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UNDERSTANDING AND COUNTERING THE CHALLENGES OF TAX EVASION AND AVOIDANCE IN INDIA: A FRAMEWORK-BASED APPROACH
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UNDERSTANDING
AND COUNTERING THE CHALLENGES OF TAX EVASION AND AVOIDANCE IN INDIA: A
FRAMEWORK-BASED APPROACH
AUTHORED BY
- SUSHRUTH PANJAGALL
& L SAI KRISHNA
Abstract
The current study presents a
framework for understanding the consequences of tax evasion and avoidance in
India. The purpose of this study is to
investigate the impact of direct tax avoidance and evasion in India, the
motivations for such avoidance and evasion, and the issues produced by such
avoidance and evasion. Tax evasion is the deliberate attempt of a taxpayer not
to pay tax, whereas avoidance is the endeavour of a taxpayer to lower his tax
liability in order to pay as little tax as possible. This move has an impact on
revenue generation in India, causing the tax's intended goals to be missed.
Despite all of the government's attempts to combat the problem of tax evasion
and avoidance, there is still a slowing in the economy's growth. Government
revenue declines as a result of tax evasion, which lowers the amount of public
funds available for investment in vital industries like infrastructure,
healthcare, and education. Contrarily, tax evasion skews the distribution of
resources and deters foreign investment, which lowers economic development
overall. The study emphasizes the grave harm that tax evasion and tax avoidance
due to India's economic growth. It offers proof in Favor of taking decisive
action against these practices in order to advance India's sustainable economic
growth. So, this study is concerned with
overcoming those challenges and finding an appropriate solution.
Keywords: Tax Avoidance, Tax Evasion, Economic
Development, Government Revenue.
I.
Introduction
Taxation is a source of revenue for
the government of a country, which it utilises to develop infrastructure,
living standards, and security for its population. These taxes, however, can
impede an individual's or a company's subjective development, encouraging
individuals and large corporations to investigate ways to avoid them by
exploiting loopholes in the rules and norms that govern taxation.
The terms "tax avoidance"
and "tax evasion" are used in the Income-tax Act of 1961. Tax
evasion, on the one hand, is unlawful, and penalties are outlined in
Chapter XXII of the Income Tax Act of 1961. Individuals who attempt to avoid
paying income taxes face a number of penalties under the Income Tax Act. The
consequences for such activities are high, with penalties ranging from 100% to
300% of the tax for undisclosed income.
Whereas, on the other hand, tax
Avoidance includes any activity performed to avoid tax while complying with all
tax regulations and without any illegal intention.
II.
The History
behind the concept of Tax evasion
& Tax
Avoidance
In India, tax avoidance and evasion
are serious problems that have an impact on the growth of the economy. Tax
evasion and tax avoidance continue to be commonplace despite government efforts
to promote tax compliance; this results in revenue losses and impedes economic
growth. The purpose is to look into how tax evasion and tax avoidance affect
India's economic growth, specifically how they affect foreign investment,
government revenue, and economic stability. We will look into the history from
the colonial period where this was the started.
Since the colonial era, tax evasion
has been a common practice in India for a long time. The Indian aristocracy
engaged in widespread tax avoidance during British rule, employing a variety of
strategies to evade paying taxes. Following its independence, India introduced a
progressive tax system where wealthy taxpayers pay higher rates, and tax evasion
increased in frequency. The tax regulations of the nation were intricate, with
several opportunities for both people and corporations to take advantage of in
order to lower their tax obligations. The government imposed a wealth tax in
1984, requiring people to pay taxes based on their net worth. The goal of this
was to lessen tax evasion by those with large assets but low taxable income.
When India's economy opened up in the early 1990s, global businesses began
making investments there. Multinational corporations increased their use of
transfer pricing and other tax evasion strategies as a result. As a result, the
Indian government unveiled a number of initiatives to address transfer pricing
and enhance tax compliance.
III.
Direct Tax
A direct tax is one that is paid
directly to an imposing authority by an individual or organisation. A tax payer
pays direct taxes to the government for a variety of reasons, such as Income
Tax, real estate taxes or asset taxes. Direct taxes differ from indirect taxes
in that they are placed on a single entity, such as sales tax paid by the
customer in a retail establishment. A direct tax cannot be transferred to
another person or entity. The individual or organisation taxed with the tax is
responsible for the payment of the tax.
In contrast, indirect taxes can be
transferred from one taxpayer to another. A direct tax, as opposed to a
transaction tax, is one placed on an individual person (juristic or natural) or
property (i.e., real and personal property; animals; harvests, wages, etc.).
The ability to pay principle governs
direct taxes. This is an economic concept that means that individuals with more
resources or a higher income should pay more taxes. The ability to pay taxes is
one way for a country's wealth to be redistributed.
IV.
Tax evasion
and tax avoidance mechanism in India.
Tax evasion occurs when someone fail
to present their true income on their income tax return. This is prohibited,
and the defaulter who conceals the actual income may face legal consequences.
You can save taxes by legal techniques that require investing in various
schemes and plans, but engaging in unfair practises is a crime.
The Indian government has recognised
the need to prevent tax evasion and has taken several initiatives to accomplish
this. Under the Income Tax Act of 1961, tax evasion is penalised by fines and
penalties. The statute also grants tax authorities the authority to conduct
searches and seizures in order to gather proof of tax evasion.
Tax avoidance tactics used by large
corporations around the world result in significant revenue losses for various
countries around the world, including India. It can only be avoided by closing
loopholes in tax laws. Through the Income Tax Act of 1961 and the Finance Act
of 2015, the Indian government established specific rules and guidelines to
regulate and limit tax evasion.
According to a study, tax avoidance
by major companies costs the government approximately INR 50,000 crore every
year. Reliance Corporation of India, Tata Group, Google, and others are
famous instances of global companies that do business in India and have
mastered the techniques of tax evasion and tax avoidance.[1]
V.
Tax Evasion
by Corporations.
Large companies in India use a number
of tax-avoidance strategies. These schemes heavily rely on tax-free nations and
subsidiaries. A "tax haven" is a country that grants foreign
individuals and businesses limited tax liability in a politically and economically
secure environment, with little or no financial information exchanged with
foreign tax authorities.
The most popular and advantageous
strategy among India's top companies is to transfer assets, shares,
transactions, and money from India to these tax havens via subsidiaries. Since
2005, several Indian and multinational corporations that have set up shop in
India have used tax havens and subsidiaries to avoid paying taxes.
The implementation of the Goods and
Services Tax (GST) has reduced tax avoidance. GST is a value-added tax (VAT)
imposed on the provision of goods and services. The GST has simplified the tax
code and made tax evasion more difficult. The entire GST system is online, and
all transactions are recorded in real time. As a result, tax avoidance has
become more difficult.
VI.
A
conceptual mechanism of Black Money.
In general, Black Money refers to
money obtained through unlawful means and kept hidden and unaccounted for.
There are other synonyms for underground economy, such as parallel economy,
shadow economy, unofficial economy, unaccounted economy, and so on. As a
result, black money is not reported to public authorities at the time of its
creation and is not disclosed at any point during its possession. Black money
can be formed by illegal drug trafficking, terrorism, corruption, or legitimate
failure to pay taxes to the government, resulting in the production of
unaccounted wealth. Certain sectors and activities, such as land and real
estate transactions, bullion and jeweller dealings, complex financial market
transactions, charitable activities, informal sector and cash economy,
self-employed professionals, external trade, and transfer pricing, give rise to
black money generation.
Tax evasion is an illegal attempt to
decrease one's tax liability by purposefully under-reporting or failing to
declare taxable income or concealing one's true position from tax authorities.
In a developing country like India, this is an issue. Global economic
circumstances deteriorated drastically in 2008, with several industrialised
economies facing their steepest decline since the post-World War II period. The
associated negative shocks that extended throughout poorer countries
exacerbated the global recession.
VII.
Tax Heavens
The phrase 'Tax Havens' is commonly
used to designate any country or region that imposes very low or no taxes on
foreigners. The most prevalent strategy is to use a tax haven solely as an
intermediary for transactions, with the real economic impact occurring
elsewhere. Internationally, two high-tax-rate countries can be channelled
through a tax haven firm so that any resulting profit in the haven is tax-free.
According to a large number of
research on tax havens, tax havens are often small countries or jurisdictions
with minimal or no taxation for foreigners who choose to come and settle there.
They normally maintain strict confidentiality or secrecy regarding their money
and accounts, making them very appealing venues for hiding unaccounted income
and, as a result, highly valuable for multinational corporations looking to cut
their global tax loads. Multinational corporations comprised of multiple
corporate and non-corporate bodies developed tax haven organisations and
intentionally transferred their profits to such conduit organisations in order
to construct low tax regimes.
VIII.
Ways to evade
tax.
Tax evasion is a frequent
practise among Indian businesses. They make a lot of money and use various
illegal tactics. Most people engage in these unethical practises in order to
avoid taxation.
1.
Filing fake
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
evasion because complete information is not provided, and they may pay less
than they should.
2.
Keeping
Money in a Foreign Bank Account
The Indian Income Tax Department has
no power over international bank accounts. Some people may maintain money in a
bank account outside of the country. This is against the law because this income
cannot be calculated when computing taxes. If government officials learn about
the money in international accounts, the perpetrator may face criminal charges.
3.
Financial
statements that are misleading.
The taxes that an individual or
organisation must pay may be determined by the financial transactions that
occurred during the assessment year. If false financial documents or accounts
books are submitted, showing incomes that are less than what was actually
earned, the tax may be reduced.
4.
Using
forged documents to obtain an exemption.
Certain exemptions and privileges may
have been granted by the government to certain members of society in order to
ensure they have a bit more financial freedom to progress. In some situations,
members who do not qualify for such benefits will have documentation
manufactured to support their claim of being a member of such group, allowing
them to claim exemptions where they are not qualified.
IX.
Why Tax
Avoidance and Tax Evasion
is
Prevalent in India?
Reasons for tax evasion are shared by
all countries, whether developed and developing. The reasons for tax evasion in
developed nations differ from those in developing countries because tax
awareness in developed countries is higher than in developing countries, and
progress in fiscal controls in rich countries has been made. One of the
consequences of tax evasion is a drop in government revenue, which casts the
tax system into disgrace. Tax evasion reduces government revenues, resulting in
a higher deficit, compelling the government to borrow or create more money,
causing inflation.
It is necessary to investigate its
cases in order to propose strategies to eliminate or diminish them. The problem
of tax evasion and its causes can be divided into economic, administrative, and
legislative causes, as well as social and other factors. We have done our best
to talk about all of the following causes:
·
Level of tax rates
·
Social psychology for taxpayers
·
The complexity of the tax system
·
Misuse or mismanagement of tax revenue
·
Inequitable distribution of amenities
·
Nature of the economy
·
Complexity of Tax Laws
·
Unwillingness of Taxpayers to Pay Taxes
·
Corruption in Tax Administration
X.
Recent Deterrent
Policies by Government.
The Indian government has taken the
following initiatives to combat tax evasion. Tax evasion is considered a crime
in India. The government imposes prosecution and penalties under various acts.
The Income Tax Department has implemented an income tax reward scheme that pays
informants about tax avoidance. Recently, India and the United States reached
an agreement to prevent Americans from evading taxes through Indian financial
institutions. The Special Bearer Bond Scheme (Immunities and Exemptions Act,
1981) allows those who have black money to invest in special bonds. Another was
the Voluntary Compliance Scheme (Amnesty Scheme).
The government raised the tax
bracket, cut the deduction rate, and expanded lawful tax avoidance tactics.
Recently, the government established the Tax Administration Reform Commission
to make fundamental changes to tax concerns in order to simplify and streamline
tax operations. Previously, India established many committees such as the
Taxation Enquiry Committee, the Indian Tax Reforms Committee, and the Direct
Taxes Enquiry Committees, among others. The Finance Bill included a provision
for auditing hidden transactions in order to combat tax evasion.
The Indian government has implemented
a number of steps to discourage tax avoidance. Such measures are listed below.
·
Statutory
Requirements
Certain statutory provisions require
everyone with taxable income to file tax returns; businessmen and professionals
must keep accounts and have them audited if their income or turnover exceeds a
certain limit; and transactions involving payments exceeding Rs.20,000 must be
channelled through banks.
·
Surveys
must be carried out.
The income tax agency conducts
surveys to bring new assesses into the tax net as well as to increase the
information base for detecting tax evasion by current assesses.
·
Significant
Measures
The government has even utilised
severe tactics such as tax raids and seizures at times.
·
Punishment
and Prosecution
To deter tax evasion, tax laws impose
monetary penalties as well as the prosecution (and incarceration) of tax
evaders.
·
Provisions
for Door-to-Door Market Survey u/s 133 B
In order to locate new assesses, the
jurisdictional income tax office may gather specific information, including tax
status of assesses. The person being surveyed must provide information on the
prescribed form no 45 D. The income tax officials are prohibited from removing
any valuables, books of accounts, or other items from such examined properties.
XI.
Legal
Implication.
In our country, the Income Tax
behaviour establishes the punishment and sanctions for people who do any type
of wilful behaviour involving taxes. Such as hiding their assets in order to
avoid paying taxes on them, passing their properties to others in order to
defraud the government, and smuggling items. The punishment for these acts is
outlined in our income tax legislation, and if some criminal activity is
involved, there are other activities that will assist us in punishing the
perpetrators.
Tax evasion should be viewed as a
penal offence in India, according to the Income Tax Act. This can lead to serious
consequences. The degree of the fraud committed and the amount of tax owed may
influence the penalty for tax evasion. As a result, it is advised to take
income tax compliance seriously in order to avoid legal action by authorities.
1. Failure to file Income tax Return: The standard punishment for failing
to file income tax returns on time is a fine of up to Rs. 5,000. The
amount of the fine will be determined by the assessing officer based on the
facts of the case. This penalty is imposed if the taxpayer fails to file their
returns by the due date and/or fails to comply fully with the relevant
provisions of the Income Tax Act, 1961.
2. Concealing the actual profits: If the taxpayer seeks to conceal the
original gains or income, the penalty imposed by Section 271(C) will be between
100% and 300% of the tax evaded. Income concealment is a serious violation that
can result in heavy fines and perhaps prosecution.
3. Under reporting the Income: A taxpayer found guilty of
deliberately attempting to avoid or under-report income in excess of Rs 25 lakh
faces up to seven years imprisonment and severe penalties under Section
276C of the Income Tax Act.
4. Inaccurate Information: When completing an ITR, it is
illegal to provide inaccurate information, including PAN details. Incorrect PAN
results in a Rs.10,000 penalty, whereas not submitting PAN results in higher
TDS deducted, i.e., 20% instead of 10%.
XII.
Judicial
Pronouncements
Union of India v. C.B. Gautam (1992)[2]
In this instance, the petitioner
filed a civil writ case in the Delhi High Court, contesting the provisions of
the Finance Act 1986 and the Income Tax Act, 1961. The petitioner claimed that
the purpose of the case was to acquire a 253-square-meter plot of land at
B-7/108A, Safdarjung Enclave, New Delhi. Thus, it was decided that the
petitioner would become the owner of the property and that construction would
start on the same day.
But later on, Chapter XX-C was
contested on the grounds that the property's value was inappropriate according
to market or regional appraisals. Then, it was claimed that leasehold
privileges infringed upon the right to equity under Article 14. Then, it was
stated that immovable property could not be transferred through a lease under
Section 269UD regulations. The court noted that it was believed that transfers
of real estate in urban areas involved a substantial degree of tax avoidance.
The statement makes reference to the
recommendations made by the Wanchoo Committee, a direct taxes inquiry panel led
by the Hon. Mr. Justice Wanchoo, a former chief justice of India. The Wanchoo
Committee concluded in its interim report from 1970 that understating prices in
real estate sale deeds was a common way to evade taxes. As a drastic measure,
the committee suggested that the government be given the authority to purchase
properties where the consideration in the sale deeds was found to be incorrect.
In response to this proposal, Chapter XX-A rules were added to the Income Tax
Act.
The Cadbury India case is a seminal
case concerning tax evasion in India. The Indian tax authorities claimed in
2010 that Cadbury India had undervalued its exports to its parent firm in the
UK, causing India to lose tax revenue. They also accused the corporation of
engaging in transfer pricing manipulation and tax cheating. Cadbury India was
required to pay back taxes and penalties of Rs. 2,500 crores by the tax
authorities.
The matter was taken to the Bombay
High Court, which decided in 2014 in Cadbury India's favor, finding that the
business had neither manipulated transfer pricing or participated in tax fraud.
The court determined that Cadbury India had complied with Indian tax
regulations and that the tax authorities had not shown enough evidence to back
up their claims. One of the most important cases involving transfer pricing and
tax evasion in India is the Cadbury India case. It made obvious how important
it is for India to have uniform transfer pricing laws and enforcement protocols
in place to stop multinational corporations from dodging or evading taxes.
XIII.
Conclusion
The above explanation concludes that
both the concepts of Tax Evasion and Tax Avoidance achieve a similar goal of
tax reduction, however one achieves this goal through legal means and the other
through unlawful means. The Indian government has made provisions for an
individual or a legal body to limit income taxes, whilst the government has
imposed numerous penalties for tax evasion. The government's revenue has been
impacted since the current taxing structure allows for loopholes, dishonest tax
officials, a lack of proper information, and other factors. Furthermore,
lowering tax rates is not an optimal solution to the problem because some
people will still try to evade or avoid taxes regardless of tax rates. The fact
is that changing tax payers' mindsets is the primary remedy to tax evasion and
tax avoidance.
We have an obligation to assist the
government by adhering to tax procedures and making timely tax payments since
we are aware of the detrimental effects of tax evasion.
Rather than standing by and waiting for things to change, let's take the initiative and create the necessary changes. All it will take is timely completion of our assigned tasks. If we all speak the same language, there won't be much space for any group or authority to take advantage of us.
Rather than standing by and waiting for things to change, let's take the initiative and create the necessary changes. All it will take is timely completion of our assigned tasks. If we all speak the same language, there won't be much space for any group or authority to take advantage of us.
Article Information
UNDERSTANDING AND COUNTERING THE CHALLENGES OF TAX EVASION AND AVOIDANCE IN INDIA: A FRAMEWORK-BASED APPROACH
Authors: SUSHRUTH PANJAGALL, L SAI KRISHNA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/02/12
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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