Taxes play a vital role in fueling a nation’s growth, funding essential services, and driving social development. Yet, in the complex world of finances, a shadowy practice looms that undermines the integrity of a fair taxation system – tax evasion. As individuals and businesses navigate the intricate web of financial responsibilities, understanding the concept of tax evasion becomes crucial.
In this comprehensive guide, we delve into the depths of tax evasion, shedding light on its intricacies, common methods employed, and the serious consequences that follow.
What is Tax Evasion?
What is tax evasion? Tax evasion happens when people or businesses use illegal methods to avoid paying the taxes they owe to the government. This is a serious crime, and those who do it can be charged with a crime and have to pay big fines. Tax evasion usually means lying about how much money you make, pretending your expenses are higher than they are, or doing secret transactions with cash.
On the other hand, there are legal ways to pay less tax, like investing in different plans. This is called tax avoidance. Tax evasion and tax avoidance are words that are sometimes used to mean the same thing, but they’re different. Tax avoidance is following the rules to pay less tax, while tax evasion is doing sneaky and against-the-law things to not pay tax.
Common Methods of Tax Evasion
If you have wondered about tax evasion meaning and how it is done, people resort to various ways to evade tax payments. Some of the commonly used methods of tax evasion are:
- Misreporting in the Income Tax Returns
Filing income tax returns is mandatory, according to the laws of India. To avoid paying the exact income tax amounts, some people and entities report incorrect information in their income tax returns by providing false data relating to income, investments, and other deductions.
- Concealing Income
Some people avoid showing a source of income by hiding cash transactions. For example, a landlord might accept rent in cash instead of a bank transfer or cheque. This is done when the landlord has not informed the authorities that the property has been rented and he is receiving some form of income against it.
- Storing Funds in Accounts Outside India
Offshore accounts or accounts in international banks are maintained as information about these accounts is not disclosed to the Indian government. This is a common method of tax evasion.
- Falsification of Financial Statements
The amount of taxes that a company or an individual has to pay is determined by the figures shown in the financial statements. One method of tax evasion is to falsify documents like balance sheets and profit and loss statements to show a lesser income than what was actually earned. This will reduce the amount of tax that is payable.
- Not Paying Taxes
The simplest way to avoid paying taxes is to not pay the amount. Even when the dues are called for, the dues will not be paid to the government.
- Fake Documentation for Exemption
There are some exemptions and privileges provided by the government to some underprivileged sections of society to provide them with more financial freedom. An unusual method of tax evasion, some citizens create false documents to show they are underprivileged to claim the benefits despite not actually belonging to that strata of society.
One method of tax evasion is bribing the tax official to either change the tax liability or to make it disappear altogether.
Penalties for Tax Evasion
The income tax department can levy various kinds of penalties on people and entities who resort to tax evasion. Some of the common penalties that are levied are:
- In case the income is undisclosed, Section 271(C) of the Income Tax Act states that a penalty of 100-300% can be levied. The exact percentage depends on the following:
- If the taxpayer acknowledges the undisclosed income and declares it, a penalty of 10% on the previous year’s hidden income is levied.
- If the reason behind misreporting is an actual mistake, a penalty of 50% on the previous year’s hidden income is levied.
- If there is a genuine intention to conduct tax evasion, a penalty of 300% on the hidden income is levied.
If the officials conduct any kind of a raid to discover the undeclared income, the penalty is levied according to Section 271(AAB)
- If the due taxes are not paid, the tax officials can impose a penalty amount. This penalty amount has to be lesser than the monetary amount of taxes.
- According to Section 139 Subsection 1 of the Income Tax Act of 1961, income taxes have to be filed within the tax filing period of each financial year. From 2020-21 onwards, the penalty for filing a late income tax return is Rs. 5,000.
- If accurate information is not provided while filing the income tax return, penalties are levied. The PAN card is used to deduct TDS or tax-deductible at the source from the salary.
- If the PAN card number is not provided, instead of deducting 10% as TDS, 20% will be deducted.
- If an incorrect PAN number is provided, a penalty of Rs. 10,000 is levied.
In some situations, it is possible that the person filing the income tax notices some inaccuracies after the report has been filed, and it might not be possible to correct these within ten days of submission. In this case, a penalty of Rs. 50,000 is levied.
- Businesses or employers who deduct TDS must have a tax deduction account number or TAN. If they don’t have a TAN, a penalty of Rs. 10,000 is levied. Two kinds of tax evasion can be committed here:
- In case the tax at source is not collected, the penalty is the same as the tax that was not deducted at the source
- If the TDS return is not filed within the specified time, a tax has to be paid for every day of delay until the entire amount is paid. This tax usually starts from Rs. 10,000 and goes up to Rs. 1,00,000.
- In case any inconsistencies are found in the ITR, the income tax department might issue demand notices. The demand notice contains details of the amount of tax still owed, and 30 days are given to the taxpayer to respond to the same. Failure to respond and pay the remaining tax can result in a penalty.
- Under Section 140A (1) of the Income Tax Act, failure to pay tax as per the self-assessment can result in a penalty. The assessing office can levy the penalty, which is the total value of tax owed to the government. Only if there is a valid reason for non-payment of the tax will the penalty be waived.
- Under Section 44AB, if an organisation does not get audited or does not submit an audit report, a penalty is levied. This penalty is either Rs. 1,50,000 or 0.5% of the sales turnover, whichever is more.
- Additionally, under Section 92E, the taxpayer must get a report from an accountant or pay a penalty of Rs. 1,00,000 or more.
To avoid this penalty, all domestic and international transactions must be documented, and a report should be prepared by a chartered accountant.
What is Tax Avoidance?
What is tax avoidance? Tax avoidance refers to using legal strategies and methods to reduce the amount of taxes you have to pay. It’s about finding ways within the law to lower your tax bill, like investing in certain ways or taking advantage of available deductions. Unlike tax evasion, which involves illegal actions to avoid taxes, tax avoidance follows the rules and regulations set by the government. Some methods for the same are:
- Claiming child tax credit
- Storing the money in a health saving account
- Investing in a retirement account
- Selecting a mortgage tax deduction
Difference Between Tax Avoidance and Tax Evasion
|Aspect||Tax Avoidance||Tax Evasion|
|Legality||Legal and within the boundaries of the law||Illegal and against tax regulations|
|Intent||Minimizing tax liability through legal means||Deliberately evading taxes through unlawful actions|
|Methods||Using deductions, credits, and exemptions||Falsifying information, underreporting income, fraud|
|Consequences||Generally not subject to criminal penalties||Can lead to criminal charges, fines, and imprisonment|
|Compliance||Complies with tax regulations and rules||Violates tax laws and regulations|
|Example||Investing in tax-efficient funds||Hiding income through unreported cash transactions|
In summary, tax evasion happens when individuals or businesses play tricky games to lower their taxes. This could lead to hefty fines according to the Income Tax Act of 1961. It’s important to do things right and pay the proper amount of tax to steer clear of major financial problems.