TAX LAWS: KILLING THE INDIAN ECONOMY? BY - HIMANSHU GUPTA & MUSKAN SAHARAN
TAX LAWS:
KILLING THE INDIAN ECONOMY?
AUTHORED BY
- HIMANSHU GUPTA &
MUSKAN SAHARAN
ABSTRACT
Around the world, tax is the primary
and most common source of revenue for any government collected by them from the
citizens to run the nation. Each nation has its own tax laws and jurisdiction
some nations even help people outside their nation by keeping the money with
them in the banks which encourages inflow of money from around the world. This
may sound unethical as this is mostly used only by High-net-worth individuals
to hide their black money but it helps their economy to grow.
Tax evasion is an issue faced by
almost every nation in the world. The concerned authorities are always on a run
to catch tax evaders but some get successful in escaping to other nation where
it is difficult of extract them and if that evader brings a decent amount some
countries even offer citizenship. There are immense challenges that come in the
way of authorities they need to counter and catch these evaders.
INTRODUCTION
A tax is a legal obligation of an
individual residing in that country to pay a financial charge levied by
government of that country. Tax is the main source of income for any government
in the world. The government of every country collect taxes from its citizens
to run a country effectively. In India marginal tax rate system is applicable
and said to be the 2nd most complex tax jurisdiction in the world
and the amount of tax levied on the income is also on higher side due to which
high new worth people now prefer to settle outside India in other countries
where tax rates are comparatively low which eventually increases their revenue
by saving taxes and increase their standard of living but, this trend has a
adverse effect on the Indian economy as there is a heavy outflow of money from
the Indian economy.
The revenue collected in form of
taxes is used by the government to fund projects for the public welfare at
large scale and develop infrastructure. It helps the government to undertake
many such projects which may not provide financial benefit to the government but
are beneficial for the society, projects like maintaining local sanitation,
providing fresh and clean water. In India, taxes are levied both on legal
entities and individuals but the taxability depends on the income slab of that
particular individual or entity. The government of India also provides benefits
to taxpayers in the form of exemption and deduction which a taxpayer can claim.
Taxes help central and state government provide public services which helps in
uplifting the living standards of the citizens.
TYPES OF TAXES
Any individual / legal entity
operating and earning in India is broadly charged 2 types of taxes: Direct tax
and Indirect tax. Every individual and legal entity is bound to pay tax on time
otherwise the government can impose penalties depending upon the category under
which the violation has arised.
DIRECT TAXES
Direct taxes are the taxes that are
paid directly to the government by individuals and legal entities. These taxes
are monitored by the central board of direct taxes (CBDT). This type of tax is
purely dependant on the level/slabs of income an individual/legal entity falls
into. There are many types of direct taxes such as:
CESS AND SURCHARGE
CESS is defined in the article 270 of
the constitution of India as a fee/tax imposed for a specific purpose. It is
collected by the government from public at large and used for the specific
purpose it was collected for.
Surcharge is defined under article
271 of constitution of India, the central government takes surcharge from only
those taxpayers who have higher level of income and it can be spent by the
government for any purpose unlike cess.
INCOME TAX
This tax is
levied on the personal income or profit earned by individuals and legal
entities in an assessment year. The amount of tax also depends on the age and
total taxable income. There are different tax slabs already prescribed by
government and tax is to be given according to the tax slab your income falls
under.
In India, if
anyone earns up to Rs 2.5 lakhs per annum then that income falls under
non-taxable category
CORPORATE TAX
This tax is
only levied on corporations/ businesses. The profit or revenue generated by the
corporation in a fiscal year determines the amount of tax. It is applicable
both on public and private companies incorporated under companies act, 2013.
CAPITAL GAINS TAX
This tax is
levied on revenue generated from the sale of capital assets such as shares,
real estate, etc. capitals gain tax is further classified into two types
depending upon their duration:
·
LONG TERM CAPITAL GAIN
This tax is
generally levied on capital transaction where the time gap between sale and
purchase is more than 36 months (3 years). In some cases, the time duration is
reduced to 24 months (2 year) and 12 months (1 year) depending upon the nature
of transaction.
·
SHORT TERM CAPITAL GAIN
This tax is
generally levied on capital transactions where the time gap between sale and
purchase in less than 36 months (3 years). In some cases, the time duration is
reduced to 24 months (2 year) and 12 months (1 year) depending upon the nature
of transaction.
INDIRECT TAX
Indirect
taxes acts as a major source of revenue for both central and state government.
Indirect taxes are not paid directly to the government instead they are to be
paid on consumption of goods and services. The tax is collected by the seller
from the customers at the time of sale of goods and services. It is the
responsibility of seller to pay the collected tax to the government. Indirect
taxes are same for everyone despite their level of income unlike direct taxes
which differ from factors like age, level of income, etc. some types of
indirect taxes are:
GOODS AND SERVICES TAX
This tax
was implemented by government on 1 July 2017 to replace and combine all the
other taxes prevailing in the country like value added tax (VAT), service tax,
etc. this tax is applicable on the cost of goods and services sold in the
country. It is collected by the seller from the customers at the time of
transaction and later passed on to the government. The amount of GST applicable
depends on the nature of goods and services. There are pre-defined tax slabs
for each. It is governed by central goods and services tax, 2017.
CUSTOM DUTY
It is
imposed only on those goods which are imported in India. It is a way that helps
the government to regulate the flow of goods in the country. The rate of customs
depends on various criteria like weight, worth of goods, size, etc.
NEW TAX REGIME VS OLD TAX REGIME
With the
introduction of new tax regime in the fiscal budget of 2020 it became a bit
confusing for the taxpayers to choose between the old regime and new regime.
Both of the regime has their own tax slabs and offerings it depends on the
taxpayer which regime will suit the best.
But
generally, the old tax regime is beneficial for the people who can claim
deductions which are offered under that regime which can help the taxpayer to
save a substantial piece of tax. Deductions are offered under section 80 of
income tax act, 1961. Some of the major deductions can be taken under section
80c for payments like life insurance policies, purchase of residential
property, fixed deposit for not less than 5 years, etc. up to 1.5 lakh rupees.
The new tax
regime is beneficial for taxpayers who don’t have much deductions to claim in
their revenue as new regime offers relaxed tax slabs as compared to old regime.
There is only one deduction available under section 80TTB for up to 50k rupees.
A taxpayer
can opt for any of the regime every year which provides the most benefit but
cannot be changed in between that particular area.
TAX EVASION
In India, tax evasion is a serious offence issue as only 1% of Indian
population actually pays tax which leads to a financial loss to government. Tax
evasion can be described as illegal act done intentionally to evade from the
liability of paying taxes. Tax evasion can also be termed as tax fraud. Tax
evasion arises in both situations when there is no payment or under payment of
taxes by taxpayers. Tax evasion is a punishable offence dealt with criminal
charges and penalties but to charge a taxpayer with criminal charges it is
necessary to identify if the act was done intentionally or not.
Income tax department is responsible to identify and charge people and
legal entities involved in tax evasion. There is a difference between tax
evasion and tax avoidance as in tax avoidance taxpayers try to find legal ways
within the law to save their taxes unlike tax evasion in which there is a
deliberate illegal attempt to save taxes. In India, income tax department is
also responsible for enforcement of tax laws and ensuring that every taxpayer
pays their due tax on time but still taxpayers find different methods to evade
taxes such as:
·
REPORTING
INFLATED DEDUCTIONS
Income tax department provides certain deductions which a taxpayer can
avail in its total taxable revenue to save taxes but some misuse these
deductions provided under section 80 of income tax act, 1961 by intentionally
reporting deductions more than the actual expense to evade taxes.
·
UNDER
REPORTING INCOME
Taxpayers use fake bills and other methods to increase expense and
decrease actual revenue generated to evade taxes. Under reporting can also take
place when taxpayers do not disclose there all sources of revenue which leads
to under estimation.
·
CASH
TRANSACTIONS
Taxpayers
know that it is difficult for the authorities to establish a chain in cash
transactions as they don’t leave a paper trail behind them and they use this
loophole to evade taxes by doing their major transaction in cash which helps
them in hiding their actual revenue.
·
USING OFF SHORE ACCOUNTS AND SHELL
COMPANIES
This is one
of the most popular used methods by ultra rich people to evade from their
liability to pay taxes. They create shell companies and open off shore accounts
to disguise the real ownership of the money and saving it from the eyes of
income tax department.
·
BRIBERY
In India,
corruption has always played a major role in weakening the back bone of the
economy. Income tax officers are bribed heavily by the Ultra rich to prevent
any proceedings against them in cases like hoarding of black money or money
laundering.
·
TAX AUDITS EVASION
Tax audits
are made in the big corporation and places of high revenue to ensure that the
revenue generated is fully disclosed and the tax is paid accordingly but to
evade taxes they try to evade from these audits also and try to hide the actual
revenue by manipulating the books of account.
PENALTIES FOR TAX EVASION
As tax
evasion is treated as a criminal offence, any individual/legal entity found
guilty will have to face criminal charges and penalties imposed by income tax
department. The punishment depends on the degree of fraud committed.
CASE LAWS RELATED TO TAX LAWS
·
Commissioner OF CGST AND Central Excise vs
M/S Edelweiss financial services ltd., 2023
In this matter the supreme court gave
a landmark judgment about “Valid Consideration is Necessary for a Service to be
Taxable”. The Supreme Court of India has held that a valid consideration is
necessary for a service to be taxable as per section 65(44) of Finance Act,
1994 and dismissed the GST departments’ appeal. The coram comprising Justice
Hrishikesh Roy and Justice Manoj Misra observed that since the assessee had not
received any consideration while providing a corporate guarantee to its group
companies and would not be a taxable service.
·
Commissioner of income tax vs.
D. P. Sandu Bros. Chembur Pvt. Ltd., 2015
In this matter the court held that if the conditions of Section 80-IA
are met, a deduction cannot be denied on the ground of technical defects.
·
The State of Karnataka vs M/s Ecom Gill Coffee Trading Private Limited,
2023
In this matter the supreme court gave
a landmark judgment about ‘Payee Cheque and Copies of Invoices not ample to
prove genuineness of Transactions’. the Supreme Court of India, which was
presided over by Judge M.R. Shah. The bench observed that mere production of
invoices or even payment to the seller by cheque cannot be said to be
sufficient and may not be said to discharging the burden to claim Input Tax
Credit, to be discharged under Section 70 of the KVAT. The order issued by the
High Court and the ITAT approving the ITC was declared unsustainable by the
Supreme Court (SC), and as such, it is thus quashed and set aside.
·
Commissioner of income tax vs. L&T Finance Ltd., 2016
In this matter, the
court held that the taxpayer is entitled to deduction of interest on borrowed
capital, even if the capital is utilized for non-business purposes.
·
Commissioner of Income-tax v. D.N Memorial Trust, 2023
In this matter the Commissioner
declined the registration applied by the assessee-trust, stating that the trust
did not prove the genuineness of its activities and claimed that the trust had
generated surplus (profit) from its total receipts, which was not in line with
the provisions of Section 12AA but Commissioner failed to provide any proof
that the trust’s activities were noncharitable or for personal purposes of the
trustees and The funds acquired by the trust were utilized for educational
activities. The Tribunal concluded that there was no basis to reject the
trust’s application for registration. The court held that no substantial
question of law arises as the Tribunal considered all aspects and allowed the
appeal.
CONCLUSION
Tax is the
main source of revenue for the government which is used by them to undertake
projects for public welfare at large but tax evasion has led to serious revenue
loss to the government. In India, tax and its process to file both are very
complicated for a layman to understand and the amount of tax levied also seems
high which encourage people to evade taxes and save their money. The mindset of
general public also plays an important role as people in India considers tax as
a burden imposed by government upon them and tries to look out for ways so that
they don’t have to pay tax. People in society don’t understand the importance of
tax and the usage of tax money in the social welfare activities, people just
look out for their own benefits and no one wants to contribute to the society
by paying their taxes on time and with sincerity.
The
government should make reforms in the already persisting tax laws and provide
more benefit to taxpayers so they can get motivated to pay their due taxes on
time. The system to regulate the tax should be made more efficient and
transparent. There should be new provisions made to discourage the high-net-worth
people from settling outside India which will prevent the outflow on money from
the economy.
REFERENCES