Tax Evasion In India

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.

What is Tax Evasion?

Tax evasion is illegal action in which a individual or company to avoid paying tax liability. It involoves hiding or false income, without proof of inflating deductions, not reporting cash transaction etc. Tax evasion is serious offense comes under criminal charges and substantial penalties.

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

  • State Transport Authority asks RTOs in Odisha to check tax evasion by vehicles from other states

    The state government of Odisha has directed the Regional Transport Officers to check the tax evasion by the vehicles which are from other states. The state government has taken a tough stance on valid vehicle permits and payment of taxes from these vehicles.

    The Transport Commissioner, in a letter to the RTOs, has asked to launch specified drive to take proper action against the illegal working of contract carriages and goods carriages from other states. RTOs have also been directed to launch an enforcement drive from 2 September 2020 to 7 September 2020 to check on the operation of the vehicles.

    According to the letter, there have been witnesses where contract carriage and good carriage from other states are working inside the state of Odisha without having a valid permit and not paying taxes. Due to this, with stringent enforcement measures, the clandestine operation of such carriages need to be stopped.

    03 Sep 2020

  • CBDT to add new disclosure sections in ITR forms to check for evasion

    There will be a number of new disclosures in the income tax return forms which is a decision taken by the Central Board of Direct Taxes to check for tax evasion. For example, if there is trading in stock markets and investment above Rs.50,000 has been made, the share details must be mentioned in the ITR.

    The CBDT has signed a formal MoU with the Securities and Exchange Board of India for the data exchange between the two organisations which is said to mark a new era of cooperation and synergy between CBDT and SEBI, according to a formal release.

    Investment and trading data will be checked on an automatic and regular basis as and when requested by either of co-signers of the MoU for the purpose of carrying out the functions under various laws according to officials.

    According to official statements, the Income Tax department has sought for increasing the penalty for the non-disclosure of data which could prevent small amounts of tax evasion by the retail investors.

    The department has added a new sheet in the new form which will make disclosures under Schedule 112A easy, recording the sale of equity shares in a company which is listed in the stock market or an equity-based fund on which the Securities Transaction Tax is paid.

    14 July 2020

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