Tax evasion involves the deliberate act of underreporting income, inflating expenses, or engaging in false schemes to evade the rightful payment of taxes. It is a term that casts a dark shadow over the realm of finance.
Income tax, goods and services tax, import-export tax, state border tax, etc., are some mandatory taxes in India. However, some people try to evade paying taxes despite the rules and regulations surrounding these taxes.
Some causes of tax evasion include higher tax rates, lack of integrity on the part of the citizens, the existence of tax havens, etc. However, tax evasion can lead to severe penalties. This article talks about tax evasion, how it is committed, and its penalties.
What is Tax Evasion in Income Tax?
Tax evasion happens when people do not report their actual income under the Income Tax return. This is considered illegal, and the defaulter who hides the actual income can be punished under the law. You can save tax through legal methods available, which require investing in various schemes and plans, but following unfair practices comes under a crime.
For example, not paying the tax or paying less than what is due is considered to be tax fraud. It is essentially the criminal act of a person or a company attempting to avoid paying their tax obligations. It includes concealing or fabricating income and falsifying deductions without proof. Another tax evasion example is failing to declare cash transactions, etc.
People utilize various methods to avoid paying taxes, including filing fraudulent tax returns, smuggling, falsifying documents, and bribery.
Types of Tax Evasion
Tax evasion is commonly practiced in the informal economy. This happens mainly because of two factors: lack of compliance and lack of enforcement. One of the most common ways to evade tax is smuggling. However, there are two broad categories to classify tax evasion, which are explained below:
Evasion of Assessment
A tax evader, by filing a false return, can avoid the tax assessment. Fake returns conceal income and list erroneous deductions. This leads to an incorrect assessment of the tax. In case the person transfers taxable assets in the books to mislead the Internal Revenue Service (IRS), it is also considered an attempt to evade the assessment.
Evasion of Payment
If the taxpayer hides the assets after the tax is due, it is an attempt to evade the payment. Concealment of the assessable assets or money in a family member’s or foreign account is a different way of avoiding tax payments.
Tax Exemptions Vs. Tax Evasions
For a layperson, technical terms like tax exemption, tax planning, tax avoidance, and tax evasion can become quite challenging to comprehend. With little or no understanding of these critical terminologies, taxpayers may fail to make the most of the benefits these government provisions offer.
Here’s a tabular comparison between the two most commonly confused terms: tax exemptions and tax evasions:
Tax Exemptions
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Tax Evasions
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Refer to expenditure, income, or investment on no tax levied
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Refers to avoiding tax payments through illegal means or frauds.
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Reduces the overall taxable income
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Does not alter the taxable income
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Undertaken by employing government provisions like House Rent Allowance, Lifetime Arrears, etc.
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Undertaken by using unfair means.
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Helps taxpayers save their hard-earned money through lawful means
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Helps taxpayers save their hard-earned money through unlawful, fraudulent means.
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Leads to no penalties if done wisely and as per the available provisions
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Leads to serious penalties and fines
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What are Tax Avoidance and Tax Evasion?
Tax evasion and tax avoidance in India are another set of terms that taxpayers often misunderstand.
Tax Avoidance
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Tax Evasion
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This means reducing tax liability without violating tax rules.
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It implies reducing tax liability by using illegal methods.
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This is an informal way to reduce income tax through legal ways.
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This is objectionable, and strict legal action can be taken.
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This process occurs before filing the income tax.
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This usually occurs after tax liability arises.
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An example of tax avoidance is investing in a retirement account.
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An example of tax evasion is keeping money in foreign account.
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Having read the meanings of these terms, you can now clearly understand the difference between tax planning, tax avoidance, and tax evasion and make prudent financial decisions.
Tax Evasion Method
One can evade one’s taxable income through various unfair means. However, technology and innovation have made the Income Tax department catch the defaulters. Here are some common tax evasion methods:
- Misleading financial statements
- Reporting lower income than the actual one
- Not paying tax dues on time
- Justifying the false claim for exemption
- Keeping money in foreign accounts
Tax Avoidance Method
Mentioned below are a few methods for every employed person to avoid tax and still being legal:
- You can claim the Child Tax Credit
- You can put money into a Health Saving Account (HSA)
- Opt for a mortgage tax deduction
- Invest in a retirement account
How Do People Evade Tax?
Tax evasion is a common practice among Indian business-class people. They earn loads of money and find various illegal methods to avoid the trap. Most people carry out these unfair practices to escape the process of taxation.
Smuggling Instead of Paying State Border Tax, Import Tax, Etc
In order to avoid paying state taxes, import-export taxes, and customs duties, many people and businesses resort to smuggling. Smuggling is a punishable act under Indian law, and tax evasion can result in greater penalties.
Filing Incorrect Income Tax Returns
Submitting incorrect information like understating your income, overstating deductions, or any other kind of false reporting is a popular income tax evasion strategy. However, this is illegal.
Maintaining Fake Financial Statements
Inaccurate financial documents like balance sheets and account books can give the impression of a low annual income. Some businesses also do not keep sale receipts to understate their income and reduce their tax due for the year.
Using Fake Documents For Tax Deductions
Another tax evasion tactic is getting fake documents made to prove that you are eligible for a tax deduction, such as a disability certificate, to claim tax deductions under Section 80U.
Not Showing Any Income
Many people resort to cash transactions to hide the trail of their earnings. Not having any income on paper implies that you do not have to pay any tax either. Businesses often do not produce invoices for their sales. Similarly, landlords may accept only cash payments instead of bank transfers or cheques for rent.
Keeping Money in International Bank Account
The Indian income tax authority has no jurisdiction over foreign bank accounts. Some individuals might keep a bank account outside of the nation to keep money. This is illegal under the law as this income cannot be determined while calculating taxes. If government officials get to know about the money in international accounts, one can be punished for committing this crime.
Not Paying Tax
A lot of people refuse to pay taxes. Then, despite the tax dues, the person does not make the necessary payments to the government, or people leave the country. The Income Tax Department keeps on reminding the dues regularly. After giving chances, there are provisions under which action is taken against the defaulter.
Offering a Bribe to an Official
Offering bribes is one of the most common ways of committing tax crimes in India. Offering a bribe to an income tax official to change the amount of tax due is another way to evade tax. People turn to bribes to lower or eliminate any tax record due under their name. Both accepting and offering bribes are illegal. Strict actions are taken in case you are caught for the same.
Tax Evasion Examples
Ritika is a server at a restaurant, and she earns an amount of ₹2000 every night in the form of tips. Ritika’s employer does not keep track of tips as he trusts her to note them down in the logbook. She deliberately reports a small amount of her total tip income, which is just ₹50. This was an attempt to lower the tax burden.
According to the rules, Ritika has to report the tips she received. However, Ritika misstated her income throughout the income. As a result, she is a defaulter.
Similarly, Akash is a businessman in Mumbai. He earns crores in a year, and to avoid taxes, he has transferred the income into different bank accounts in other countries illegally. Keeping money in another country’s bank account to avoid taxes is a crime under the law. This is another wrong way to escape tax.
Tracking Tax Evasion by Using Tech
Tax evasion can be tracked by using Artificial Intelligence (AI), Data Analytics, and Machine Learning (ML). The transparent taxation platform deploys these technologies to track tax fraudsters and evaders.
The Central Bureau of Direct Taxation and the Central Board of Indirect Taxes and Customs use big analysis to determine the tax defaulters and their penalties.
What are Tax Evasion Penalties?
According to the Income Tax Act, tax evasion is treated as a punishable offense in India. This can result in severe penalties. The degree of the fraud perpetrated and the amount of the owed tax may affect the punishment for tax evasion. Hence, it is recommended to take income tax compliance seriously to avoid any legal action by authorities. Here are some situations and the subsequent penalties levied in case of each:
Failing to File Your Income Tax Return Within the Due Time
As per subsection (1) of Section 139 of the Income Tax Act of 1961, all taxpayers must file their income tax return during the tax filing period for each financial year. If anybody does not file their income tax return for any reason, they have to pay a late fee. This late penalty fee was ₹10,000 till the financial year 2019-20. However, effective from 2020-21 till date, anybody filing a belated income tax return is charged ₹5,000 as a penalty. In some cases, the assessing officer can also decide the value of the penalty, which can be less or more than ₹5,000.
Proving an Incorrect PAN Card Number or Hiding the PAN Card Number
Failure to furnish accurate information while filing an ITR is also a punishable offense. Most employers ask for the employees’ PAN card numbers at the time of employment. This information is used while deducting TDS or the tax deducted at source from the employee’s salary. Here’s the penalty for two scenarios involving a PAN card:
- Hiding the PAN card number: In the absence of a PAN card number, the employer will deduct 20% TDS instead of 10% TDS.
- Providing an incorrect PAN card number: In case of an incorrect PAN card number, you will have to pay a penalty of ₹10,000.
The taxpayer may not provide accurate information in the Income Tax Return submitted to the authorities. In addition, the assesse may discover inaccuracies in the information provided after it has been submitted. However, it is possible that the assessment will not be able to be corrected within ten days of submission. Alternatively, the assessor may be aware of the error during submission but fail to notify the Income Tax Department. The penalty amount in such circumstances can be ₹50,000.
Concealing or Misreporting Your Income
As per Section 271(C) of the Income Tax Act of 1961, in case of hiding or understating your income, the penalty can be anywhere between 100% to 300% of the amount of tax that was due but not paid. Here’s how the percentage is decided:
- A penalty of 10% on the previous year’s hidden or understated income is levied if the taxpayer owns up to the undisclosed income and declares it. Interest may also be charged here.
- A penalty of 50% on the amount of income that is hidden or understated is levied if the reason behind the under-reporting was a bona fide mistake. This refers to a genuine mistake that is not committed with an aim to evade tax.
- A penalty of 300% on the amount of hidden or understated income is levied if the mistake was intentionally made to evade tax. This is also known as a mala fide mistake.
Income tax officials may feel compelled to raid a location to find the taxpayer’s undeclared income. Consequently, the penalty will be computed according to Section 271AAB in such instances.
Not Complying with TDS Regulations
For businesses or employers who deduct and collect tax at source, having a Tax Deduction Account Number (TAN) is vital. Not having a TAN can result in a penalty of ₹10,000. There are two kinds of fraud that can be committed here:
- Not collecting tax at source: In this case, the penalty is the same as the tax that was not deducted at the source.
- Not filing a TDS return: Just like income tax returns, there is also a due date for filing TDS returns. If the TDS return is not filed within the stipulated time, the taxpayer has to pay tax every day after the due tax until the entire payment is made. The penalty, in this case, can start from ₹10,000 and go up to ₹1,00,000. To avoid paying this penalty, taxpayers must file TDS returns before the prescribed due date.
Failure to Comply with a Demand Notice
The Income Tax (IT) department can issue a demand notice if inconsistencies are found in the income tax return. If this happens, the IT department issues a demand notice stating the amount of tax still owed. The taxpayer is offered 30 days to respond to the demand notice from the day of receiving the document. A failure to respond and pay the tax due can result in a penalty.
Not Paying Tax as Per Self-Assessment
Taxpayers who fail to pay the entire or a part of their self-assessed tax or interest are considered defaulting taxpayers. Failure to pay tax as per self-assessment is considered to be tax fraud under Section 140A (1). In such a case, the assessing officer can levy a penalty up to the total amount of tax owed to the government. However, the assessing officer may waive the penalty if there is a valid reason for not paying tax as per self-assessment.
Not Getting Audited
If an organization does not get itself audited or does not submit an audit report under Section 44AB, they have to pay a penalty of ₹1.5 lakhs or 0.5% of its sales turnover, whichever is more. In addition to this, if the taxpayer does not provide a report from an accountant as mandated under Section 92E, they have to pay a penalty of at least ₹1 lakh or more.
To avoid the penalty, the taxpayer must document all domestic and overseas transactions and obtain a report from a chartered accountant in India on or before the deadline. In addition, a penalty of 2% of the value of the transaction (international or domestic) will be applied if any documents required by the Act are not given or attached under Section 92(D)3.
It should be emphasized that the assessing officer is not required to impose a penalty in all circumstances where there is a default. The assessee may have been experiencing difficulty due to circumstances beyond their control.
For example, the assessee may have been unable to carry out ordinary business operations, such as maintaining books of account, due to the hardship. In addition, natural disasters such as cyclones, floods, and other natural disasters may have contributed to the hardship. In such instances, the assessing officer has the authority to exclude the assessee from the Act’s criminal penalties. However, the assessing officer must document in writing the basis for granting the assessee the exemption advantage.
How to Avoid Tax Evasion?
Keeping track of your income, deductions, and exemptions and understanding the underlying rules about each of these can ensure that you file your income tax return and pay your tax correctly. You can also help consult a professional financial advisor or tax planner to avoid delays, lapses, or mistakes.
Conclusion
Tax evasion is a serious crime in India and should be avoided at all costs. Repeated attempts to evade tax can result in severe punishments. This is why it is extremely important to pay attention to your income tax details, file your returns on time, and ensure that you follow all the rules and regulations laid down by the income tax department and the Government of India.
Key Takeaways
- Taxpayers who fail to pay the entire or a part of their self-assessed tax or interest are considered defaulting taxpayers.
- Tax exemption can reduce your taxable income.
- For businesses or employers who deduct and collect tax at source, having a Tax Deduction Account Number (TAN) is vital.
- Unlawful activities to evade tax can make you a defaulter and penalized under the law.
- The degree of the fraud perpetrated and the amount of the owed tax may affect the punishment for tax evasion.
