What is Tax Evasion And What Are The Penalties For Tax Evasion In India?

• 26th Mar 2021
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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, there are some people who try to evade paying tax. There are several ways to do this. However, tax evasion can lead to severe penalties. This article talks about tax evasion, how it is committed, and the penalties associated with it.

What is tax evasion?

Any activity that aims at hiding, understating, or falsely reporting income to reduce your tax liability can be termed as tax evasion. Not paying the tax due or paying less than what is due is considered to be tax fraud. Tax evasion is illegal in India and is dealt with severe penalties and punishment.

How do people evade tax?

People can resort to different ways to evade tax. Some of the most commonly used strategies include the following:

• 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 the Indian law, and the evasion of tax can result in greater penalties.
• Filing incorrect income tax returns: Submitting incorrect information like understating your income, overstating deductions, or any other kinds 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: 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, is another tax evasion tactic.
• 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 outside India: International bank accounts are not under the purview of the Indian income tax department. So, some people may maintain a bank account outside the country to store money.
• Not paying tax: A lot of people may refuse to pay tax. In this case, despite the tax dues, the person does not make the necessary payments to the government.
• Offering a bribe to an official: 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 completely eliminate any record of tax due under their name.

What is the penalty for tax evasion in India?

The penalty for tax evasion can depend on the fraud committed and the extent of tax unpaid. Here are some situations and the subsequent penalties levied in case of each:

1.Failing to file your income tax return within the due time. As per the subsection (1) of Section 139 of the Income Tax Act of 1961, all taxpayers need to file their income tax return during the tax filing period for each financial year. If anybody does not file their income tax return due to any reason, they have to pay a penalty of ₹5,000. In some cases, the assessing officer can also decide the value of the penalty, which can be less or more than ₹5,000.

2.Proving incorrect pan card number or hiding the pan card number Most employers ask for the employees’ pan card number 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 as opposed to 10% TDS.
• Providing an incorrect pan card number: In case of an incorrect pan card number, you will have to pay a penalty of Rs. 10,000.

3.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 10% and 200% 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 income that is hidden or understated 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 200% on the amount of income that is hidden or understated is levied if the mistake was intentionally made to evade tax. This is also known as a mala fide mistake.

4.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 frauds 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 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 for every day after the due tax till the time the entire payment is made. The penalty, in this case, can start from ₹10,000 and go up to ₹1, 00,000.

5.Failure to comply with a demand notice The income tax (IT) department may issue a demand notice if there are inconsistencies 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.

6.Not paying tax as per self-assessment. 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.

7.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 their 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.

How to avoid tax evasion?

It can help to be fully aware of the tax rules in the country in order to avoid any tax frauds. Keeping track of your income, deductions, and exemptions and understanding the underlying rules pertaining to each of these can ensure that you file your tax returns and pay your tax correctly. It may also help to consult a professional financial advisor or tax planner to avoid any delays, lapses, or mistakes.

Savings and tax guide by Kotak Life

Kotak Life offers a carefully curated pool of helpful guides that makes it easier to understand tax-saving strategies. Given the many provisions to claim tax benefits, deductions, etc. under the Income Tax Act of 1961, you can lower your tax liability using legal and accepted ways. This leaves no room for committing fraud or evading tax by unlawful means. Moreover, not only do you save tax but also build a pool of savings for later, securing your future and that of your family’s.

To sum it up

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.

- A Consumer Education Initiative series by Kotak Life