.
• Personality traits and Greed in society.
• The habit of accumulation in society.

Impact of Tax evasion on the Indian Economy

• Less Revenue for the Government leading to Fiscal Deficit.
• Generation of Black Money and Gresham’s Law. Gresham's law is a monetary principle stating that "bad money drives out good." This increases inequality in the society.
• When Black money circulates in the market, it leads to high inflation in the market.
• The inflated prices of Real Estate are an example of this.
• India’s Black Money is stashed in tax havens abroad like Swiss Bank etc.

Government Efforts to stop Tax Evasion and Black Money

• 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.

Way Forward and Conclusion

• If India really wants to avoid tax evasion, then it must lower tax rates, bring Direct Taxes Code Bill, create an efficient tax administration, increase awareness and simplify the procedures to create a well-defined tax structure for the long term.