Although they are
sometimes equated, tax avoidance and evasion are distinct in many respects. Tax
evasion is the use of illegal methods to evade paying taxes, whereas tax
avoidance uses legal methods to lessen the tax due. Although it is not criminal,
tax evasion is frequently regarded as unethical. On the other hand, tax
avoidance is illegal and is subject to legal penalties.
A complicated tax
system with several tax laws and policies exists in India. In recent years, the
nation has worked to strengthen its tax code and boost tax compliance. The
Indian tax system still faces significant difficulties from tax evasion and
Overview of the
Indian Tax structure:
India has a hybrid direct and indirect tax structure. Direct taxes, such as
income tax, wealth tax, and corporate tax, are levied directly to the
government. Contrarily, indirect taxes such as sales tax, service tax, and
are levied inadvertently via the purchase of goods and services.
India has a progressive
tax system, which means that people who earn more money pay a bigger percentage
of their income in taxes. The maximum tax rate is 30% for people making over Rs.
15 lakh per year, with tax rates varying according on income level.
The Goods and Services
Tax (GST) system, a value-added tax imposed on the provision of goods and
services, is also in place in India. Sales tax, service tax, and excise duty
were all replaced by the GST, which was a single tax.
The terms "tax
avoidance" and "tax evasion" are sometimes used interchangeably. But there is a
big distinction between the two. Tax evasion entails using dishonest and
unlawful ways to evade tax obligations, whereas tax avoidance refers to the
lawful use of tax planning strategies to reduce the tax due. Tax evasion, on the
other hand, involves the use of tax credits, deductions, and exemptions which
may entail falsifying transactions, hiding assets, or underreporting income.
Tax evasion and avoidance have serious legal repercussions in India, and there
are strong laws and procedures in place to address these problems. This essay
looks at how India's tax laws and policies affect tax avoidance and evasion
Indian tax avoidance
In India, tax avoidance refers to the ethical use of tax planning techniques to
reduce tax liability. The practice of organizing one's finances to take full
advantage of all tax deductions, credits, and exemptions is known as tax
planning. Taxpayers are encouraged to use tax planning since it is acceptable
and lawful. The Income Tax Act of 1961 offers a number of credits, exemptions,
and deductions that can be used to minimize taxes.
Tax planning, however,
can occasionally be mistaken for tax avoidance. Utilizing tax law gaps to lower
tax liability is known as tax avoidance. The government has taken many steps to
stop tax evasion after realizing the need to do so. To fight tax evasion, the
Finance Act of 2012 included the General Anti-Avoidance Rule (GAAR). If it is
shown that a transaction was created principally with the intention of avoiding
taxes, GAAR gives the tax authorities the authority to classify the transaction
as a prohibited avoidance transaction.
government has put in place a number of safeguards to stop tax evasion through
transfer pricing. The price of products and services between related parties is
referred to as transfer pricing. Transfer pricing manipulation is a common
strategy used by multinational corporations to move revenues from high tax
countries to low tax jurisdictions.
A comprehensive framework for determining
the arm's length price for transactions between related parties is provided by
the Transfer Pricing Regulations, which were implemented by the Indian
government. The requirements also mandate the preservation of thorough records
to support transaction pricing.
Tax avoidance in India
has greatly decreased as a result of the implementation of GAAR and Transfer
Pricing Regulations. Nowadays, taxpayers are less likely to use aggressive tax
planning techniques that could be interpreted as tax avoidance.
India's tax evasion
In India, tax evasion refers to the use of dishonest and unlawful techniques to
avoid paying taxes. Underreporting income, concealing assets, misrepresenting
transactions, and manipulating records are just a few examples of the myriad
ways that people evade taxes. Tax evasion is a serious crime that may lead to
The Indian government
has recognized the need to combat tax evasion and has implemented a number of
steps to do so. Tax evasion is punishable by fines and penalties under the
Income Tax Act of 1961. In order to obtain proof of tax evasion, the act also
gives the tax authorities the authority to undertake searches and seizures.
To combat tax evasion
relating to undeclared overseas income and assets, the government has also
introduced the Black Money (Undisclosed overseas Income and Assets) and
Imposition of Tax Act, 2015. The act imposes severe fines and penalties for
Tax evasion has been
reduced as a result of the Goods and Services Tax (GST) adoption. Value-added
tax (VAT) is imposed on the provision of goods and services and is known as GST.
The GST has streamlined the tax code and made it harder to evade taxes. The
entire GST system is online, and all transactions are immediately recorded. Tax
evasion has become more difficult as a result.
implications of tax evasion
Although tax evasion is not forbidden in India, it does have legal implications.
Some of the legal implications of tax evasion in India include the following:
The exclusion of
The ITA offers taxpayers a number of tax breaks and deductions. The tax
authorities, however, have the right to invalidate such perks and deductions
if they think a taxpayer has engaged in tax evasion. The tax authorities may
refuse the deduction, for instance, if a taxpayer claims a deduction for a
donation made to a charity organization but the donation was made to a
fictitious organization created to evade taxes.
The ITA establishes penalties for a number of income tax-related offences. A
taxpayer may be required to pay a fine if it is determined that they
participated in tax avoidance. Depending on the offence committed and the
amount of tax saved, the penalty amount may change.
If a taxpayer is suspected of participating in tax avoidance, the tax
authorities may review their tax returns. The authorities may open an
investigation if they discover proof of tax evasion. Examination of bank
statements, books of accounts, and other documents pertaining to the
taxpayer may be part of the investigation.
Taxpayers who are proven to have participated in tax avoidance may face
criminal charges. Tax evasion is punishable by a fine or even jail time. The
amount of tax that was avoided and the specifics of the case determine the
severity of the sentence.
Tax evasion's legal
implicationTax evasion is a serious crime that has many legal implications, such
as fines, penalties, incarceration, and harm to one's reputation.
are a few legal implications of tax evasion:
Tax evaders may be subject to civil penalties such as fines, interest, and
penalties on the amount of unpaid taxes, among other things. The penalty
might be as much as 78% of the unpaid tax amount, depending on the severity
of the offence.
Tax evasion may result in accusations that carry serious penalties,
including jail time and large fines. A person found guilty of tax evasion
may be sentenced to up to five years in jail, depending on the amount of
taxes that were avoided and other factors.
Professional and company Licenses:
If found guilty of tax evasion, a person may lose their professional or
company licenses. For instance, a chartered accountant could have his
To cover outstanding taxes and penalties, the CIT may seize a tax evader's
assets, including as bank accounts, vehicles, and residences.
Tax evasion can harm a person's reputation, particularly if they are
well-known or in a position of trust.
After being found guilty of tax evasion, a person may face future inspection
by the CIT. Additionally, the CIT may conduct more frequent tax return
In summary, tax evasion is a serious offence with substantial legal
repercussions. Taxes must be paid honestly and precisely to prevent any legal
implications of Tax Avoidance:
Tax evasion is lawful, but it creates ethical concerns because it denies the
government funds that may be used for social welfare programmes. Wealthy people
and businesses who can afford to retain tax professionals and attorneys to
assist them in finding loopholes in tax laws and policies frequently engage in
This practice is viewed
as unethical because it burdens others in society who are less well-off and
cannot afford to avoid paying taxes. The medium and lower income groups bear a
disproportionate amount of the burden of paying taxes because they lack the
means to do it legally.
The idea of fairness
and equity in tax collecting is also undermined by tax avoidance. Everybody is
required to pay their fair share of taxes, according to the idea behind tax
legislation. But when people and businesses practice tax avoidance, they
effectively get away with paying less tax than they ought to. As a result,
individuals who cannot afford to avoid paying taxes bear a disproportionate
amount of the burden of doing so.
evasion jeopardizes the pact that people have with their government. According
to the social contract, residents agree to pay taxes in exchange for the
government's delivery of public goods and services. By not paying their fair
share of taxes, people and businesses who participate in tax evasion basically
violate this social contract.
Implications of Tax Evasion:
It is illegal and unethical to avoid paying taxes that are owed, so tax evasion
includes breaching the law. People and businesses who purposefully underreport
their income or inflate their expenses in order to lower their tax liability
sometimes engage in tax evasion.
The idea of fairness
and equity in tax collecting is threatened by tax evasion. It burdens
individuals who do pay their taxes honestly since they are forced to increase
their payments to make up for the revenue lost to tax evasion.
Written By: Kshitiz Kumar,
Shri Jainarayan Mishra P.G. College
(University of Lucknow)
Email: [email protected]