What is Tax Evasion? Meaning, Methods & Penalties

What is Tax Evasion?

Tax evasion is the illegal and deliberate act of not paying taxes that are legally due. It is typically not an accidental mistake on the tax return; rather, it is a conscious, often deceptive, effort to defraud the government. Tax evasion meaning the act of avoiding tax with the help of illegal practices, for example, intentionally underreporting income, inflating deductions or credits you are not entitled to, or hiding money or assets offshore.

Tax evasion in income tax is fundamentally different from tax avoidance, which involves legally arranging your financial affairs to minimize tax liability. Tax evasion, however, steps firmly into criminal territory because it directly starves the public pool of funds. These are the very funds essential for building and maintaining our infrastructure, such as roads, schools, and hospitals, and for providing public services such as healthcare, education, and national defense. Ultimately, it is a serious offense that undermines the fairness and integrity of a system designed to benefit everyone.

Penalties for Tax Evasion

According to the Income Tax Act, tax evasion is 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 returns during each financial year’s tax filing period. If anybody does not file their income tax return, they must pay a late fee. This late penalty fee was ₹10,000 until the financial year 2019-20. However, effective from 2020-21 to 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.

Providing an Incorrect PAN Card Number or Hiding the PAN Card Number

Failing to provide 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 assessee may discover inaccuracies in the information provided after submitting it. 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 between 100% and 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 hidden or understated income is levied if the reason behind the under-reporting was a bona fide mistake. This refers to a genuine mistake that is not committed 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.

For businesses or employers who deduct and collect tax at the source, having a Tax Deduction Account Number (TAN) is important. Not having a TAN can result in a penalty of ₹10,000. Two kinds of fraud can be committed here:

• Not collecting tax at the source: The penalty is the same as the tax 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 date until the entire payment is made. In this case, the penalty can start from ₹10,000 and go up to ₹1,00,000. Taxpayers must file TDS returns before the prescribed due date to avoid paying this penalty.

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 from receiving the document to respond to the demand notice. 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 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 submit an audit report under Section 44AB, it must pay a penalty of ₹1.5 lakhs or 0.5% of its sales turnover, whichever is more. In addition, if the taxpayer does not provide an accountant’s report as mandated under Section 92E, it must pay a penalty of at least ₹1 lakh or more.

Common Methods of Tax Evasion and Penalties in India

Tax evasion occurs when individuals or organizations fail to report their true income on their tax returns, an illegal act punishable by law. While tax savings through legal investments are permissible, dishonest methods constitute a crime and lead to tax evasion penalties such as imprisonment or heavy monetary fines. Ways of tax evasion include the following:

Smuggling Instead of Paying State Border Tax, Import Tax, Etc.

Many people and businesses resort to smuggling to avoid paying state taxes, import-export taxes, and customs duties. Under Indian law, smuggling is punishable, 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.

Not Getting Audited

If an organization does not get itself audited or submit an audit report under Section 44AB, it must pay a penalty of ₹1.5 lakhs or 0.5% of its sales turnover, whichever is more. In addition, if the taxpayer does not provide an accountant’s report as mandated under Section 92E, it must pay a penalty of at least ₹1 lakh or more.

Common Methods of Tax Evasion and Penalties in India

Tax evasion occurs when individuals or organizations fail to report their true income on their tax returns, an illegal act punishable by law. While tax savings through legal investments are permissible, dishonest methods constitute a crime and lead to tax evasion penalties such as imprisonment or heavy monetary fines.

Smuggling Instead of Paying State Border Tax, Import Tax, Etc.

Many people and businesses resort to smuggling to avoid paying state taxes, import-export taxes, and customs duties. Under Indian law, smuggling is punishable, 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 sales receipts to understate their income and reduce their taxes due for the year.

Using Fake Documents for Tax Deductions

Another tax evasion tactic is getting fake documents 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 you do not have to pay 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 Bribe to an Official

Offering bribes is one of India’s most common ways of committing tax crimes. 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.

Difference between Tax Evasion vs. Tax Avoidance vs. Tax Planning

While many people look for ways to reduce their tax liability, it is absolutely important to understand the different paths available, because they come with vastly different implications. We are talking about tax evasion, tax avoidance, and tax planning. At one extreme, tax evasion is the outright illegal act of deliberately misrepresenting or concealing information to pay less tax than legally owed. This is a criminal offense with severe penalties.

Then there is tax avoidance, which operates in a grayer area. It involves using legal methods and interpretations of tax laws, often exploiting loopholes or ambiguities, for tax exemption. While technically legal, it can sometimes be seen as aggressive or contrary to the spirit of the law and may carry reputational risks or trigger legislative changes.

Finally, tax planning is the proactive and entirely legitimate process of arranging your financial affairs to make the best use of all available allowances, deductions, exclusions, and exemptions in the tax code to reduce your tax burden, often in ways the government actively encourages.

Understanding these distinctions is key, so let’s break them down further in a table:

Conclusion

Tax evasion in India is a serious crime 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.

FAQs on Tax Evasion