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Tax Evasion

Tax is a common contribution towards the government according to everybody's ability to pay for raising revenue that's for the benefit of society. The dictionary definition states that “a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.”[1] They are levied by the state and central government. Tax plays an integral part of any economy.

These taxes are collected in many forms: state taxes, central government taxes, direct taxes, indirect taxes, and much more. The government gets a large sum of money from the income tax. A part of the income is contributed to the government every year. Everyone does not need to pay the same amount. Higher the income, higher the tax you have to pay. Any person who earns below 2.5 lakhs in India does not need to pay tax. As the income tax of a person increases he has to pay a certain percentage of his income that has been set by the government.

Through taxes, the government runs the country. The government uses these taxes to pay for public expenditure and to provide the best facilities and infrastructure in the general interest of the society. With the taxes collected, the government invests in health services, primary education, better infrastructure like roads, street lights, public parks etc.

These taxes are also used to pay income to public servants like police, fire force, government staffs etc.

Taxes affect the economic growth of any country. It contributes to the GDP of the country. For any business to flourish in the country, there has to be a good infrastructure. The taxes are used in such developments which promote economic activities. It helps in raising the standard of living of its citizens. What the government takes from its citizens, it gives back to them through services. It is like a give and take system.

Tax evasion is an illegal activity in which a person deliberately makes an underpayment or non-payment of tax. It means deliberately hiding and misrepresenting their income from the authorities to reduce their tax liability. It is a white-collar crime. Tax evasion and tax avoidance are often confused by the people. Tax avoidance means using legal methods to decrease the percentage of tax payable.

In general understanding tax avoidance is legal whereas tax evasion is illegal. Tax avoidance is making small changes that help one to minimize his tax. It's finding the loophole and making optimum use of it. People generally avoid tax by creating a legal entity like trust/ foundation or changing their country or by escaping double taxation.

Tax evasion is a criminal offence in India. Chapter XXII of the Income Tax Act, 1961 states provisions related to the prosecution of such offences, failure to file a timely return, false information, deliberate attempt to evade tax, fabrication of numbers etc. The burden of proof in such cases lies on the accused.

Tax evasion is majorly done by higher income group, business persons, politicians etc. In India, people generally evade tax because of the high tax rate, inflation, inefficiency of tax administration, corruption in the government sector. Politician and government officers evade tax since that money is out of bribery or illegal means. The tax department believes that tax evaders are high among the non-salaried people.

Tax evasion is done in various ways, some are stated below:

  • Purposefully not paying the required tax by hiding or misrepresenting their actual income.
  • Smuggling the goods to avoid taxes. A smuggler does not pay the customs duty since it is not authorized through any ports because it is an illegal activity. Hence, they are not subjected to any duty or tax.
  • Escaping the custom duty by faking the number either by under-invoicing or by misdeclaration of the quality of products.
  • By submitting the false financial statement. It is generally done by manipulating the book of accounts, statement of income, cash flow or by maintaining multiple books of accounts.
  • Using fake documents to claim exceptions: The government has provided various privileges for some financial benefits to underprivileged citizens. Some people who don't qualify for such privileges create fake documents to claim those exceptions.
  • Not reporting the income, i.e. hiding them or bribing. This is the most common method of tax evasion.
  • Storing wealth outside the country. (there are legal ways available)
The offender is given a penalty or punishment of minimum rigorous imprisonment to a minimum of 6 months to a maximum period of seven years and fine if tax evaded exceeds 25 lakhs. The penalty of not proving correct details or concealing the income tax will be 100% to 300% of the tax evaded as per section 271(C) of the Income Tax Act 1961. In case of not paying the tax due, a penalty is imposed which cannot exceed the due amount. Out of 130 population of the country only 1.46 crore, people pay the tax. That is a little over 1% of the country's population. [2020 report][2]

The difference between the estimated tax revenue and the actual tax revenue collected is called as “tax gap”.[3] It is the estimation of total tax evaded, tax avoided and corruption. Generally, the tax gap is referred to as the estimated amount of tax evaded. The tax gap can be estimated by direct method and the indirect method of calculation. The total tax can be calculated using macroeconomic data, this is an indirect method. This method links tax evasion to the underground economy i.e. through illegal activities.

The direct method is more for the VAT (value-added tax). It is done by comparing the input-output revenue and the actual VAT collected. Calculation of tax evasion through macroeconomic aggregates gives us less information on the reasons for revenue loss, whereas the estimation of tax evasion given by the use of microeconomic aggregates is often less comprehensive

Tax evasion has an ill effect on the country. It manipulates the efficiency of an economy. The capacity of an economy is severely affected due to tax evasion. This is because of the lower availability of resources. This leads to the inefficiency of the country which leads to slower growth of the economy. This, in turn, affects the development of the country because of the underestimation of the GDP.

The main effect of tax evasion is that it is a loss of revenue but an increase in inflation. It brings disequilibrium in the country that means the rich become richer and the poor becomes poorer, which leads to a poor standard of living, which affects the global reputation of the country. For any country to develop foreign investment is very important. A bad economy does not attract good business.

Measures To Fight Tax Evasion:

Reduction in tax rates: High tax rate is the primary reason for tax evasion since this makes the tax evasion benefit able despite the risk. The high tax level leaves the government with less scope for raising additional resources during emergencies e.g. Pandemic of Covid-19. A reduction in tax rates will help in increasing the demand which would lead to higher productivity and higher economic growth.

Minimizing the corruption activities:

By lifting off the ban on donation to various persons to political parties, giving them a reasonable grant in aid and appropriate criteria should be made which would help the government to determine the extent of such donations and keep track of it. In such ways, corruption will decrease by a certain percentage and help in raising the revenue towards the government.

Building trust among small tax group:

Generally the burden of the tax falls on small taxpayers because usually, the high taxpayers evade the taxes. By creating confidence among the small taxpayer, we ensure that what they pay is used efficiently and effectively.

Changes in the punishment, legal provisions:

The law should be more stringent in order to create a fear among the taxpayer. There should be serious repercussions to the tax evaders because ignorance of the law is not an excuse.

Taxation outside the central tax:

Income such as agriculture and donation offers a scope to hide the black money. Such incomes need to be subjected to uniform taxation or by creating a new category to avoid the scope of tax evasion.

Compulsory maintenance and audit of accounts:

A statutory provision may be made requiring maintenance of accounts by all persons in the profession, and by businessmen where the income from the business is in excess of exempted limit or turnover. A provision may be introduced in the law-making presentation of audited accounts mandatory in all cases of business or profession where the sales /turnover /receipts exceed the exemption limit.

Permanent Account Number The absence of a uniform system of indexing all taxpayers in the country on a permanent basis has to some extent been responsible for the difficulties experiences by the department in tackling tax evasion. It will be necessary to have an additional code, a ‘Records Locator Code', to help locate the records of a taxpayer when the case is transferred from one circle to another after the permanent account number has been allotted. To avoid confusion with the permanent numeric code, this records locator code may be a short alphabetic code

Educating about tax laws: Many citizens to date have very less knowledge about taxes. By educating the citizens about the Indian Tax system and the importance of tax for a country and creating an environment where everyone is willing to contribute towards the society will make a big difference in the number of taxpayers in this country.

There are very famous cases of tax evasion. Water Anderson is known as the guy who wanted to turn the Russian Mir Space Station into a tourist attraction destination. However, he was charged for hiding $365 million of his personal income. It was the biggest tax evasion case in the United States.

The famous Portuguese footballer Cristiano Ronaldo has accepted the punishment of a two-year suspended prison sentence and a fine of 12.1 million pounds in a tax evasion case and paid a total of 16.8 million pounds to evade the prison sentence in which he was found guilty by the Spanish authorities.

India has the famous case of Cadbury and Vodafone[4], the former case was for the allegation of bribing the authorities for tax evasion and the latter turned out to be the case of tax avoidance.

For an economy to grow together, they should give back what they get from society. Being aware of the effects of tax evasion on the economy, it is the citizens' responsibility to support the government by abiding the tax laws and paying taxes on time. Just like every drop of water makes an ocean, the contribution of every citizen makes a difference in the economy. The changes that we demand from our government can only be done if we change ourselves and fulfil our responsibilities.

These taxes are for the benefit of society. if we want to live in a better place, we need to contribute towards it. Only by fulfilling our duties, we can ask for what is rightfully ours. The first step to a better economy is to pay tax. If we take the first step in the proper direction, everything will fall in place eventually.-Ragma Ramesan

End-Notes:
  1. Oxford Dictionary definition
  2. Financial Express 13th Feb 2020.
  3. Tax Gap: Causes and Solutions- Stephen PHAU
  4. The Vodafone Case: A Critical Analysis- Harsha Agraval

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