This article is written by Amartya Sharan from School of law, UPES. This is an exhaustive article that covers the meaning of tax evasion and the difference between tax evasion and avoidance.
The growth of a country depends on the amount of tax it collects, it is one of the ways of getting funds to run the country. The amount of tax collected plays a very important role in the growth of the Indian economy.
Tax evasion simply means hiding information or income from the Income-tax authorities. In our country, tax evasion is a very big problem and due to that, it creates a lot of problems in the functioning of public sector organizations. This public sector organization depends on the government money that is collected by leaving different types of taxes on the population but if people will hide their income or show less income then they will pay less tax to the government that will affect the basic functions of the public sector organizations.
In our country, we need to inform people about all of the possible measures which we have to take in order to ensure that a proper taxation system is being followed. One of the basic requirements is to ask for the bill from the shopkeeper for any purchase, when we accidentally forget to ask for a bill for our purchase then the shopkeeper will not have to pay the amount of tax on that particular purchase so he will not pay tax on that amount. It may seem very little but think how many of us are asking for the bill, many times the shopkeeper purposely do not give us the proper bills in order to save tax. So we need to ask for a bill for every purchase no matter how small or big it is.
The tax money that the government collects will be ultimately used for the development activities, so the money we pay as tax is used to give us the benefits that we use as citizens of the country.
What is tax evasion?
In simple words, tax evasion can be understood as the underpayment or non-payment of taxes. The taxation structure of our country is very lengthy and confusing due to the fact that many times some people made mistakes in filing the tax return, these types of mistakes are accepted by statute but purposely hiding income or assets from the tax authority is known as tax evasion and it is a criminal offence. It includes both illegal non-payment of taxes as well as illegal underpayment of taxes.
If a person fails to pay the proper taxes to the authority then he may face criminal charges against him but the authorities have to prove that it is a willful act of the accused. Willful non-payment is one of the essential conditions that are necessary to prove that the person is trying to do tax evasion.
In our country, we can see the results of doing tax evasion such as an increase in corruption, an increase in the prices of houses, land, etc. The direct impact of tax evasion can also be seen in the increase in inflation and the loss of revenue of the country. The Indian revenue system categorizes tax evasion in two categories i.e. evasion of assessment and evasion of payment. In evasion of assessment, the taxpayer transfers his assets to some other person so that when the authority assesses his income they cannot evaluate the tax liability of that person. In evasion of payment, the taxpayer tries to hide his money after the tax becomes due which is the case of evasion of payment.
Difference between tax avoidance and tax evasion
The major difference between tax evasion and tax avoidance is tax evasion is an illegal activity under the income tax Act while tax avoidance is a legal activity. Our government provides us many opportunities to reduce the tax liability on us by investing our money in various schemes that are provided by the government. The government also provides us loans for houses, for study, etc and by taking such loans we can save the tax on the amount.
Tax evasion is completely different from tax avoidance. In tax evasion, a person purposely shows his income less in order to cheat the government. There are many ways in which a person can perform tax evasion such as non-payment of dues in this the person is not paying the tax to the government that is due upon him. Providing inaccurate financial documents and forged documents in this the person provides fake or inaccurate documents to the authority that shows a very less amount of income so that they have to pay very less amount of tax than the actual amount. Smuggling of goods from one state to another is also a way of doing tax evasion. In this the person moves goods from one state to another by different means without paying the appropriate taxes to the authorities. Off-shore wealth, in this the person keeps money in some other country where he has to pay a very minimal amount of tax, and that country also not discloses the amount of money he kept in his country.
Reasons to avoid tax evasion
Tax evasion can be avoided by the citizens of the country because of many reasons. The most important is the government uses the money given by us in the form of tax for the development activities and if we do not pay taxes or we hide our income to pay less tax to the government then ultimately it will affect the overall development of our country.
The country depends on its taxpayers to build or to repair the infrastructure that is there in the country. If the government will not receive enough tax then they do not have the money to repair the public infrastructures such as dams, roads, railway, and bridges. These things require proper maintenance and to do that a lot of money is required and tax is one of the major sources of income of the government, so we need to pay the tax that is liable to us.
The government pays salaries to lakhs of their employees all by the tax money they collect, and if we don’t pay tax or pay less amount of tax then the government will have to take loans from international organizations in order to pay the salaries of these people and because of that the growth rate of the country decreases, so it is in the benefit of ours as well as our country that we pay the exact amount of tax that is due.
There are various other schemes that the government officially provides us to save some amount that we pay on our taxes. So if we want to pay less tax then we can invest our money in those schemes to save our tax by a legal method. We can also donate some of our money in order to save tax.
So, there were enough and good reasons that no one should practice tax evasion, it is for the betterment of society that we pay tax.
There were various rules and regulations in the Income Tax Act that restricts tax evasion and different activities that are used in paying less tax to the government.
Such as in section 139(1) of the income tax Act it is given that a person has to follow the rules prescribed in this section for submitting his/her tax return and if he fails in doing so then the assessing officer has the power to impose a fine on such person.
The assessee has to provide a PAN number to the employer at the time of joining a company so that the TDS of 10% is deducted from our salary and if we fail in providing PAN number to our employer then 20% of our salary will be deducted.
In Section 140 A(1) it is said that if any person fails in paying the self-assessment tax or interest then he shall be treated as a defaulter under this section and the punishment for this offense will be given according to Section 221(1).
In Section 270A of the income tax, it is said that if a person tries to show his income more than the actual income then he will be made liable under this section.
In Section 44AA of the Act, some requirements were given that a company has to follow to maintain their books and if they do not follow that then according to Section 271 A a fine will be imposed upon them.
Response of the Government
The Indian government has adopted various measures to curb this evil practice of tax evasion. Some of the measures were the introduction of new taxes, adopting a new mechanism in taking the annual tax return from the citizens to remove the complexities present, and giving options to the people so that they can use them and save some amount that they pay as tax. Our country also follows the agenda of the Base erosion and profit shifting Initiative and also a major contributor to the OECD BEPS initiative Programme.
The government also established a special investigating team that will look into cases where large amounts of the sum are taken out of the country by some persons after doing tax evasion or some illegal activities.
The government also adopted a new Act named The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 to deal with the income-related matter specifically.
Our government is also working with other countries in order to exchange information about the people depositing their money in their banks. India has also signed an agreement with countries like Mauritius and Cyprus regarding avoidance of tax.
Our government is also focusing on information exchange with many countries such as Switzerland where many people of our countries have deposited their money to save taxes, both the government has also agreed on some points related to information sharing between them regarding these persons.
Implications of tax evasion
In our country, the income tax Act determines the punishment and penalties for those who have done any kind of willful act related to tax. Such as showing their income less than the actual, hiding their assets in order to pay no tax on them, passing their properties to others to cheat the authorities, and smuggling of goods too. The punishment related to these activities was given in our income tax act as well as in some criminal activities is involved in between then there were other activities as well that will help us in giving punishment to the culprits.
In section 270A of the Act, the punishment related to under-reporting of income is given under this section it is given that if a person allegedly reports his income less than the actual income then he will be made liable according to this action and he will have to pay a tax of up to 200 % on the unreported income. There is a provision of imposing a fine of up to Rs. 25,000 on a person who does not maintain his books of accounts as per the act given in Section 271A of the Act. There were various cases in which it is possible to spend some time in jail because of tax evasion.
The difference between tax evasion and tax avoidance is very less, we can say that the one major difference is that one system is legal and another is not but in both ways we only hope to save our money. The method that is used to do that differentiate both of them. One system is provided to us by the government to give us the options for saving our tax money legally and not to indulge in any kind of illegal activities and face consequences of the same.
Tax is the biggest source of income of the government and the government uses only that money in all types of development activities. So, it is in the interest of all of us to not practice tax evasion and to give proper tax to the government that is liable to us. The government has introduced a lot of measures so that no one faces any difficulties in giving theIr annual returns.
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