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Ref. No. KLI/22-23/E-BB/492
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Tax evasion is an illegal practice to avoid paying income tax. It is considered a crime under the law. Read ahead to know more about it.
Income tax, goods and services tax, import-export tax, state border tax, etc., are some mandatory taxes in India. However, despite the rules and regulations surrounding these taxes, some people try to evade paying 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.
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. Tax evasion is important because it is considered illegal in India and leads to severe penalties. The penalty for not disclosing income ranges from 100 percent to 300 percent of the tax.
Tax evasion is commonly practiced in the informal economy. This happens majorly because of two factors, the lack of compliance and the 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:
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 Services (IRS), it is also considered an attempt to evade the assessment.
If the taxpayer hides the assets after the tax is due, then 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.
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.
Tax planning and tax evasion are two such terms. The difference between tax planning and tax evasion is clear and simple to understand. Here’s a tabular comparison between the two most commonly confused terms: tax exemptions and tax evasions:
Tax Exemptions |
Tax Evasions |
Refer to expenditure, income, or investment on no tax levied. |
Refers to avoiding tax payments through illegal means or frauds. |
Reduces the overall taxable income |
Does not alter the taxable income |
Undertaken by employing government provisions like House Rent Allowance, Life-time Arrears, etc. |
Undertaken by using unfair means. |
Helps taxpayers save their hard-earned money through lawful means |
Helps taxpayers save their hard-earned money through unlawful, fraudulent means. |
Leads to no penalties if done wisely and as per the available provisions |
Leads to serious penalties and fines |
Tax evasion and tax avoidance in India are other set of terms that taxpayers often misunderstand.
Tax Avoidance |
Tax Evasion |
This means reducing tax liability without violating tax rules. |
It implies reducing tax liability by using illegal methods. |
This is an informal way to reduce income tax through legal ways. |
This is objectionable and strict legal action can be taken. |
This process occurs before filing the income tax. |
This usually occurs after tax liability arises. |
An example of tax avoidance is investing in a retirement account. |
An example of tax evasion is keeping money in foreign account. |
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.
One can evade one’s taxable income through various unfair means. However, the technology and innovation have made the Income Tax department catch the defaulters. Here are some common tax evasion methods:
As tax avoidance is basically finding a way to save income in a legal way, it comes with various methods for the same. Mentioned below are a few methods for every employed person to avoid tax and still being legal:
Tax evasion being a common practice among Indian business-class people. They earn loads of money and find various illegal methods to avoid the trap. These unfair practices are carried by most people to escape the process of taxation.
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.
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.
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.
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.
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.
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 a crime.
A lot of people refuses 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 an action is taken against the defaulter.
Offering bribe is one of the most common ways of coming tax crime 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 the bribe is illegal. Strict actions are taken in case you are caught for the same.
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 a 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 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 through illegal ways. 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.
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 uses big analysis to find out the tax defaulters and their penalties.
According to the Income Tax Act, tax evasion should be 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:
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.
Failure to furnish accurate information while filing 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:
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 assesse will not be able to correct it within ten days of submission. Alternatively, the assesse may be aware of the error during the submission process but fail to notify the Income Tax Department. The penalty amount in such circumstances can be ₹50,000.
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:
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.
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 frauds that can be committed here:
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.
Taxpayers who fail to pay 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, if there is a valid reason for not paying tax as per self-assessment, the assessing officer may waive off the penalty.
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 the basis for granting the assessee the exemption advantage in writing.
It can help to be fully aware of the tax rules in the country in order to avoid any tax fraud. 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.
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.
Ref. No. KLI/22-23/E-BB/999
Ref. No. KLI/22-23/E-BB/490
