What is Tax Evasion? All You Need To Know About

Tax evasion is an illegal activity committed by an individual or a corporation in order to avoid paying taxes. It includes concealing or forging income, misrepresenting deductions without proof, failing to declare cash transactions, and other offences.

Tax Evasion in India

In India, there are various ways through which people evade tax such as Smuggling, Evasion of sales tax, Evasion of Income Tax, Evasion of Wealth Tax, Evasion of Customs Duty and Evasion of Excise Duty. Also, officials take bribery and help in making fabricated statements instead of reporting to tax authorities. By law tax evasion is a criminal offence in India. The Income Tax Act of 1961, Chapter XXII, contains provisions relating to the punishment of such offences.

Common Methods of Tax Evasion

Following are some of the ways people can avoid/evade paying taxes.

1. Failing to pay the due

This is the most basic method for avoiding paying taxes. They simply refuse to pay their taxes to the government, even though they are required to do so.

2. Using fake documents to claim exemption

The government grants certain members of society exemptions and benefits in order to ensure that they have the financial freedom to progress. However, members who do not qualify for such privileges may produce documents to support their claim of being a member of that organisation, thereby claiming exemptions where they are not qualified.

3. Smuggling

Many individuals and businesses turn to smuggling in order to avoid paying state taxes, import-export levies, and customs fees. Smuggling is a punishable offence in India, and tax evasion can result in more heavier fines.

4. Not showing any income

Many people use cash transactions to disguise the source of their income.  People often do not produce invoices for sales. Landlords may also only accept cash payments for rent rather than bank transfers or cheques.

5. Inaccurate financial statements

False financial records or accounts books may be filed, showing income that is less than what was actually earned. Reduction in taxable income, reduces the tax liability.

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Penalties for Tax Evasion

The punishment for tax evasion might vary depending on the type of fraud perpetrated and the amount of underpaid tax.

Penalty for failure to file taxes within due time.

According to subsection (1) of Section 139 of the Income Tax Act of 1961, all taxpayers are expected to file their income tax returns during the tax filing period for each fiscal year. Anyone who fails to file their income tax return on time, for whatever reason, must pay a late charge. This late penalty fee was Rs. 10,000 until the fiscal year 2019-20 ended. However, commencing in 2020-21, anyone filing a late income tax return will face a Rs. 5,000 penalties.

Failure to comply with a demand notice

If discrepancies in the income tax return are identified, the income tax (IT) department may issue a demand notice indicating the amount of tax still owed. The taxpayer has 30 days from the day the document is received to respond to the demand notice. A penalty may be imposed in the case of failure to answer and pay required amount. 

1. Not paying tax as per self-assessment

Section 140A considers failure to pay tax in accordance with self-assessment to be tax fraud (1). In such cases, the assessing officer may levy a penalty of up to the total amount of tax owed to the government.

2. Not complying with TDS regulations

Employers require a tax deduction account number (TAN) to deduct and collect tax at the source. Failure to obtain a TAN might result in a Rs 10,000 fine. Non-compliance gives rise to two kinds of frauds:

• The penalty for failing to collect tax at the source is the same as the tax that was not deducted at the source.

• Failure to file a TDS return: Taxpayers need to file TDS returns within due time. Failure to do so exposes the taxpayer to pay tax every day after the due date until the total payment is made. In this situation, the penalty can range from Rs. 10,000 to Rs 1,000,000.

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Tax Avoidance in India

Tax avoidance occurs when an individual or company legally utilises the tax system to reduce tax payments. Simply put, it means paying the least amount of tax while being on the right side of the law. It is defined as "the art of evading taxes without breaching the law." Through budget revisions, directives, and treaties with foreign countries, the Indian government has always been aggressive in addressing and fixing loopholes in tax laws and their structure.

Example of Tax Avoidance

There are numerous large companies’ houses that employ a variety of tax avoidance tactics, including tax heaven. For instance, in 2007, Vodafone International Holdings B.V. based in Netherlands purchased Hutch Essar in India through a complex tax avoidance strategy.The purpose of using non-resident businesses in the transaction was to avoid paying capital gains tax in India. Non-resident corporations were their own subsidiaries that conducted business outside of India. Vodafone International Holding B.V. purchased a 67 per cent share in CGP International, a subsidiary of Hutchison Telecommunication International Limited based in the Cayman Islands (HTIL). CGP already had a controlling position in Hutch Essar in India before to the acquisition, and Vodafone International Holdings B.V. gained control of Hutch Essar India by transferring a 67 per cent controlling stake in CGP.