This article is written by Aanchal Rawat, a 2nd year student of R N Patel Ipcowala School of Law and Justice.
“Only 5.78 Crore individual taxpayers filed income tax return for the financial year 2018-19 till Feb 2020 and even in that only 1.46 Crore, individual taxpayers filed returns declaring income above ₹5, 00,000.”
This was said by Anurag Singh Thakur, MoS, and Ministry of Finance in a reply to a question asked in Lok Sabha.
Tax Evasion is the illegal non-payment of tax or underpayment of tax.
The taxation system in India
Art. 256 of Indian Constitution,
“No tax can be imposed unless it is passed as a law.”
The Tax structure of India consists of 3 parts:
1. Central Government
2. State Governments
3. Local Municipal bodies
Taxes are imposed and determined by the Central Government and State Government along with local authorities like municipal corporations.
Salient Features of Tax System of India
- Role of Central and State Government
The entire system is demarcated with specific roles for the central and state government.
The Central Government of India takes following taxes: customs duty, income tax service tax, and central excise duty.
The state governments take the following taxes: income tax on agricultural income, professional tax, value-added tax (VAT), state excise duty, land revenue and stamp duty.
The local bodies take the following taxes: octroi, property tax, and other taxes on various services like drainage and water supply.
- Types of taxes
Taxes are of two types:
- Direct tax
- Indirect tax.
- Direct Tax
- Direct Tax is directly paid by the taxpayer to the government.
- Examples: Income Tax and Wealth Tax.
- Indirect Tax
- Indirect taxes are consumption-based taxes which are applied on goods or services when they are bought and sold.
- The government receives indirect tax from the seller of the good/service and the seller receives it from the buyer of that good/service.
- Examples: sales tax, Goods and Services Tax (GST), Value Added Tax (VAT), etc.
- Revenue Authorities
- Central Board of Direct Taxes
- Central Board of Excise and Customs
- Central Board of Indirect Taxes & Customs
Impact of Tax evasion on Indian Economy
Tax evasion has many negative effects on the entire economic system of India. Some of the important impacts are:
- Less Tax for the Government
Due to tax evasion, the Indian Government fails to collect the estimated amount of tax from the people. As a result, credit has to go to the black money-driven underground economy showing the impact of illicit wealth on GDP.
- Creation/Growth of Mass Poverty
The misdistribution of wealth and income in India has seriously affected the growth of the underground economy. If all black money can be recovered in the tax havens the amount which will be recovered will be approximately by which the Indian Government can pay off all the outstanding liabilities of the it and even then there will still be money left for spending.
- Uncontrollable Inflation
Due to tax evasion there is loss of revenue because of which the prices of commodities increases beyond normal level. And people who have money offer more money on specific items.
- Investment on Gold, Stones and Jewellers
People convert black money into white money to evade tax by largely investing in precious metals like gold and other jewellers. Gold can be bought and converted back to money any time with least efforts. Thus, the flow of underground money has caused the Indian economy to stall on its growth. Estimation says that if all the money in the underground economy could be diverted to our main economy, the Indian economy would grow more.
- Transfer of Black Money from India to Abroad
Black money generated in India is kept in foreign tax havens through secret channels with the help of two important methods,
- under-invoicing of exports
- Over-invoicing of imports.
Corruption creates tax evasion and it creates black money in the economy. Black money holders then bribe different people to reach their desired goals and can get what they want.
- Effect on GDP of the country
As income is not shown properly, tax collection decreases and thus the GDP cannot be calculated properly. The GDP is underestimated.
- The higher tax rate on existing taxpayers
The Government is forced to enhance the tax rates every assessment year for increasing its revenue resulting in the high tax burden of those paying taxes promptly.
Tax evasion is a criminal offence.
Chapter ⅩⅫ of Income Tax Act, 1961 deals with the punishment for evading tax.
In following scenario punishment is given:
- On not filing income tax returns
If income tax return is not submitted as per s.139 (1) of Income Tax then assessing officer can penalise penalty of ₹500
- Providing Wrong PAN or Not Providing PAN
If PAN is not provided to the employer at the time of employment then instead of 10% TDS (regular) 20% TDS will be deducted.
If PAN number is wrong then penalty of ₹10,000 may be penalised.
- Not checking form 26AS before filing income tax return
The details of Form 26AS should be checked multiple times as if any mismatch is found in details it could lead to severe punishment.
- Non payment of Tax as per Self Assessment
The taxpayer will be treated as defaulter if he fails to pay either wholly or partly self assessment tax or interest.
Being a defaulter he may be penalized by the assessing officer if justified reasons are not provided for the delay of payment.
- Concealing Income to evade Tax
If correct income details are not provided or concealed then the taxpayer will be penalized 100 % to 300% of the tax evaded.
Section 271AAB penalises penalty for the following scenario:
- Tax payer admits the undisclosed income
Penalty: 10% of the previous year’s undisclosed amount along with interest.
- Taxpayer does not disclose the undisclosed income but does so in return of income furnished in previous year
Penalty: 20% of the undisclosed amount along with interest.
- Amount undisclosed for the previous year
Penalty: Minimum 30% and Maximum of 90% penalty can be levied.
Ways to tackle tax evasion
- Reduction in taxes
- Simplifying the law and tax system.
- Designing well organised administrative structure for taxation.
- Strengthening Anti-corrupt policies.
- To increase awareness among the taxpayers with the use of different mediums like conducting seminars, conferences, etc.
- Relief provisions for huge tax payers.
- Strengthening laws related to it and making sure it is being implemented.
- A permanent tax structure for once and all.
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