Abstract: In recent times, the number of cases of Tax Evasion are rising. Big corporate entities and businesses are setting up their managing branches in such countries where there is zero or minimal corporate tax. Many unicorns are registering themselves in these countries which are also known as Tax Havens. The majority of taxes collected from citizens by our government, come from Indirect Taxes. After the GST Bill was passed in 2017, some essential items fell under higher tax slabs. Though implementing GST was a brilliant initiative by the Indian Govt, the execution of implementation was terrible. Cases like- fraudulent invoicing, fake bills, anonymous billing, and not filling out GST rose every day. On the other hand, Direct Taxes are collected according to the Income Tax Act, of 1961. A large chunk of revenues is collected from Income taxes. As the rich or ultra-rich people got ways to avoid income taxes, the burden of tax slabs falls upon the middle class. Even though the cases of forged documents, avoiding taxes through false documents rose. Many upper-class people use offshore bank accounts like Swiss bank accounts to hide their income statements. That’s why immediate transparency should be brought into Indian Taxation system and certain amendments and new laws should be implemented in The Income Tax Act, 1961.
Keywords: Direct Taxes, Income Tax, Tax Haven, Offshore Account, GST, Tax Evasion
Introduction: Taxes are defined as a payment made by the citizens of a country to their government for wellness and betterment of the country so that they can avail good services. The Government spends this revenue on various fields like- Education, Social Welfare Schemes, Health & Wellness, Military, Infrastructure and provides basic amenities to the poor class. The economy of a country is dependent on the taxes collected by the government, as the government’s earnings are defined by the taxes paid by citizens. There are mainly two types of taxes-
Direct Taxes: Income Tax, Land Revenue, Corporate Tax, Capital Gain Tax etc.
Indirect Taxes: GST, Custom Duties, Service Tax, Stamp & Registration Fees, Taxes on Goods, Union Excise Duties etc.[1]
The money collected from these two types of taxes is spent on the betterment of our country in various ways. India has a well-established Taxation System to collect revenues from its people. But there are some loopholes in the regulations of this system. As a result, there is a sharp rise in evasion of taxes.
Tax evasion is a pervasive issue that has plagued the Indian economy for decades. It is a crime where individuals and businesses intentionally conceal or misrepresent their true income to avoid paying taxes, depriving the government of much-needed revenue. This not only leads to a significant loss of revenue for the government but also undermines the fairness of the tax system by placing an unfair burden on honest taxpayers.[2]
This article will explore the issue of tax evasion in India in detail, highlighting its impact on the economy and society. It will also examine the limitations of the current taxation system in addressing tax evasion and propose specific reforms to address this issue. The ultimate goal is to spark a conversation around the urgent need for reform in India’s taxation system and to find effective solutions to curb tax evasion.
Research Methodology: This paper is descriptive and the research is based on secondary sources for the deep analysis of tax evasion and the taxation system in India. sources of information like newspapers, journals, and websites are used for the research.
Review of Literature: Tax evasion is an illegal activity used by an individual or a business to avoid paying the tax liability. It entails concealing or fabricating income, exaggerating deductions without proof, failing to declare cash transactions, and so on. Tax evasion is a serious offense that can result in criminal prosecution and significant penalties.
Supporting taxes is never simple because most people doubt the premise of giving away a portion of their earnings to a government, yet taxes are a crucial source of revenue for the government. This is the money invested in various development projects aimed at improving the company’s status. However, the country has long struggled with tax avoidance. People who should be paying taxes have devised ways to avoid doing so. After the one nation one tax policy, many tax slabs for essential goods & services rose (Indirect Tax- GST), amounting to harming the betterment of the lifestyle of salaried people. Because it is the middle class, that actually got a serious hit due to this price rise. They are the people who pay both Direct & Indirect Taxes.
It further increased the number of individuals committing to fabricating income streams, exaggerating deductions without proof, failing to declare cash transactions, and so on.
[3]Indian Laws regarding Taxation: As discussed earlier, there are mainly two types of taxes. To know better about the entire tax regime and different kinds of taxes, we are going to discuss every pointer of these two kinds of taxes.
- Direct Taxes- A direct tax is one that is paid directly to the entity that levied it by a person or organization. Income tax, real property tax, personal property tax, and asset taxes are all examples of Direct Taxes, paid directly to the government by an individual taxpayer. Here are the types & laws regarding Direct Taxes-
- Income Tax: According to Income Tax Act, 1961 Individuals, Hindu undivided families, firms, co-operative societies (other than companies), and trusts (defined as bodies of individuals associations of persons) or any artificial Juridical person will have to give taxes on their income according to their respective income tax slab. In India, the inclusion of a certain income in a person’s total income for income tax purposes is determined by his residency status. All residents of India are taxed on all of their income, including income earned outside of India. Non-residents are only taxed on income received in India or income earned in India.
- Property Tax: Property tax, also known as ‘house tax,’ is a local tax placed on owners of structures and appurtenant land. The taxing authority is vested in the states, and it is granted to local authorities by law, which specifies the valuation process, rate band, and collection procedures. The annual ratable value (ARV) or area-based rating serves as the tax basis. Owner-occupied and other non-rental properties are assessed at cost and then converted to ARV by applying a percentage of cost, often 6%. Generally, vacant land is free from assessment. The properties under Central’s ownership and foreign embassies’ properties are exempt from taxes, with no requirement for reciprocity.
- Gift Tax: According to the Gift Tax Act, 1958 all gifts more than Rs. 25000 (in any form) received from one who doesn’t have blood relations with the recipient, were taxable. But in 2004, the act was again revived partially. A new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable. But if you gift your parents something or cash that is worth not more than 15 Lakhs, then you don’t need to pay taxes.
- Corporation Tax: Under the provisions of the Income Tax Act of 1961, firms and commercial organizations in India are taxed on the income from their worldwide dealings. A company is considered to be a resident of India if it was incorporated in India or if its control and management are wholly based in India. In the case of non-resident corporations, tax is charged on revenue obtained through commercial transactions in India or from other Indian sources, depending on the bilateral agreement of that country.
- Inheritance Tax: In the context of the Income Tax Act of 1961, no tax is levied on inherited properties, whether movable or immovable. However, if the new owner decides to sell the property, the tax will be charged. In the event of movable assets such as mutual funds, gold, and stocks, the new owner is not required to pay any tax. However, when they decide to sell these mobile assets, he or she must pay the tax.
While selling the immovable property, the new owner has to pay long-term capital gain tax. But there is a tax exemption is given under section 54 of this Income Tax Act, 1961. Plus, the new owner will be liable to pay wealth tax if the value of that immovable asset is greater than 30 Lakhs.
- Indirect Taxes- An indirect tax is collected and paid to the government by one business in the supply chain, such as a manufacturer or retailer; however, the tax is passed on to the consumer as part of the purchase price of a good or service by the manufacturer or retailer. The tax is eventually paid by the consumer, who pays more for the goods.
- GST: In 2017, the Goods and Services Tax was implemented. GST is levied at every stage of the supply chain, regardless of where consumption occurs. There are four forms of GST under the new tax system[4]
Inland Goods and Services Tax (IGST)- When goods from one state are provided to another, the integrated goods and services tax is levied. The IGST legislation governs this tax, and the body is responsible for collecting the IGST under this legislation. Later, the money would be split among the several states by the Central Government.
SGST (State Goods and Services Tax)- When commodities are supplied within a state, the State Commodities and Services Tax is levied. If the trader sold products within the state, he must pay both GST and SGST.
(CGST) The Central commodities and Service Tax, like the State Goods and Service Tax, is levied on commodities provided within a state (intrastate). For example, if the merchant sold the products for Rs. 7000, the GST applicable will be a combination of CGST and SGST.
UTGST (Union Territory Goods and Services Tax) Union Territory Goods and Services Tax is the same as State Goods and Services Tax. It imposes a tax on the supply of goods and services in the Union Territories of Andaman and Nicobar Islands, Chandigarh, Daman Diu, Dadra Nagar Haveli, and Lakshadweep. The UTGST Act governs this Act, and the revenue is collected by the Union Territory Government.
- Others: The Central and State Govt levied some more Indirect Taxes other than GST. Like Toll Taxes, Value added tax(VAT), customs duty, Inconvenience charges, service fees, and others.This type of tax varies from state to state. For some states, Service & Sales tax are the majority source of Income. This can be levied on both domestic and imported goods.
How Tax Evasion Happens: So, it should be pretty clear that the main motive behind Tax Evasion is because of the serious financial hits taken by the middle class. They have this thinking that the rich or ultra-rich people don’t pay income tax, as they are not salaried people, and they get a lot of tax deductions. On the other hand, the lower class doesn’t fall under the bracket of tax slab and Govt takes many social initiatives for their upbringing, whereas the middle class doesn’t get any excellent facilities. And the corporates or the businesses want to save as much money as possible to feed themselves at the time of recession, by showing less profits or shifting their managing branches to Tax Havens. Here are some ways they do evasion of Taxes-
Submitting false tax returns- In rare situations, when an individual files their taxes, they may provide misleading or erroneous information in order to reduce or avoid paying the tax. This is also tax avoidance because comprehensive information is not provided, and they may pay less than they should.
Inaccurate financial statements- The taxes that an individual or organization must pay may be determined by the financial transactions that occurred during the assessment year. If fraudulent financial documents or accounts books are submitted, showing incomes that are less than what was actually earned, the tax may be reduced.[5]
Not reporting income- This might be considered one of the most popular strategies of tax evasion. Individuals will simply not disclose any income received throughout a fiscal year in this situation. They successfully evade tax by not reporting any income and without paying any tax. The most basic example would be a landlord who has kept tenants but has not informed the authorities that he has rented the house and is earning money from it.
Storing wealth outside the country- We all know about Swiss bank accounts. These are offshore accounts and these accounts are maintained outside the country and information about the transactions in these accounts can not be disclosed to the income tax department thereby evading any and all taxes due on that wealth.
Not getting accounts audited- Section 44AB requires a taxpayer to have his or her account audited or to provide an audit report. If this is not done, the penalty would be 0.5% of total sales, turnover of gross receipts, or Rs 1,50,000, whichever is greater. If the taxpayer fails to produce a report from an accountant, as required by Section 92E, a penalty of Rs 1,000,000 or more is levied.[6]
Non-compliance with TDS regulations- Any individual who deducts or collects tax at source must also collect the tax deduction and collection account number. (TAN). If this is not done, a penalty of Rs 10,000 would be applied. If a firm or organization fails to file tax deducted at source (TDS) or tax collected at source (TCS) returns on time, they must pay a penalty of Rs 200 per day. The penalty cannot be greater than the TDS amount. Furthermore, the tax authorities may levy a penalty for erroneous information or failure to file TDS or TCS returns by the necessary dates. The fine might be anywhere between Rs 10,000 and Rs 1,000,000.
Providing an incorrect PAN number or not furnishing PAN card number- When completing an ITR, it is illegal to provide incorrect information, including PAN details. PAN card numbers are required by all tax deductors, including employers. This information is used to deduct TDS from payments. For two cases, there are two sorts of penalties: If you provide an erroneous PAN, you will have to pay a penalty of Rs.10,000. Higher TDS will be deducted if a PAN is not provided. For example, instead of 10%, the deductor will deduct 20% TDS.
Forged Documents- Taxpayers use falsified paperwork to hide their taxes. For example, a taxpayer may produce counterfeit or fraudulent receipts for the purchase of raw materials. In this manner, the taxpayer raises expenses, resulting in a reduced net profit chargeable to taxes. Fake documents are frequently used to claim a tax deduction under Section 80U for charitable contributions. Inaccurate financial records, such as balance sheets, sales or purchase vouchers, cash flow statements, and other account records, could result in a reduced annual net profit. Many businesses do not save sales receipts in order to present a lower income and pay less tax.[7]
Offshore Bank Accounts- Some people may retain their money in a bank account outside of the country. Offshore accounts are those that are kept outside of the country and do not provide information about their use to the IRS. The taxpayer and the owner of the money avoid paying taxes on their income and the money held in a bank account outside of India in this manner.
Tax Havens- Though India has less corporate tax, many businesses set up or shift their managing branch in foreign countries with minimal or zero taxes like Cyprus, Panama, Morisush, Caribbean Islands, Cayman Islands etc. They have currently no corporate taxes in their country, which is great for corporate entities to avoid paying taxes. Another great thing is that; to register in these countries, the entities do not require to operate out of their country and it takes minimal paperwork for registration.[8]
Suggestions: For many years, India has struggled with the issue of tax evasion, and despite various government efforts to address it, the problem persists. This has resulted in enormous financial losses for the government, affecting the country’s development and well-being. As a result, major adjustments to India’s taxation structure are required to properly address the issue of tax evasion. Furthermore, the government could strengthen penalties for tax evasion. Currently, the penalties are not strict enough to deter tax evaders. Therefore, the government could increase fines for tax evaders and impose stricter punishments, such as imprisonment, for repeat offenders. It could also consider offering leniency for taxpayers who voluntarily disclose their previously undisclosed income. Another area for improvement is enhancing taxpayer compliance. The government should create public awareness efforts to emphasize the significance of paying taxes and the consequences of tax evasion. It may help simplify the tax code, making it easier for taxpayers to understand and follow. Furthermore, the government should look into granting tax incentives to encourage taxpayers to follow tax laws. The government can ensure that all residents and businesses pay their fair share of taxes and contribute to the economy by doing so.
Conclusion: To summarize, tax evasion is a severe issue that affects both the Indian economy and society as a whole. Despite the government’s attempts through various methods to combat tax evasion, the problem persists. As stated throughout this article, there is a need for reform in India’s taxation system in order to successfully address tax evasion. Addressing the core causes of tax evasion is also critical, such as decreasing corruption, promoting transparency, and guaranteeing equitable and fair tax systems. To promote ethical behaviour and decrease the potential for tax evasion, both the government and the corporate sector must work together. Overall, revamping India’s taxation system to combat tax evasion will necessitate political will and a long-term commitment to putting necessary adjustments in place. The stakes are high, and the advantages of efficient tax administration and compliance are substantial. As a result, stakeholders must collaborate to improve India’s taxation system and reduce tax evasion for the sake of the country’s economy and society.
Dibyojit Mukherjee
Institute of Law, Nirma University
Batch of 2028
9883993237
[1] Cleartax, https://cleartax.in/s/direct-indirect-taxation-india-explained (12th Apr. 2023).
[2] Julia Khan, Tax Evasion: Meaning, Definition, and Penalties, Investopedia (12th Apr. 2023, 9:30PM), https://www.investopedia.com/terms/t/taxevasion.asp.
[3] Priyanshu Gupta, Features of Indirect Taxes and Its Validity and Significance in India, Manupatra, (2018), https://articles.manupatra.com/article-details/Features-Of-Indirect-Taxes-And-Its-Validity-And-Significance-In-India.
[4] Vikas Vasal, Arman Joshi, Indirect Tax: Definition, Types & Rates Of Taxation In 2023, Forbes (12th Apr. 2023, 9:30PM), https://www.forbes.com/advisor/in/tax/indirect-taxes/ .
[5] Bankbazaar, https://www.bankbazaar.com/tax/tax-evasion.html, (12th Apr. 2023).
[6] Cleartax, Understanding Tax Evasion and Penalties in India (cleartax.in), (12th Apr. 2023).
[7] Neela Rajesh P, Tax Evasion in India – Ways, Effect and Control, Caclubindia (12th Apr. 2023, 9:30PM),
https://www.caclubindia.com/articles/tax-evasion-in-india-ways-effect-and-control-20851.asp .
[8] Anjana Dhand, Tax Evasion, Script Box (12th Apr. 2023, 9:30PM), Tax Evasion: Meaning, Common Methods and Penalties (scripbox.com).