Tax Evasion

Tax evasion is the malpractice of not paying taxes or saving them unethically. A tax amount is charged by the government on the income or the transactions between individuals and organizations to maintain equality in the economy and lessen the gap between the haves and have nots.   

This tax responsibility is sometimes intentionally avoided by individuals or companies. To curb tax evasion in India, the government has, therefore, designed multiple penalties and punishments.

This blog will help you understand what tax evasion means, followed by its common methods. Also, check out the various penalties for tax evasion as charged by the Indian Government.  

What is Tax Evasion?

Tax evasion is an illegal action that an individual or company takes to avoid their liability of tax payment. It includes activities such as hiding income, inflating deductions without proof, and not listing or recording cash transactions. This is a severe offense registered under criminal charges for which substantial penalties are charged.     

Tax evasion is deemed as an illegal practice as the amount of tax collected from the citizens by the Government of India is further used to improve the country’s various sectors, like infrastructure, agriculture, education, etc. Tax is an earning of the government used to improve the country. When individuals and organizations evade tax, they hinder this ability of the government, causing inequality in the economy and jeopardizing the country’s condition. 

Common Methods Used for Tax Evasion

There are two different ways an individual evades tax payments when the payment is due. These include:

• Tax Avoidance
• Tax Evasion

Tax avoidance is defined as the various steps taken by an individual to save taxes. Unlike tax evasion, this is not known to be completely illegal. On the other hand, tax evasion is defined as not making the payments when the payment of the tax is due, and the non-payment of such taxes is known to be illegal in every aspect.

Below are some of the ways or methods mentioned through which individuals avoid paying taxes.

Not Paying Taxes on the Due Date

The first and the easiest way an individual opts not to pay taxes is simply by not paying them. In this case, the individuals don’t make their tax payments to the government, even when the due date has been declared. An individual in this type of tax evasion may willingly or unwillingly choose not to pay taxes.

Smuggling

Whenever there is a transaction or exchange of goods between two borders (international or national), it requires some amount of tax payment. But sometimes, to avoid such taxes, individuals import or export such goods surreptitiously to avoid the tax payment. This is a common and highly illegal tax evasion technique, commonly known as smuggling.

Submission of False or Fraud Tax Returns

Individuals and organizations are required to submit relevant documents when filing for taxes. However, to evade taxes, individuals may at times submit forged documents or documents bearing false information on tax returns to lessen the amount of tax or not pay taxes at all. This is another tax evasion method where the income information is showcased in a way that reduces or completely nullifies the tax amount.

Inappropriate Financial Statements

The tax amount that an individual is liable to pay depends completely upon the financial transactions that have been made. But if in case the company or the individual decides not to showcase the same on their financial statement and rather put in false incomes, then the income earned for that particular year automatically reduces from the actual amount initiating tax evasion.

Fake Documents for Exemption

The Government of India has made several tax exemption guidelines to make taxation easy, smooth and equal for all. While such exemptions have to be availed via authentic document submission, some may do the same with fake documents so that they get exempted from taxation.

Not Reporting The Income

This is one of the most common ways to avoid taxes. In this part of the method, the individual does not record their income. This simply means that if an individual is not recording their incomes for a particular financial year, they are not liable to pay any taxes, committing tax evasion.

For instance, if you are a landlord with a tenant, you are supposed to receive a regular monthly income. But when you are not recording this income via rent bills, etc., you are obliterating the record of your income so that the government doesn’t levy any tax on you. Therefore, you are evading your tax responsibilities.

Bribery

It is quite possible that while making payment for taxes, there is still some amount that remains unpaid. Sometimes this unpaid amount is not paid by the individuals, and the simple reason is that they are not willing to do so. In this case, the individuals offer some money to the officials of the department, which is counted under bribes to remove the unpaid amount from the document.

Storing Your Wealth Outside the State

Swiss Bank Accounts are considered offshore bank accounts. Income kept in this type of account is not considered taxable. So, if an individual or an organization keeps most of their income in those accounts and shows their income is lesser than the taxable amount, they are basically evading tax. 

Penalties for Tax Evasion

It is not easy for an individual to simply get away with tax evasion via fake documents or false information. If any citizen is found guilty of evading any tax policy, they are further levied with heavy penalties. These penalties can be charged for failing to pay taxes or reporting TDS deductions on time.

Some of these penalties have been listed down below:

1. If the income has not been disclosed, the tax collection is somewhere around 100% – 300%.
2. If an individual fails to pay the tax that has been due, the official from the income tax department tends to impose penalties. (This penalty amount can never surpass the amount that has been due in the taxes).
3. If any individual fails to report their tax statements within the stipulated time frame, a penalty of INR 200 is charged each day until the individual files their tax statement.
4. If an individual does not maintain the account records as per the structure mentioned in Section 44AA, they are charged a penalty of INR 25,000 on the same.
5. If any organization is not able to get themselves audited and at the same time does not report the file of audits, a penalty of INR 1.5 lakhs or sales turnover of 0.5% is charged considering the lesser amount.
6. In case the report of an accountant is not submitted as per the directions mentioned, then a charge of INR 1 lakh is levied.
7. If a company does not allow tax deduction while the company is making payments or is indulging in any transaction that requires tax deduction but fails to do so, they are charged with a penalty equal to the tax payment that is due.
8. If an individual has concealed a report regarding the income of an individual or fringe taxable benefits, a penalty ranging from 100 to 300% is charged on the total due tax amount.

The above penalties are charged on individuals or organizations by the Income Tax Department, which sometimes can even cost a hefty amount. Therefore, it is best suggested for individuals and organizations to pay taxes on time to ensure zero tax evasion. 

Frequently Asked Questions (FAQs)