According to the income tax laws, individuals and entities with income above a certain limit must pay income tax to avoid penalties. Tax avoidance and tax evasion are commonly used terms regarding taxation in India. While tax avoidance is the legal approach used by taxpayers to reduce their tax liabilities, tax evasion is illegal and involves the use of fraudulent methods to avoid tax payments. The income tax collected from citizens is a major part of the government’s revenue. Thus, the income tax department levies penalties on tax evaders.
Let’s check the main difference between tax avoidance and tax evasion
What is tax evasion?
Tax evasion is the illegal avoidance of tax payment, which is subject to criminal charges and penalties. These include fraudulent methods, such as falsifying information, having excess tax credits and hiding documents or income proofs. Chapter XXII of the Income Tax Act 1961 specifies the penalties for tax evasion, which may vary from 100-300% of the tax for undisclosed income.
In India, tax evasion is a serious concern for the government as it poses a threat to the economy and impacts the government’s ability to provide essential facilities and infrastructure owing to insufficient funds.
Impact of tax evasion
- Loss of revenue: The revenue collected through taxes is utilised for public welfare and development projects. Tax evasion results in significant revenue losses for the government.
- Economic impact: Tax evasion impacts the country’s economic development as it reduces the government’s ability to invest in public services and infrastructureand leads to inflation.
- Impact on living standards: Tax evasion reduces the government’s funds for healthcare, education, infrastructure development and public welfare programs, impacting people’s quality of life.
- Inequality: Tax evasion by individuals and businesses causes inequality by burdening honest taxpayers.
- Increased tax burden: Owing to revenue loss due to tax evasion, the government increases the tax rates, which leads to a tax burden on the taxpayers.
- Legal penalties: Tax evasion leads to hefty fines, imprisonment or both, depending on the severity of the offence.
- Reputation damage: Individuals and businesses involved in tax evasion face reputational damage. The raids and other enquiries by the authorities may expose their evasion methods, resulting in a loss of trust and credibility.
Methods of tax evasion and penalties in India
Concealing income
If a taxpayer attempts to hide the original earnings or income, it is considered to be evasion. This results in a penalty between 100-300% of the tax evaded, according to Section 271(C).
Underreporting income
Deliberately reporting an income lower than the full income, either by not specifying certain income sources or by manipulating financial records to lower tax liability, is an offence according to income tax laws. An individual misreporting or under-reporting income has to face a penalty, ranging from 50-200% of the tax payable, depending on the case, according to Section 270A.
Late filing of income tax return
In case taxpayers file their taxes after the specified date or do not file the tax returns, the assessing officer can impose a penalty of up to Rs 5,000.
Keeping unaccounted money
Several offenders resort to hiding income or assets and not disclosing them to the tax authorities. Keeping unaccounted money, referred to as black money, is tax evasion. The penalty for holding black money can be up to 20% of the tax evaded.
TDS rules non-compliance
If an individual charges TDS from the source and fails to pay the tax to the government, it is referred to as non-compliance with TDS rules. This results in a penalty of Rs 10,000 for an individual and Rs 10,000-1 lakh for an organisation.
Not getting accounts audited
According to Section 44AB, a taxpayer must get the account audited or furnish a report of the audit. Failure to do so can result in a penalty of 0.5% of total sales, turnover of gross receipts or Rs 1,50,000, whichever is higher. A taxpayer must present a report from an accountant, required under Section 92E, failing which a penalty of Rs 1,00,000 or more is levied.
Furnishing incorrect PAN or not furnishing PAN
Furnishing inaccurate details to the income tax department, including PAN, when filling an ITR is punishable as per the income tax laws. Tax deductors, including employers, must request PAN while deducting TDS from an employee’s salary.
- A penalty of Rs 10,000 is levied for providing an incorrect PAN. Not providing PAN
- leads to a higher TDS deduction.
Difference between tax planning, tax avoidance and tax evasion
| Parameters | Tax planning | Tax avoidance | Tax evasion |
| Definition | It is the legal method of arranging finances to reduce tax liability. | It involves the use of legitimate strategies to reduce tax liability through tax incentives and loopholes. | It involves the use of illegal methods, such as underreporting income or concealing income, to evade paying taxes. |
| Legality | Legal and allowed as per income tax laws | Legal, if the tax laws and regulations are followed | Illegal and punishable under law |
| Intent | To lower tax liability within legal boundaries | To lower tax liability by exploiting loopholes in the tax laws | To avoid payment of the full tax amount owed to the government |
| Approach | Transparent and disclosed to income tax authorities | Transparent and disclosed to income tax authorities | Intentionally concealed and hidden from income tax authorities |
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Role of technology in tackling tax evasion
Technology has played a crucial role in tackling tax evasion in India. Tax authorities can leverage advanced data analytics and artificial intelligence to effectively identify tax evasion instances. The income tax department has launched big data analysis and personal social media tracking to track suspicious activities to claim tax benefits.
What measures can the government take to address tax evasion in India?
- The government can strengthen the tax administration and improve its capacity to identify and punish offenders.
- Public awareness and campaigns could be organised to educate the public about the legal consequences of tax evasion.
- Stricter laws and fines can keep a check on such practices.
Housing.com News Viewpoint
Tax evasion leads to severe penalties for the tax evader and revenue loss for the government, ultimately affecting the economy. Thus, taxpayers must comply with the income tax laws and pay their taxes on time. One can consult a tax expert to understand their tax liability and pay taxes to avoid penalties.
FAQs
What is the penalty for tax evasion in India?
There are various penalties imposed by the income tax department, depending on the type of tax evasion.
How is tax evasion done in India?
Underreporting income, concealing income, late filing of tax returns and keeping unaccounted money are the common tax evasion methods in India.
What happens if you do not pay tax in India?
Tax evasion penalties may vary from 100-300% of the tax for undisclosed income.
Can you go to jail for not filing a tax return in India?
Non-filing of Income Tax Returns (ITR) can lead to imprisonment of three months to two years or up to seven years in case of higher tax liabilities.
How to avoid tax evasion penalties?
Taxpayers can avoid tax evasion penalties through timely payment of income tax dues to the government.
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