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Tax Evasion and Controlling Tax Evasion by Indians

Given the explosion in this work, a natural question to ask now is: what do we really know about tax evasion? In this article, I give my own answer to this broad question, by answering several other, more specific, questions. First, how do we measure the extent of evasion, given that it represents behaviour that by its very nature individuals and firms go to some length to hide? Second, how can we explain these patterns of behaviour, via theoretical and experimental methods? Third, how can we use these various insights to control evasion?

In the process, I illustrate my answers to these questions by highlighting various specific examples of research. My main conclusion is that we have learned much in last 40 years but that we also have many gaps in our understanding of how to measure, explain, and control tax evasion. I also give some suggestions and some predictions about where promising avenues of future research may lie.

Introduction:
Tax Evasion is an illegal activity in which person or being knowingly avoids paying a true tax liability. To willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax code. Tax evasion applies to both the illegal non-payment as well as the illegal underpayment of taxes. Generally, a person is not considered to be guilty of tax evasion unless the failure to pay is deemed intentional.

Causes of Tax Evasion:

  • Low educational level of the population.
  • Lack of simplicity and accuracy of the tax legislation.
  • Inflation.
  • Tax pressure – high rates.
  • A significant informal economy
  • Permanent regularization regimes (moratoriums, whitewashing, etc.)
  • Possibility of failing to comply without greater risks.
  • Promotional regimes (tax incentives, exemptions and tax expenses).
  • Lack of dissemination regarding the use of resources originating from taxes.
  • Lack of citizens’ tax integrity.
  • Inefficiency of the Tax Administrations (AATT).
  • Presence of multinational enterprises with aggressive tax planning.
  • Tax havens – jurisdictions of null or low taxation or as it is said in many countries, non-cooperating jurisdictions.
  • Great weight of intangibles, which makes it difficult to assign them their true value and determine their place of origin.
  • Financial system with multiple sophisticated figures that allow for mobilizing money in a speedy and simple manner.
  • Proliferation of special tax regimes for attracting investments (e.g. tax rulings)
  • Difficulty to control the transfer prices of related multinational enterprises: currently over 60% of world trade is carried out through these enterprises and 50% are intragroup operations.
  • Digital economy, with the significant technological development: electronic commerce, collaborative platforms, digital currencies and new ways of commercializing goods and services, there are increasing difficulties for taxing and controlling.

Tax Evasion in India:

In India there are various ways through which people evade tax are Smuggling, evasion of sales and Value Added Tax, Evasion of Income Tax, Evasion of Wealth Tax, Evasion of Customs Duty and Evasion of Excise Duty. Also, officials takes bribery and helps in making fabricated statements instead of reporting to tax authorities. Idealist wilfully fails to file return, submit false returns, submits false certificates to get deduction, exemptions and claim low income, charging personal expenses to revenue, fails to pay dues within due date and so on to evade tax.

Effect of Tax Evasion in India:

Taxes are the major source of revenue of India government. Tax evasion causes economic inequality that is how some people are getting richer and others are getting poorer. Many reform measures and initiatives of government have to be set aside and welfare activities are getting affected. Black money causes inflation and value erosion.

Measures Taken by Indian Government to Curb Tax Evasion:

Several steps as below have been taken by Indian government to avoid tax evasion. In India, tax evasion is regarded as a crime. Prosecution and Penalties are imposed under different acts by government. Income tax reward scheme has been introduced by Income Tax Department which gives rewards to informers about tax evasion. Recently, India has entered into pact with US to avoid tax evasion by Americans through Indian financial organizations. Special Bearer Bond Scheme (Immunities and Exemptions Act, 1981) enable person in possession of black money to invest in special bonds. Voluntary Compliance Scheme (Amnesty Scheme) was another one.

Government increased the tax slab, reduced deduction rate, and increased legal tax avoidance measures. Most recently, Tax Administration Reform Commission was set up by Government to make structural reform to tax matters to simplify and streamline tax procedures. Earlier India had set up several committees like Taxation Enquiry Committee, Indian Tax Reforms Committee, and Direct Taxes Enquiry Committees etc. Transfer Pricing Audit was introduced by Finance Bill to audit undisclosed transactions to curb tax evasion.

Limitations of Indian Tax Structure which result in Tax Evasion:

  1. High rate of taxation:
    High rate of taxation cause a burden to tax payer. So, they find ways to avoid tax.
  2. Failure to curb bribery:
    There should be adequate system to curb bribery and corruption among officials. They help taxpayers to avoid tax by taking an agreed share of profit out of evaded tax.
  3. Lack of simplified procedures:
    Tax structure in India is complex and people find it hard to go to different departments for a single matter.
  4. Existence of large number of taxes:
    Existence of large number of different type of taxes causes burden on taxpayers.
  5. Complex tax laws and loopholes to avoid tax in laws:
    Indian tax law is complex. In the same law, people find provisions to escape from tax liability.
  6. Lack of organized and systematic Administration structure.
  7. Frequent changes in Government and Political instability:
    Frequent changes and political instability is another reason of non-implementation of well-defined tax system. Different governments implement different tax system and it becomes difficult to follow.
  8. Frequent changes in tax policies:
    Tax policies in India are changed frequently by government. It creates confusion among tax payers and officials about the relevant provisions.
  9. Deficiencies in implementing Penalty Provisions.

Best Ways To Avoid Tax Evasion

  1. Reducing tax rates.
  2. Make more simplified laws and simplified system.
  3. Design a well-organized tax administration structure.
  4. Strengthen anti-corruption policies.
  5. Increase awareness among taxpayers by conducting seminars, conferences and through media.
  6. Design a permanent tax structure.
  7. Ensure the political changes do not affect well defined tax structure. Make tax administration more independent and autonomous without losing final control of Government.
  8. Audit, tax collection, depositing and filing provisions to be more strengthened and updated.
  9. Make penalty provisions more stronger and avoid it’s non-implementation.
  10. Encourage taxpayers to pay tax by more friendly schemes.
  11. Give relief provisions to huge tax payers.

Recent Tax Evasion Cases in India:

The Goods and Service Tax (GST) department has registered over 1,470 cases of tax evasion in the financial year 2018-19 and recovered around Rs 360 crore in Gujarat.

The Income Tax Department has seized paintings worth Rs 30 crore in connection with its tax evasion and benami assets probe against Haryana Congress leader Kuldeep Bishnoi.

The raids to unearth the large tax evasion nexus were conducted in the first week of this month (November) on 42 premises in Delhi, Mumbai, Hyderabad, Pune, Agra and Goa on a group of people indulging in issuing bogus bills and carrying on Hawala transactions. Hawala denotes illegal transaction of funds by skirting the legal banking channels.[1]

End-Notes:
  1. The Economics Times (Online Edition)
  2. Principles of Taxation (Prof. Ullas Kumar Saha)

Written By: Sunil Kumar

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