Tax evasion is the use of fraudulent practices such as under-reporting taxable income or inflating expenses to reduce one's tax liability. It's an illegal attempt to lower one's tax bill. The goal of tax evasion is to display fewer profits in order to avoid paying taxes. Making false statements, hiding key documents, failing to keep accurate records of transactions, concealing revenue, overstating tax credits, or presenting personal costs as business expenses are all examples of illegal practices.

Tax evasion is a crime for which the assessee may face legal consequences. In this article, Tax Evasion is described, which is Important for UPSC Economy Syllabus.

Tax Evasion – Introduction

• People in India try to avoid paying taxes by illegal means or by using loopholes in the Indian tax system.
• Individuals, corporations, trusts, and other entities engaged in tax evasion through illegal means, which is known as tax evasion.
• It is the purposeful misrepresentation or concealment of their genuine financial situation to the tax authorities in order to decrease their tax liability.
• It ultimately boils down to avoiding tax duty by declaring lower incomes, profits, or gains than they actually make, or by overstating their expenses.
• As a result, funds intended for economic and social growth are diverted to anti-social activities.
• All forms of tax evasion that result in the development of black money and other social ills are bad for society.
• The amount of Evasion Tax levied is also determined by the number of chartered accountants and tax lawyers that assist companies, firms, and people in avoiding paying taxes.
• In all major countries, tax evasion is a criminal offense punishable by imprisonment and fines.

Methods of Tax Evasion

There are two parts to failing to pay taxes on time. The first is tax evasion, while the second is tax avoidance. The distinction between the two is that tax avoidance entails discovering a loophole that allows you to avoid paying taxes and is not strictly criminal, whereas tax evasion entails not paying taxes when they are due and is technically prohibited. These are some of the methods people use to avoid or evade paying taxes.

• Failure to make a payment when it is due: This is the most straightforward technique to avoid paying taxes. They just refuse to pay it to the government, even when it is demanded. A person who engages in this type of tax evasion will not pay the tax, willingly or unwillingly, before or after the due date.
• Smuggling: When certain items are transported from one location to another, whether across international or state borders, a tax or charge may be imposed. Some people, on the other hand, may shift these commodities in secret in order to evade paying the taxes or to avoid paying the tax entirely.
• Falsely filing tax returns: When an individual files taxes, they may provide misleading or incorrect information in anattempt to reduce or avoid paying the tax that they are obligated to pay. This is also tax evasion because the full picture isn't supplied, and they could be paying less than they should.
• Financial statements that are incorrect: The taxes that an individual or an organizationmust pay may be determined by the financial transactions that occurred during the assessment year. The tax may be reduced if fake financial documents or accounts books are filed, showing incomes that are less than what was actually obtained.
• Obtaining an exemption by falsifying documentation: To ensure that particular strata or individuals of society have a bit more financial freedom to progress, the government may have established specific exemptions and privileges. In some circumstances, members who do not qualify for such benefits will have documentation made to prove their membership in that group, allowing them to claim exemptions when they are not qualified.
• Bribery: There may be a case when a particular amount of taxes is owed and the individual is unwilling to pay it. In this instance, he or she may offer a bribe to officials in order to avoid paying the tax and make it 'disappear.'
• Keeping money outside of the country: We've all heard stories about Swiss bank accounts. Offshore accounts are accounts kept outside of the country where information about transactions is not given to the income tax department, allowing the owner to avoid paying any and all taxes due on the wealth.

Tax Evasion – Causes

• Taxes are High: When the tax rates are high compared to the respective incomes, people tend to evade taxes.
• Tax authorities that are inefficient: When tax authorities are not vigilant, people will evade taxes as they can manage and give excuses to tax authorities.
• Law enforcement is ineffective: When law enforcement is not strict, people will evade taxes as there are no consequences of evading taxes.
• Multiple taxes: Multiple taxes and taxes at different levels on the same activity encourage under-reporting of taxable income or activity.

Impact on Economy

• Less Tax for the Government: The Indian government has failed to collect the estimated amount of tax from the people of our country on numerous occasions, and credit must be given to the black money-fuelled underground economy for this.
• Uncontrollable Inflation: When black money circulates in the market, the amount of money in circulation exceeds the government's expectations, leading commodity prices to rise above normal levels.
• The emergence of the underground economy has had a significant impact on the distribution of wealth and income in our society.
• Corruption: While corruption contributes to the creation of black money in the economy, it can also be a result of the emergence of an underground market.
• Inflated Real Estate: People involved in the black money business are usually willing to pay more for a piece of land since it helps them transform their coloured money into lawful currency.
• Transfer of Indian Funds to Abroad: India's black money is stashed in tax havens around the world. Two of the most common tactics used by black money holders to transfer money overseas are under-invoicing of exports and over-invoicing of imports.

Steps Taken by Government

• NDA government after taking office formed a Special Investigating Team [SIT] to look into black money issues, as ordered by the Hon'ble Supreme Court.
• While the SIT had a limited scope, the truth remained that the government still had a lot of work to do.
• In this context, Budget 2015 has announced a number of steps to combat "black money generation and concealment effectively and forcibly."
• This declaration of intent is backed up by the fact that inquiries into cases of undeclared foreign assets are given top attention. This inquiry is in addition to the one done by SIT.
• The government imposes prosecution and penalties under various acts.
• The Income Tax Department has implemented a tax evasion reward scheme, which compensates those who report tax avoidance.
• India and the United States recently signed an agreement to prevent Americans from evading taxes through Indian financial institutions.
• Persons in possession of black money can invest in special bonds under the Special Bearer Bond Scheme (Immunities and Exemptions Act, 1981).
• Another was the Voluntary Compliance Scheme (Amnesty Scheme).
• The government raised the tax bracket, lowered the deduction rate, and tightened lawful tax avoidance techniques.
• Joining the Multilateral Competent Authority Agreement in Respect of Automatic Exchange of Information (AEOI) and having an information-sharing arrangement with the United States under the Foreign Account Tax Compliance Act (FATCA) are examples of global initiatives to combat tax evasion and black money.
• To combat black money, the government is also attempting to streamline information exchange with a number of countries, including Switzerland.
• Both India and Switzerland have agreed to speed up work on the Automatic Exchange of Information (AEOI) in order to make it possible by 2018.
• According to a PTI article, the Lok Sabha passed the Benami Transaction Bill 2015 on July 20, which was primarily an anti-black money policy with the goal of seizing unknown property and prosecuting people involved in such activities.
• The Government has established the Tax Administration Reform Commission to undertake fundamental reforms to tax concerns in order to simplify and streamline tax procedures.
• Previously, India established a number of committees, including the Taxation Enquiry Committee, the Indian Tax Reforms Committee, and the Direct Taxes Enquiry Committees, among others.
• The Finance Bill introduced the Transfer Pricing Audit to audit concealed transactions in order to combat tax avoidance.

Limitations of Indian Tax Structure which result in Tax Invasion

• Taxation at a high rate - Taxation at a high rate places a burden on the taxpayer. As a result, they devise strategies to avoid paying taxes.
• Failure to prevent bribery - There should be a system in place to prevent bribery and corruption among government officials. They assist taxpayers in avoiding tax by obtaining a portion of the earnings from evaded tax.
• Lack of simple procedures - India's tax structure is complicated, and people find it difficult to go to multiple departments for a single issue.
• Existence of a large number of taxes - Taxpayers is burdened by the existence of a huge number of different types of taxes.
• Complex tax laws and loopholes that allow people to avoid paying taxes – The Indian tax code is complicated. People can find provisions to avoid paying taxes in the same statute.
• There is an absence of a well-organized and methodical administrative organization.
• Changes of government on a regular basis and political instability – Another cause for the non-implementation of a well-defined tax system is frequent changes and political instability. Different governments have different tax systems, making it difficult to keep track of them all.

Penalties for Tax Evasion

The income tax department can impose a variety of penalties on anyone who is found guilty of evading or avoiding taxes. Companies that either fail to report and pay their own taxes or fail to deduct taxes at source when they are supposed to face penalties.

Some of them could include:

• When income is not revealed, 100 percent to 300 percent of the tax is collected.
• If you don't pay your taxes, the assessing officer can charge you a penalty, but it can't be more than the amount you owe in taxes.
• If a person fails to file tax returns within the stipulated period, a penalty of Rs. 200 per day may be imposed for each day the returns are not filed.
• The penalty for concealing details of one's income or any taxable fringe benefits can range from 100 percent to 300 percent of the tax due.
• A penalty of Rs. 25,000 may be imposed if a person or a corporation fails to maintain their accounts properly as instructed by section 44AA.
• A penalty of Rs. 1.5 lakhs or 0.5 percent of the sales turnover, whichever is less, may be imposed if a firm fails to have itself audited or fails to furnish a report of the audit.
• A punishment of Rs. 1 lakh may be imposed if an accountant's report is not given as ordered.
• If a company fails to deduct tax when it is obliged to during payments, the penalty could be the payment of the tax owed.

How to avoid tax Evasion?

• lowering tax rates
• Make rules and systems that are easier to understand.
• Create an efficient tax administration organisation.
• Anti-corruption policies should be strengthened.
• Organise seminars, conferences, and use the media to raise awareness among taxpayers.
• Create a long-term tax framework.
• Verify that political changes do not have an impact on a well-defined tax structure.

Conclusion

Taxation is never simple since most individuals are hesitant to give up a portion of their earnings to a government, yet the reality remains that taxes are a vital source of revenue for the government. This is the amount of money allocated to various development projects aimed at improving the company's position. However, the government has had a significant problem with tax evasion.