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Introduction

Tax planning entails making the best use of tax deductions, exemptions, or planning for income, expenses, allowances, and rebates in order to decrease tax burden in a fiscal year. Tax avoidance, on the other hand, is the practise of exploiting loopholes and discrepancies in tax regulations in order to avoid or reduce tax payment. It is not unlawful since tax regulations do not clearly define it. Many corporations, for example, route cash through offshore operations to avoid paying taxes in their native nation. Tax evasion, on the other hand, is unlawful, and penalties for the same are outlined in Chapter XXII of the Income Tax Act of 1961. When an individual, a corporation, or an organisation wilfully avoids payments of tax due, misreporting of income, and purposeful attempts to avoid paying tax these activities would fall under the ambit of tax evasion.

Article Review

Tax evasion is an unlawful attempt to decrease one’s tax burden by purposefully under-reporting or failing to declare taxable income or concealing one’s true situation from tax authorities. In a developing country like India, this is an issue.[1] Global economic conditions deteriorated drastically in the year of 2008, wherein some industrialised economies were experiencing their steepest decline since the post-World War II period. The associated adverse shocks also did extend throughout the other developing countries which contributed towards global recession.[2]

It is well known fact that there are certain legally authorised economic operations which also contribute towards tax evasion which is beyond disclosure to the public authorities and is in accordance with the provisions of the law in order to evade taxes. Excessive procedural rules and regulations do generate an incentive to conceal one’s true financial position. The increased globalisation and economic liberalisation have an influence on cross-border transactions, creating more opportunity for sophisticated devices to avoid paying taxes by obeying different tax regulations in different nations and using tax havens.[3]

One of the main factors behind tax evasion is the rate of tax such as, where the rate is high in a country the probability of tax evasion is high as well; there are other factors as well which contribute such as, nature of the economy and penalties sanctioned in the respective country. There are various consequences of tax evasion that can harm the economy such as when certain economic policies are laid down by the concerned government, tax evasion interferes with the implementation of such policies by distorting the investment as well as saving patterns with respect to the availability of the resources that are fixed for the sectors of the economy.[4]

Furthermore, it also undermines the attribute of equity in the tax system because, the honest taxpayers who regularly pay their tax usually bear disproportionate tax burden and it encourages the concentration of economic power in the hands of undeserving groups in a particular country which acts as a threat for the economy.[5] Whenever an individual tries to evade taxes, either by tampering with official records or by submitting fake documents the time and energy of the administrative body of taxation is consumed a lot in order to disentangle the manipulation caused by the said tax dodgers.

When more people are involved in such practices, the Government is prevented from making efforts of resource mobilisation a success as it faces the issue of shortage of funds which then acts as a barrier for implementation of development plans and forces due to the deficit financing in the public expenditure.[6]

Analysis

The problem of tax evasion is one which cannot be completely be curbed in single stretch as there are certain class individuals who opt for methods or tricks in order to evade tax and are still in the pursuit of finding new loopholes in the system’s governance. Some of the methods used by the said class individuals includes fake documentation, off shore bank accounts, non filing of ITR and many more. The said methods are mentioned below-

1. Concealment of Income- This method is the most often practised wherein an individual does not stipulate their true income at the time of filling their ITR and conceal the relevant information which helps the said individual in paying a lower rate of tax. Such individual operates/conducts their business by only taking cash transaction as it is easier to hide the trail of any sort of earnings and it is easy for them to fake invoices.[7] Like for example- If Mr. A has an income of Rs. 20,00,000 so the tax rate that he must pay is 30% according to the new tax slab but at the time of filling his ITR he shows the record of Rs. 14,00,000 on which he will pay only 20% tax rate. Therefore, the act done by Mr. A would constitute as tax evasion.

2. Forged Documents- It is well understood fact that, a business needs certain raw material in order to function or to conduct its day-to-day operation therefore, taxpayers provide a fake/forged receipts of purchasing the said raw materials.[8] Like for example- Mr. X has restaurant wherein he has an annual income of Rs. 60,00,000 and he at the time of filling his ITR shows that he incurred an expense of Rs. 50,00,000 although he only incurred an expense of Rs. 30,00,000 for purchasing raw materials. Such act done by Mr. X would constitute as tax evasion.

3. Offshore Bank Accounts- When businesses tend to expand worldwide and generate a huge some of revenue then in that, case they tend to have a bank account outside their home country which helps such businesses from not disclosing information about their usage of funds and to not pay high rate of taxes to the income tax departments (also known as “Tax Haven”).[9] Like for example- NIKE is well known company around the globe and United States is its home country, and it does not pay any income tax in the US as all the income goes to Bermuda where the rate of tax is low.

4. Non-Filing/Incorrect ITR’s- In each country there are certain class of individuals who do not provide any sort of information with respect to their income and ultimately do not even file their income tax returns in order to avoid any sort of tax liability. Furthermore, there are even certain class of individual who file their ITR’s but it contains false information regarding their income which helps in evading high tax rates.[10] Like for example- Mr. C runs a IT company wherein the annual income is Rs. 40,00,000 and while filling the ITR he mentions that in total he has incurred an expense of Rs. 35,00,000 which is false. Therefore, act done by Mr. C of presenting false deductions would amount to tax evasion.

5. Abuse of Charities- It is well known fact that, all the charitable organisation who are sanctioned the government status of a charitable organisation are entitled to tax benefits and tax reliefs. There are various such type of organisation which are being used as means of tax evasion wherein one person gets the requisite status from the government and then use such type of organisation as means for not paying tax rates.[11] Like for example- Mr. Z is a millionaire and has a charity organisation which is approved by the concerned government and uses the said organisation as means for storing his funds by donating the requisites funds as donations.

Conclusion

Escaping the duty of paying tax would still always be part of a country’s economy irrespective of whether there are any stringent actions/measures being taken by the concerned government or not due to the fact that, there will always be one individual who is either the tax payer himself or part of the administrative body of tax department who will be induced in committing the act of tax evasion. Whether such act was motivated for personal gain or by some pressure being put up by some political public figure is irrelevant, what is relevant is there must be body constituted which is independent and is not governed by any political influence or by favours of industrialists. As it is well know fact that when certain administrative action being taken with respect to tax evasion it is not cost effective due to which the ego of tax evaders is boosted which ultimately leads to promoting an evil in the society, therefore, as this is the era of digitisation there must be use of certain software or AI (Artificial Intelligence) which would speed up the process and would save the expense being incurred by the administrative body.

Notes:

[1] Antung Anthony Liu, Tax Evasion and Optimal Environmental Taxes, SCIENCE DIRECT (February 22, 2024, 2:00 PM), https://www.sciencedirect.com/science/article/abs/pii/S0095069613000454.

[2] Pradip Kumar Das, An Insight into Black Money and Tax Evasion – Indian Context, RESEARCH GATE (February 28, 2024, 10:00 AM), https://www.researchgate.net/profile/Umidjon-Akhunjonov/publication/326414977_An_Insight_into_Black_Money_and_Tax_Evasion-Indian_Context/links/5b4c4a36aca272c609474352/An-Insight-into-Black-Money-and-Tax-Evasion-Indian-Context.pdf.

[3] LegalKart Editor, What is Tax Evasion? All You Need To Know About, LEGAL KART (February 24, 2024, 4:00 PM), https://legalkart.com/legal-blog/what-is-tax-evasion-all-you-need-to-know-abouta.

[4] G. Tarun, A Study on Tax Evasion in India, ACADPUBL (February 23, 2024, 4:00 PM), https://acadpubl.eu/hub/2018-119-17/1/21.pdf.

[5] Supra note 1.

[6] Id.

[7] Anjana Dhand, Tax Evasion, SCRIPBOX, (February 23, 2024, 4:00 PM), https://scripbox.com/tax/tax-evasion/.

[8] Id.

[9] Eric Fontinelle, How to Open and Access an Offshore Bank Account, INVESTOPEDIA, (February 23, 2024, 4:00 PM),  https://www.investopedia.com/articles/pf/11/opening-an-offshore-bank-account.asp.

[10] Supra note 7.

[11] Shoaib Zaman, Pay Lesser Tax by Contributing to Charities and NGOs, BUSINESS TODAY, (February 23, 2024, 4:00 PM), https://www.businesstoday.in/magazine/tax/story/tax-saving-tips-contribute-to-charities-and-ngos-45990-2014-06-25.

Author Bio

Miccy Agarwal, a law student at Symbiosis Law School, Noida, is a distinguished individual. He has Served as the Indian delegate to Russia in World Youth Festival, 2024, he's showcased his prowess on global platforms. His accolades include a gold medal in the International Olympiad on Financial Secu View Full Profile

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