Tax Evasion in India


  • A performance audit of India’s private hospitals has revealed that a majority of the institutions is evading tax.

The Report

  • The report by the Comptroller and Auditor General (CAG), pointed out that data on ‘non-filers’ of income tax was available only in three states — West Bengal, Assam and Gujarat.
  • The auditors found that Delhi, Kerala, Rajasthan and Tamil Nadu had no process of identifying hospitals that were evading tax.
  • The CAG analyzed 10 trust hospitals and found that none of them fulfilled the conditions of Bombay Public Trust Act.

Tax Evasion

  • People in India try to evade tax by some illegal means or by taking the benefit of some loopholes in the Indian tax system.
  • Tax evasion is the term for the efforts by individuals, corporate, trusts and other entities to evade taxes by illegal means.
  • It is the deliberate, misrepresentation or concealment of the true state of their affairs to the tax authorities to reduce their tax liability.
  • It is all about avoiding the tax liability by declaring less incomes, profits or gains than actually what they earn or overstating their expenses.
  • Thus, the amount which would have been used for economic and social development is used for anti-social activities.
  • All the tax evasion leading to creation of black money and social evils is harmful to the society.
  • The level of Evasion Tax also depends on the chartered accountants and tax lawyers who help companies, firms, and individuals evade paying taxes.
  • Tax Evasion is a crime in all major countries and the guilty parties are subjected to imprisonment and fines.

Ways of Tax Evasion in India

  • 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 take bribery and helps in making misrepresentations and fabricated financial statements instead of reporting to tax authorities.
  • Evaders willfully fails to file return, submits false returns, submits false certificates to get deductions.
  • Exemptions and claim low income, charging personal expenses to revenue, fails to pay dues within due date and so on to evade tax.

Causes of Tax Evasion

  • High tax rates.
  • Complete tax system.
  • Inefficient tax authorities.
  • Inefficient enforcement of laws.
  • Multiple taxes.

Impact on Economy

  • Less Tax for the Government: Many times, the Indian Government has failed to collect the estimated amount of tax from the people of our country and for this, credit has to go to the black money driven underground economy.
  • Uncontrollable Inflation: When black money is out in the market, the amount of money in the system is higher than the Government expects causing the prices of commodities to increase to a level beyond normal.
  • Leads to Mass Poverty: The distribution of wealth and income in our country has been severely affected by the growth of underground economy.
  • Lack of Technology: Due to the existence of black money, India is facing the problem of shortage of capital. This has the direct impact on the up gradation of technology in all sectors. The major reason behind such backwardness is the parallel economy.
  • Corruption: While corruption creates black money in the economy, it can also be a result of the growing underground market.
  • Inflated Real Estate: Generally, people involved in black money market are always ready to pay more for a piece of land as this helps in converting their colored money to legal money.
  • Transfer of Indian Funds Abroad to Safe Heavens: The black money generated in India is kept in foreign tax havens Under-invoicing of exports and over-invoicing of imports are two of the main methods used by black money holders for transferring money overseas.

Measures taken by the Government

  • Generation of black money, stashing it abroad in tax havens and recovering such illicit wealth secreted in these accounts was one of the dominant issues in the run up to the 2014 General elections.
  • In fact, on assuming office one of the first decisions of Narendra Modi led NDA Government was to constitute a Special Investigating Team [SIT] as mandated by the Hon‟ble Supreme Court to look into these matters.
  • While the SIT was operating on a narrow compass the fact remained – much was left to be done by the Government.
  • It is in this background that Budget 2015 has pronounced certain measures to deal with the “generation of black money and its concealment effectively and forcefully.”
  • This statement of intent has been backed by providing highest priority to investigations into cases of undisclosed foreign assets. This is over and above that investigation conducted by SIT.
  • According to the Finance Minister “major breakthrough” has been made with the Swiss Authorities and certain critical and actionable information obtained from such authorities.
  • Several steps as below have been taken by India 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.
  • Global efforts to combat tax evasion and black money were taken by joining the Multilateral Competent Authority Agreement in respect of Automatic Exchange of Information (AEOI) and having an information sharing arrangement with the US under its Foreign Account Tax Compliance Act (FATCA).
  • The government is also trying to automate information exchange with several countries, including Switzerland, to clamp down on black money.
  • For this, so far, both India and Switzerland have agreed to speed up work on the Automatic Exchange of Information (AEOI) and make it possible by 2018.
  • The Lok Sabha on July 20, passed the Benami Transaction Bill 2015 which was predominately an anti-black money measure with the purpose to seize unknown property and prosecute those indulging in such activities, according to a PTI report.
  • 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 invasion

  • High rate of Taxation – High rate of taxation cause a burden to tax payer. So, they find ways to avoid tax.
  • 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.
  • Lack of simplified procedures – Tax structure in India is complex and people find it hard to go to different departments for a single matter.
  • Existence of large number of taxes – Existence of large number of different type of taxes causes burden on taxpayers.
  • 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.
  • Lack of organized and systematic Administration structure.
  • 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.
  • Deficiencies in implementing Penalty Provisions.

How to avoid tax evasion?

  • Reducing tax rates.
  • Make more simplified laws and simplified system.
  • Design a well-organized tax administrative structure.
  • Strengthen anti – corruption policy.
  • Increase awareness among taxpayers by conducting seminars, conferences and through media.
  • Design a permanent tax structure.
  • Ensure the political changes do not affect well defined tax structure.
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