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Introduction

Tax evasion refers to various actions or activities using which an individual or business entity willfully avoids paying due taxes to the government. Non-payment, underpayment of taxes, concealing of assets to reduce tax liability are some commonly practised methods of tax evasion. Tax evasion is a major criminal offence and if caught evading taxes you are liable to be punished by the prevailing income tax laws of the country.

Effects of Tax Evasion on the Economy

Tax evasion has a ripple effect on the economy. When individuals and corporations engage in tax evasion, it reduces the tax revenue for the government. As a result, the government has to cut down essential expenses, go into debt or increase the tax burden of the citizens.

When one person evades taxes, it will not cause the government to lose a significant portion of its revenue. However, when a large number of taxpayers engage in these malpractices, it impacts the revenue of the government, thereby slowing down the economic progress of the nation.

As a result, the government is strict in handling tax evasion. If caught, the consequences are quite severe and can range from hefty penalties to even imprisonment.

Common Ways of Tax Evasion

Not Paying Dues Willfully

The most basic form of tax evasion is simply not paying the dues when the time arrives to pay taxes. The individual willingly avoids paying his/her taxes even if the due date passes.

Evading Import and Export Duties

Tax paid when bringing in or moving goods out of a country are called customs charges. All goods have these charges; The amount of charges varies depending on the type of goods. Not paying customs charges is the act of smuggling goods illegally into or outside the country and is a common method of tax evasion.

Falsifying Tax Returns

Some individuals may file incorrect tax returns to lessen or completely remove the requirement to pay taxes. This will also be included as part of tax evasion because these individuals have not submitted complete or full information required for paying taxes, as a result, will be paying less tax than they should be paying.

Inaccurate Financial Statements

This is another popular method of tax evasion. This type of evasion can be done on a massive scale like an entire company falsifying their bank statements or by individuals as well. A company can falsify their statements only if they submit edited account books.

The tax amount due will be based on the numbers from the edited account book. Similarly, if a single person does the same by submitting false account books and documents to the government based on which their tax dues are generated.

Availing Exemption Using Fake Documents

To ensure that the lower classes of society can survive on their meagre incomes the government of India offers various beneficial schemes to help them cope better financially. Certain members of society who are not eligible for these deductions misuse these schemes to get exempted from paying taxes. They submit false documentation to avail the benefits of tax exemption.

Not Reporting the Correct Amount for Source Income

This is the most common form of tax evasion. To put it simply - if one does not report to the government whether he has received any income during the financial year then he does not have to pay any taxes for the income he has received.

Now, for example, the most common case would be if a house owner has rented out his house and fails to inform the authorities of the change in house status. He, therefore, does not have to pay taxes for the amount he receives as rent from the tenant.

Bribing Tax Collection Officers and Other Authorities

In most of the methods mentioned above, when an individual does not want to pay his due amount in taxes and does not want to get caught by the authorities he resorts to bribing the authorities into keeping quiet or making the unpaid amount ‘disappear’. A bribe is offering a large amount of money to authorities to convince them to make your taxes disappear or go unnoticed.

Storing the Money in Offshore Accounts, Outside the Country

Storing the money outside the country so the banks do not report your wealth to the government. When you have non-reported income, you don’t have to pay any taxes on it, thereby evading due taxes in India.

Penalties for Tax Evasion

The government has full authority to impose charges and penalise those who don't pay their taxes. The penalties can be imposed either on an individual or a corporation that has indulged in illegal tax evasion methods.  Here are some of the common penalties imposed for tax evasion:

  • Collecting the entire amount of taxes due or three times the due taxes is allowed.
  • The penalised individual /company has to pay the due tax amount as well as the penalty fee. i.e Total amount paid = Taxes due + Penalty fee. However, note that the penalty amount imposed by the collecting officer can not exceed the amount due in taxes.
  • For concealment of income amount or falsifying documents the penalised amount can range from 100% to 300% of the total amount of taxes due.
  • If a company has been found to have not maintained their account book according to section 44AA, a penalty of Rs.25,000 can be placed on the company.
  • A company has to conduct an audit every year. If a company does not do so in a proper and timely manner then the company is liable for a penalty of Rs. 1.5 lakhs or 0.5% of the sales turnover.
  • Failure of report submission from the accountant as directed can lead to a penalty of Rs. 1 lakhs.
  • Lastly, if the company fails to deduct taxes when making salary payments or just about any payments to anyone, they are liable to be penalized for that as well.

These are some of the penalties that the government can penalise you for if you fail to pay your due taxes on time or engage in illegal tax evasion malpractices.

FAQs on Tax Evasion

1. What is the difference between tax evasion and tax avoidance?

​Tax avoidance is using loopholes and ambiguities in income tax rules to reduce payable taxes. Tax evasion is using illegal means to conceal income from the government to avoid paying taxes or reduce taxes. The main difference is that for tax avoidance you do not get jail time or are penalised by the government. Meanwhile, for tax evasion depending on the duration you have evaded paying taxes and the amount of money that has not been paid, the penalties can vary between paying the taxes due and fines to imprisonment.

2. What is the income tax calculation period?

Income tax is calculated for each fiscal year. A fiscal year starts from 1st April and ends on 31st March of the next calendar year. You have to pay income taxes for the previous fiscal year in the current assessment year. e.g., Income earned during the period of 1st April 2019 to 31st March 2020 is treated as income for the year 2019-20. Taxes for this period are paid during the following assessment year 2020-21.

3. How does the government collect taxes?

Taxes are collected by the government in three ways:

  • Voluntary payment by taxpayers through their designated banks.
  • Taxes deducted from the income of the receiver, or the salary of the working population paid to them by their employers.
  • Taxes deducted at source (TDS) - This simply means that the payer is required to deduct the tax amount before paying the payee. The TDS comes from salary assets and income dividends.

4. Who can help me pay my taxes?

The income tax department makes it easy for individuals to file their taxes online. However, if you require assistance preparing your tax returns, you can approach a chartered accountant or a tax return preparer. They can help you prepare your returns for a nominal fee. Recently, several online services also offer tax-related assistance.

5. What is exempt income and taxable income?

Exempted income includes income from sources that are specifically granted exemption from tax. Some examples of exempt income include i) Income that you get from agriculture ii) Interest on savings iii)Income earned on scholarship is tax-free under sec 56(ii). All other sources of income that are not exempted fall under taxable income.

EndNote:

Income taxes are used for the development of the nation. It is the moral duty of every citizen to pay their taxes on time and fully. Avoid engaging in illegal tax evasion methods, as the penalties are dire.

Tax Evasion - Customer Reviews

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21 Feb 2021

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