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The Concept of Tax Evasion and its Impact on National Economy

We often come across this kind of terms on our daily basis we hear about them in news and in newspapers, that this person committed tax evasion or our national economy dropped due to tax evasion or similar kind of crimes. But the question arises, that do we actually know about this concept or this term i.e. Tax Evasion, do we know the really meaning of it and the reasons behind the happening of such kind of things?

Well, to answer all these questions the author has put forth a detailed discussion about concept related to Tax evasion as well as all other matters which are in connection. In the present article the author has tried to explain the topic its general definition, the causes, then the measures which people use for evading tax, and at the end its consequences and influence on economy of our country.

It has been a very important topic for our concern it is somehow related to the economic strata and the government really need to put check on these kinds of crimes which are slowly eating up the development criteria of our country. Due to this the rich become richer and the poor becomes poorer. And somehow this encourages the honest people to use these kinds of ways just to pay less tax and save more. The Indian govt. need to be more rigid about this issue and should make more effective laws in order to curb this.

Author has also recommended some ways to stop these crimes. If we want to remove such kind of discrepancies from society, we have to regard the administration and laws, and the executive also needed to take more care of all honest citizens out there. It will take time but if done with extreme care than our country will definitely get rid of causation of black money and other crimes.

Introduction:

Tax Evasion:

Measure that are illegal, taken by people in order to pay less amount of tax.

Tax Avoidance:

A measure to pay lowest tax which should be paid legally.
  • Tax evasion and avoidance is just a way through which people erode socio-economic regime, and try to live an expensive and lavish life. Tax evasion puts the whole economic power in the hands of most undesirable people who donít deserve to enjoy such illegal outcomes generated by it.
     
  • We often see and discuss that globalisation and liberalisation has done so much good to our country but they somehow increased the opportunity for people for evading tax by lowering the costs spend over it, and has also facilitated the creation of black money.
     
  • Tax avoidance has increased sustainability problem. People take excuses like they earned less profit or gain on such income than what they actually earned, just to evade taxes.
     
  • People are supposed to give taxes which could be used for social activities but on contrary they are used for objectionable activities, by evading tax.
     
  • This is a ground why creation of black money is happening continuously and unfortunately India is unable to acquire a position of greatest economy.

Objectives:
  1. To analyse meaning of tax evasion and tax avoidance.
  2. To inquire upon the causes which give rise to evasion of tax.
  3. To analyse different measures to restrict evasion.
  4. To analyse consequences of evasion of tax.
  5. To inquire the impact of it over economy of India.

Tax evasion is an act against law in which non-payment or under paying of taxes by people takes place.[i]

Person tries to not inform the authorities about the real income/profits he gets at a time and conceals his true affairs of income from such authority. The need to seize the black money or tax evasion felt during the crisis of finance in 2008.

Till now in India various conventions took place to restrict the deceit which increased from evading tax. These conventions are also helpful for our country to freeze and seize such kind of criminal acts related to tax evasion.

Sources of Tax Evasion:

There are so many legal and illegal actions which work as a source for evading tax, let us take a look into these:
  1. Legal Sources: In our country there are so many legal ways through which tax evasion takes place.

    There are so many activities related to economy which are in some way gets legal permission but most of the black money is generated from those activities by hiding the true fact from the authorities prescribed by law. The so many laws and procedures help in some way to hide the real ratios and help such kind of activities by not considering them in highly reported and restricted works, that is very bad output of principles related to law and be termed as a loophole to the laws of our country.

    Have you ever thought that the objects that lead to sudden growth to economy of our country can become a cause behind tax evasion?
    Well itís not good but, yes it has been taking place in India and still going on. The globalization and liberalisation of economy which we think are too good for our country have their influence on trans- boundary occupations which give a high opportunity to not so intelligent people to get rid of paying taxes by using the defence of various laws of tax of various countries & not only this those persons use the rules of tax as a shield to evading the tax as much as they can.

    The various corporate multinational agencies, which do global level of trade, use the price estimation methods as a weapon to evade taxes, because in country like India there are still lack of sufficient resources which help in price estimation and on contrary it gives rise to price manipulation [ii].
     
  2. Illegal Sources:
    Tax evasion is the object which consist of a number of activities that are unsociable one of them is creation of black money. However, these illegal acts diminish the values socially as well as morally. Centre and state govt. made these illegal acts punishable by enacting different acts and included such kind of acts under the Act, of Prevention of Money Laundering which was enacted in 2002.

There are some other causes also which give rise to tax evasion such as: [iii]

  • Inflated amounts of tax rates which government imposes.
  • Character of financial system of our country.
  • Less strict laws and provisions prescribed by government.
  • Lack in esteem for laws and the government who make laws.
  • Structure of tax system in our country.
  • Low education and literacy rate of population.
  • Complexity and less accuracy of taxes.
  • Tax planning by multinational objects.
  • Inefficiency of rigid administration.

Inflated rates of tax increase the tendency for people for evading taxes. They are directly proportional to each other as the rate of tax goes high more person tries for evasion. If people of any nation are less enthusiastic about laws and administration than these kinds of acts can easily be found in such nations.

And when we are taking about the government letís talk about them, how many times we see the evaded tax by the politicians and other governmental authorities, they just form a religious trust and save themselves to spend their money on taxes in the name of that trust only, but this isnít with everyone, but now we can say that after seeing these kind of authorities doing such kind of crimes related to tax the honest public finds it right and donít obey the laws. The nations with good and sound regulation of laws have small black economies than those countries with not so good system of law.

Methods to Evade Taxes:

  1. Wielding Capital Expenditure:
    One of the measures for evasion of tax is excess calculation of assets whose value is fixed which helps to reduce business gain and thereby increment in the depreciation.
     
  2. Changing the logbook:
    The most used methods leading into tax evasion. In this measure basically the manipulation of receipts takes place and sales related to trade are diverted to some other body of the association that are present in some other jurisdiction, due to which the issue becomes the issue of global taxation. By this method the association tries to dodge tax by hiding the real logbook and show lower profits than the real one. And sometimes this happens that if the entity is present in some state where lower tax rates are imposed than the company succeeds in paying lower taxes than it should pay. Another similar way is to show lower production rates than the original one this also helps to diminish the unpaid tax amount.
     
  3. Dealings shut Out of Record:
    This method is popular among small scale trading. In order to stay away from paying taxes and hide the real profits to business from the authorities of tax, the enterprises keep different books of record that they use to befool the authorities, in one of the logbooks the actual amount is stated which is only used by the traders and in other record they try to make fake entries in order to pay less tax comparatively.
     
  4. Lower Impact Laws related to tax:
    The laws of taxes in nation like ours are too fragile and due to the complexity and ambiguity they are completely ignored by individuals this is why such kind of crimes like evasion of taxes, find their way in India easily.
     
  5. Excessive Tax Imposition:
    In India there are conditions where very huge amount of tax are imposed on individuals. In corporate sector this is seen very easily because the imposed tax are way much higher this is why they get more margin for dodging tax.
     
  6. Changes in Quality of Product:
    In this method the raw product which is imported for a business are to be faked in the list of accounts by changing the quality of the products this clearly helps in tax evasion as the real expenses are kept hidden by doing so.
     
  7. Transactions made Out of Country:
    In this method the income on which tax is imposed is somehow transferred to one of the entities of the same business which situate outside the country or in any other country where the tax rates are comparatively lower.
     
  8. Giving funds to Political Parties:
    This method leads to lessen the amount of payable tax as much of the amount is showed to be donated as funds for some political issues by big businesses in order to show them in their logbooks and dodge tax.
     
  9. Excessive Corruption:
    By continuous dodging of tax by some business entities they manage to collect a high amount of illegal gains which is further used for dodging taxes when the charges of tax goes up.
     
  10. Using income for Agricultural purpose:
    Many companies transfer their generated income to agricultural sector owned by them which helps them to pay less amount of tax and leads to crime of tax evasion.

Outcome/ consequences of Tax Evasion or Avoidance:

As we have already seen the methods through which tax evasion takes place these method effect very harsh on the nation. These are harmful for the sustainable growth and improvements of society and the whole nation as well. Tax evasion gives dominance to the causation or formation of illegal gains which people try to hide and dodge tax by doing this but due to this rich section became more wealthier and poor section is affected badly as government donít have enough funds to do something for weaker sections as it donít get the correct tax paid to it.

As the administration fails to remove these kinds of wrongdoing apparently more harm is done to the feeble segment of the nation. Tax evasion gives rise to administration to stop the development programmes which it started to do some good to persons individually and societies as it goes out of wealth and enough funds due to avoidance of tax by people. Evasion barge into the policies made by government for society and twist the plan of administration by forming the main resources unavailable for project.

Evasion of tax by many people somewhere put an excessive load on tax payers who honestly pay taxes every time, due to this they are encouraged to dodge taxes after this kind of biasness. Evasion and avoidance of tax is also harmful for the security of nation in some way because due to it whole lead is provided to those people who try to dodge tax and dishonestly make illegal money and also lead the enemies in downsizing growth of nation. There are so many social evils which takes place on small accounts but at end give rise to evasion only. E.g. taking bribe, forging documents etc.[iv]

Aftermath of Evasion and Avoidance:

Evasion of tax has been one of the largest issues in our country. Due to it the rate of generation of illegal gains has increased over a period and this is why our country faced so many problems regard to the poverty, the scams and many more socio- economic issues.

Let us discuss the major impacts which are laid down by this tax evasion or avoidance:

  1. Less payment of tax:
    This is the first and foremost impact which is laid down by tax evasion. This is somehow predictable to us that whoever do tax evasion will not pay the full tax and due to this act government gets unable to fulfil the fund requirement for growth and development and this is one of the reasons that GDP falls down.
     
  2. Increase in Corruption activities:
    we can say that corruption or deceit is a reason and impact for evasion of tax, in view of the fact, because of corrupt intentions and to form more money people do evasion, and by seeing any other person doing tax evasion people get encouraged to do this and they practice such kind of activities just in greed of more money making they generate this kind of illegal money.
     
  3. Increment of insufficiency:
    Because of evasion of tax the illicit business gets more urge and that is why the individuals get deprived from the essentials for their expansion and evolution. Due to this rich people just save the money and enjoy to the fullest but the situations of poor people get more worse.
     
  4. Funding in alternatives:
    Almost all the evaders of tax try to fund in their illegal gains into the alternatives, one of which is gold jewellery and by doing this they just secure their wealth and this money can be get back by just converting the jewellery in actual money. If we try to calculate this it will definitely increase the conditions of our nation economically.
     
  5. Transmission of illegal gains:
    Many of the tax dodgers afford this kind of approach and by this they just move their illegal money generated by tax evasion in India, to the safest place i.e. Foreign funds, they hire the agents who make this transmission possible and just save these kind of tax evaders, and one of the main weapon of doing this is changing invoicing process of exports and imports.
     
  6. Trouble on other Tax payers:
    By all this tax evasion and avoidance done by such evaders there is no other way remains for government but to increase the further tax rates, and due to this the honest tax payers suffer a lot and poverty increases by all these activities.

So after all this discussion we can say that the activities related to tax evasion and tax avoidance do nothing good to the country and the tax system of India must be reformed in order to end these kind of activities

Actions taken by Indian Government to stop these activities:

Many measures have been taken from a long time in order to stop these kinds of activities by reforming the tax laws in our country. By all these measures government has tried to lower the black money generation and he corruption which is the ultimate goal of tax evaders.

Let us look into some of the actions which the Indian government has taken to curb this, till now:

  1. Tax rate deductions is a great step taken by Indian government in order to stop activities leading to tax evasion but somehow this does not do more effect and does not generate more revenue as the tax evasion happens in every estimate of incomes and tax rates.
     
  2. Tax amnesties are also a good way to check the activities leading in tax evasion because by this the people who did tax evasion come forward and reveal each and every act of them due to which they hide the money, and also give the estimate of money which they concealed and in lieu of this they get less punishments, but somehow this leads to a bad impact on people who honestly pay their taxes because then for those people it seems to be easy to do tax evasion and afterwards on disclosing that they wonít get any punishments which encourage the other people to do so.
     
  3. Other measures like advance tax payments, TDS, obligation to provide PAN and GIR on the transactions are some small measures but have big role in keeping check on such activities of tax evasion.
     
  4. Survey by income tax authorities is also a good action towards it.
     
  5. Payment of taxes by E- means is a good way to collect tax from people as it is a simple procedure of collecting taxes without any complexity in it.
     
  6. Levying penalties on tax evaders and prosecuting them for the evasion done by them under various provisions of Income tax act is also a good measure to keep check. And also the officer of income tax have power to summon the persons on whom they have doubt that he must have done something wrong in regard to this and then they can search his property in order to find the black money concealed by him and then have power to seize such property of the person on finding some suspected black money. [v]

Case laws:

R.K Garg vs. UOI [vi]:

In the present case the question upon the measure taken by government i.e disclosure of having possession of black money, was challenged. In this case the contention was raised that this measure is taken only to avoid the crime related to tax evasion which are becoming the white collar crimes and this is not to encourage such kind of activities because this will help only to get back all the money which has been taken over and hide by the people.

This was just an initiative to disclose all that money which has been taken wrongfully by the criminals through tax evasion. This was later considered as a helpful measure because it ultimately helps in stopping such kind of things as the Indian govt. does not have complete set of effective rules that is why it is to be considered a good method.

Mc Dowell case[vii] and Azadi Bachao Andolan Case[viii]:
In both of these cases the question of territoriality on tax laws of India arose and these both were in contrary to each other because the ratios given in there were totally different.

The Supreme Court held that India doesnít have any jurisdiction over the matters of tax evasion in these cases because the question of territoriality is there and since the tax evasion has taken place outside the territory of India then the tax authorities of India canít exercise their jurisdiction in the present case.

Similarly, in Birla and Star controversy cases the question on tax planning was raised and supreme court gave its verdict that arranging of such commercial affairs in order to avoid taxes and distribution of taxes in such order is not at all prohibited. Because they ultimately help in removing such crimes.

Recommendations:
In order to stop tax evasion and get back the black money the author recommends some ways which are discussed here:
  1. First of all the judiciary and legislative framework need to be amended in order to provide fast remedies in such cases of tax evasion.
  2. The information collected by tax authorities which re related to tax and economy must be double- checked by them in order to avoid any kind of discrepancies.
  3. A proper connection between the state and central government must be there so that no chances of tax evasion could arise.
  4. An efficient E- system must be there in order to get the accurate information related to all transactions.
  5. People should be more aware of these kinds of crimes and should respect the laws.
  6. There must be a simple and lower tax rate system which could be afforded by any kind of group of people, so that they donít find it difficult and donít get into such kind of crimes.
  7. The punishments related to such crimes must be made more rigid.
  8. Laws must be changed in order to punish more and more tax evaders and so that the innocent people should not suffer anymore.

Conclusion:

After all this detailed discussion we can now say that at present our country really need a better law system and better rules and regulations in order to curb such kind of crimes, which are done by such people whom we think are very innocent and are not really supposed to be do so. As we have also discussed about the so many ways through which tax evasion takes place, these are the ways through which more and more people try to evade taxes and these are so rigid that government is not able to stop them completely.

Tax related crimes are like some dangerous disease which slowly eat up the whole economy of the country and are not easily stopped through less effective laws made by government. Similarly, there is an important role of the citizens because if they are aware of these crimes and they respect the laws and government than it can easily be stopped and demolished. It is a curse which gives growth to black money generation.

As we know it is not really possible to stop such kind of crimes completely in short period but they can be made less in number by just making the government system more efficient and making more bodies which ultimately reach to such aim of curbing Tax evasion and crimes related to tax.

End-Notes:
  1. Tax Evasion- Definition & Penalties in India, AEGON life, https://www.aegonlife.com/insurance-investment-knowledge/penalty-for-tax-evasion-in-india-a-read/
  2. Pradip Kumar Das, Impact of Tax Evasion on Indian Economy IJCAR, https://www.journalijcar.org/issues/impact-tax-evasion-indian economy#
  3. Alfredo collosa, which are the causes of Tax Evasion, CIAT https://www.ciat.org/which-are-the-causes-of-tax-evasion/?lang=en
  4. Crime relating to tax evasion, shodganga, https://shodhganga.inflibnet.ac.in/bitstream/10603/129394/13/13_chapter%207.pdf
  5. Supra Note 2
  6. 1981 133 ITR 239
  7. 154 ITR 148
  8. 263 ITR 706
Written By Anshika Sharma

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