Tax Evasion In India Last Updated : 07 Jun 2020

There are many methods that people use to evade paying taxes in India that range from false tax return and smuggling to fake documents and bribery. The penalties for this are high, from 100% to 300% of the tax for undisclosed income.

Rooting for taxes is never an easy thing because most people question that concept of giving away part of their earning to a government but the fact is that taxes are an important source of income for the government. This is the money that is invested in various development projects that are meant to improve the company's situation. But the country has been facing a massive problem with tax evasion. People who should be paying taxes have found ways not to pay them and, as a result, it may be said that the income of the country has been suffering. So let's take a look at what are the ways in which people are avoiding taxes and what are the penalties for it.

Common Methods of Tax Evasion:

There are two aspects of not paying taxes when they are due. The first is tax avoidance and the other tax evasion. The difference between the two is that tax avoidance is basically finding a loophole that exempts you from paying taxes and is not strictly illegal, while evasion is not paying the taxes when they are actually due, which is absolutely illegal. These are some of the ways in which people may avoid/evade taxes.

  • Failing to pay the due:

    This is the simplest way in which someone may evade taxes. They simply won't pay it to the government, not even when the dues are called for. A person engaged in this sort of tax evasion won't, willingly or unwillingly, pay the tax before or after the due date.

  • Smuggling:

    When certain goods move from one location to another, across international or state borders, a tax or charge may be payable in order to move the goods. However, some individuals may move these goods in surreptitious ways in order to avoid paying those taxes that evading the tax altogether.

  • Submitting false tax returns:

    In some cases, when an individual files taxes, they may submit false or incorrect information in order to either lessen the tax that they are supposed to pay or not pay it at all. This is also tax evasion since the complete information is not provided and they may actually be paying less than what they should.

  • Inaccurate financial statements:

    The taxes that are payable by an individual or an organisation may be decided on the financial dealing that have taken place during the assessment year. If false financial documents or accounts books are submitted, ones that show incomes less than what was actually earned, the tax may come down.

  • Using fake documents to claim exemption:

    The government may have provided certain exemptions and privileges to certain strata or members of society in order to ensure they have a bit more financial freedom to progress. In some cases, members who actually don't qualify for such privileges will get documents created to support their claim of being a part of that group thus claiming exemptions where they are not suited.

  • Not reporting income:

    It could be said that this is one of the most common methods of tax evasion. In this case, individual just won't report any income that they receive during a financial year. Not having reported any income, they don't pay any tax thus successfully evading tax all together. The simplest example of this would be a landlord who has kept tenants but has not informed the authorities that he has rented the house and is actually receiving an income from it.

  • Bribery:

    There may be a situation where there a certain amount due in taxes which the individual may not be willing to pay. In such a case he or she may actually offer a bribe to officials to not make them pay the tax and to make it 'disappear'.

  • Storing wealth outside the country:

    We have all heard tales of Swiss bank accounts. Offshore accounts are accounts maintained outside the country and information about the dealing in these accounts is not disclosed to the income tax department thereby evading any and all taxes due on that wealth.

Penalties for Tax Evasion:

There are various penalties that the income tax department can impose on anyone who is found guilty of evading or avoiding taxes. These penalties can also apply to companies that either fail to report and pay their own taxes or fail to deduct taxes at source when they are supposed to.

Some of these may be:

  • Collecting 100% to 300% of the tax when income is not disclosed.
  • In case of a failure to pay the tax due, the assessing officer may impose a penalty amount but it cannot exceed the amount due in taxes.
  • If an individual fails to file tax statements within the time allotted then a penalty of Rs. 200 per day may be charged for every day that the statements are not filed.
  • In case someone has concealed details of their income or any fringe benefits that are taxable, the penalty can range from 100% to 300% of the tax amount due.
  • In case a person or a company fails to maintain their accounts properly as directed by section 44AA, a penalty of Rs. 25,000 may be levied.
  • If a company fails to get itself audited or fails to provide a report of said audit, then a penalty of Rs. 1.5 lakhs or 0.5% of the sales turnover, whichever is less, may be charged.
  • If a report from an accountant is not provided as directed then a fine of Rs. 1 lakh may be levied.
  • In case an organisation fails to deduct tax where it is supposed to while making payments then the penalty could be payment of the tax due.

These are just some of the penalties that can be levied by the Income Tax department and, in some cases, it can be a hefty sum to pay, so best thing to do is to ensure that all taxes are paid when they are due.

News About Tax Evasion

  • CBEC Instructs Officials to Visit Garment Outlets Only for Tax Evasion

    The Central Board of Excise and Customs (CBEC) has issued instructions for officials to visit garment retail outlets only on the basis of concrete information of tax evasion after obtaining approval from seniors. The junior officials should obtain permission from the jurisdictional Commissioner or Additional Director General.

    In Budget 2016-17, the levy of excise duty was increased on branded readymade garments carrying a retail price of Rs.1,000 or more per unit. The new duty payable is 2% or 12.5 %, depending on the CENVAT credit.

    22 June 2016

  • Tax Pact with Mauritius to be amended to prevent Tax Evasion

    India is in talks with Mauritius for amendment of its tax pact with the country. The move is supposed to prevent tax evasion by taxpayers. India also might be seeking the right to levy capital tax in Mauritius. Round tripping and other treaty abuses are the main reasons why India has been looking to check the treaty points once again.

    Under the current bilateral agreement between India and Mauritius, Capital gains arising out of sale of securities can only be taxed in Mauritius. Capital gains tax is almost zero in Mauritius and as such almost 40% of investment inflow in the country comes from there. After a long round of negotiation, Mauritius has agreed to include a clause which shares benefit with India and is similar to the treaty that India has with Singapore.

    10 December 2015

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