Introduction
A tax is an obligatory financial requirement that governments at all levels place on people and businesses. Its goal is to provide funding for projects, administrative tasks, and vital public services. Imposing these charges is known as taxation. Tax rates vary depending on whether they target transactions, assets, or income. In addition to income tax, there are other types such as sales tax, gift tax, property tax, and wealth tax. Taxes are divided into groups according to their type, structure, application, and goal. Taxes are categorised into direct and indirect categories under the traditional classification.
A significant percentage of the general population in India uses illegal methods or takes advantage of tax system weaknesses to avoid paying taxes. This practice, which is often referred to as tax evasion, entails people, businesses, trusts, and other organisations knowingly misleading tax authorities in order to lower or evade paying taxes. Misrepresenting company operations, understating costs, or claiming lower incomes than real earnings are examples of tactics. As a result, money intended for legal activity is diverted from the government, which would otherwise be used for social and economic development. These kinds of activities create black money and societal issues that impede the advancement of the country. Experts like tax attorneys and chartered accountants frequently support people and companies using tax avoidance tactics.
We minimise our tax responsibilities while upholding all legal obligations when we engage in tax avoidance. Since tax avoidance complies with legal requirements, it is not subject to penalties or fines like tax evasion is. Rather, it entails taking advantage of legal gaps to lower our tax liability. By taking advantage of loopholes or inconsistencies in tax legislation, tax avoidance is a legal tactic for reducing tax liability and lowering tax payments. However, tax avoidance is frequently seen as unethical because it is linked to evading tax duties and delaying tax payments. One method of avoiding taxes is to make adjustments to financial records to guarantee conformity with tax rules. Tax avoidance may occasionally be viewed as fraudulent even though it is legal.
Page Contents
- Reasons For The Tax Evasion & Avoidance
- Theoretical framework
- Distinction between tax fraud and tax evasion
- The role of taxpayer behaviour in tax manipulation
- Types of Tax Manipulation
- Case studies
- Detection and Prevention Strategies
- Strengthening tax enforcement agencies
- Improving transparency and information exchange
- Enhancing international cooperation against tax evasion
- Implementing penalties and sanctions for offenders
- Legal Regulations
- Conclusion
- Reference
Reasons For The Tax Evasion & Avoidance
People evade and avoid paying taxes for a variety of reasons in both developed and developing nations. The reasons for these actions vary, meanwhile, across countries with high tax awareness and those with low tax compliance. The decrease in government tax collection resulting from tax evasion and avoidance is a noteworthy effect that jeopardises the fiscal integrity of the government. Government revenue declines as a result of tax evasion and avoidance, which might result in budget deficits that force the government to borrow money or print more money, which would accelerate inflation. To effectively suggest measures to reduce or eradicate tax evasion and avoidance, it is necessary to understand the elements that contribute to these behaviours.[1]
The intricate nature of tax rules and regulations is a key factor contributing to tax evasion. Tax regulations are frequently intricate and obscure, posing a challenge for taxpayers to adhere to them. The intricacy of the situation might give rise to confusion and errors, ultimately leading to the act of evading taxes.
Another factor contributing to tax evasion is the impression of inequity within the tax system. If taxpayers perceive an unequal distribution of tax burden, they are more inclined to partake in tax evasion. This perception can be intensified by the conviction that others are not contributing their fair portion of taxes, or by the perception that the tax system exhibits favouritism towards specific groups or individuals[2]. Tax evasion is sometimes driven by the strong motivation to evade tax payments. Taxes can impose a substantial weight on both individuals and corporations, and the inclination to alleviate this burden can result in tax evasion. This phenomenon is particularly prevalent in nations with elevated tax rates, where the motivation to engage in tax evasion is extremely compelling. The efficacy of tax audits conducted by tax authorities can also influence tax evasion. When tax authorities are viewed as being inexperienced or corrupt, taxpayers may be more prone to engage in tax evasion.
The severity of the punishment system can also affect tax evasion. When the penalties for tax evasion are seen as being overly low, taxpayers may be more prone to engage in this behaviour. On the other hand, when the penalties are harsh, people may be less likely to avoid taxes[3].
The degree of tax burden, the equity of the tax structure, the utilisation of tax collection, compliance expenses, and taxpayer service can all effect tax evasion. When taxpayers feel that they are being overwhelmed with taxes, or that the tax system is inequitable, they may be more prone to participate in tax evasion. Similarly, when compliance costs are high, or when taxpayer service is poor, taxpayers may be more likely to avoid taxes.
Economic reasons, legal issues, social aspects, demographic factors, mental factors, and moral factors can all play a part in moulding individuals’ decisions to engage in tax evasion activities. For example, those who are struggling financially may be more likely to cheat taxes, as may those who have a history of indulging in illicit activities.
Theoretical framework
In the Indian context, tax fraud and evasion refer to deliberate acts aimed at evading tax payments by illicit methods or fraudulent practices. Tax evasion involves the act of deliberately not reporting income or participating in deceptive actions to avoid paying taxes. On the other hand, tax fraud encompasses the intentional concealment or hiding of information with the goal of deceiving tax authorities. In India, engaging in tax evasion can result in significant consequences, such as substantial financial penalties and imprisonment. Individuals or corporations convicted of tax evasion may be subject to legal repercussions, including monetary penalties and imprisonment[4]. The Indian government has implemented rigorous laws and regulations to combat tax evasion and money laundering. Technologies such as Artificial Intelligence (AI), Data Analytics, and Machine Learning (ML) can be utilised to track instances of tax evasion. The Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs employ data analytics to identify individuals involved in tax fraud and evasion[5]. Common tax evasion techniques in India encompass the deliberate misrepresentation of income, exaggeration of expenses, utilisation of shell corporations, maintenance of several sets of financial records, submission of fraudulent statements to tax authorities, and the concealment of funds in offshore bank accounts. Tax evasion is a serious offense in India, and the penalties depend on the degree of fraud and the amount of owed tax. It is imperative to comprehend the differences between tax evasion and money laundering, as both are illicit financial activities that can result in serious legal consequences. Indian authorities place significant importance on combating tax evasion and money laundering, and the exchange of information plays a crucial role in identifying and investigating suspicious activity associated with these crimes.
Distinction between tax fraud and tax evasion
Tax fraud and tax evasion are two related but distinct concepts in the area of tax law. Both include illegal behaviours aimed at avoiding or decreasing tax payments, although they differ Tax fraud refers to the deliberate act of manipulating tax officials to underpay or evade taxes payable. This could comprise submitting incorrect information on tax forms, misrepresenting financial data, or delivering forged paperwork. The purpose of tax fraud is to reduce the tax burden or to claim credits and deductions illegitimately. Tax authorities rigorously investigate and punish events of tax fraud to safeguard the integrity of the tax system. Penalties for tax fraud may be harsh, including huge fines and potentially imprisonment.
On the other side, tax evasion is the intentional failure to pay taxes owed by either not completing tax returns or under reporting taxable income. Unlike tax fraud, which includes willful deception, tax evasion often contains a more passive resistance to executing tax duties. Some frequent strategies utilised in tax evasion include underreporting income, altering deductions on tax forms, and collecting unauthorised financial contributions. Additionally, companies may aid in tax avoidance by not correctly reporting and paying earnings and employment taxes[6]
The role of taxpayer behaviour in tax manipulation
Taxpayer behaviour has a crucial part in tax manipulation, which can take the form of tax evasion or tax fraud. Understanding taxpayer behaviour and its effects on tax compliance is vital for tax authorities to design effective tactics to increase voluntary compliance and prevent non-compliance[7].
One significant aspect influencing taxpayer behaviour is trust in the government and the tax administration. If taxpayers regard the government as spending tax resources wisely and fairly, they are more inclined to comply with tax rules. Conversely, if there is a lack of faith in the government or a perception of unfairness in the taxing system, tax compliance is likely to decline. A service-oriented approach by tax administrations, which treats taxpayers with respect and dignity, can help create confidence and encourage compliance.
Another major aspect influencing taxpayer behaviour is the complexity of the tax system. When tax rules and procedures are intricate and confusing, taxpayers may struggle to comply, leading to non-compliance. Tax administrations can help address this issue by simplifying tax rules and procedures, providing clear and simple counsel to taxpayers, and offering support to those who need it.
Taxpayer behaviour can also be influenced by psychological elements such as tax morale, which refers to a taxpayer’s inherent motivation to pay taxes. When taxpayers have a strong sense of moral responsibility to pay taxes, they are less likely to participate in tax evasion. However, when tax morale is low, taxpayers may be more prone to engage in tax evasion, especially if they regard the tax system as unjust or if they believe that others are not paying [8]
Social factors, such as income level, marital status, and religion, can also impact taxpayer behaviour. For example, taxpayers with greater earnings may be more prone to engage in tax evasion, whereas those with lower incomes may be more likely to adhere with tax regulations owing to fear of penalties. Marital status and religion can also affect taxpayer behaviour, with married taxpayers and those who attend religious services being more likely to adhere with tax regulations.
Mental issues, such as cognitive biases and heuristics, can also influence taxpayer behaviour. For example, taxpayers may utilise mental shortcuts, such as relying on past experiences or societal conventions, to make decisions concerning tax compliance. These mental shortcuts can contribute to biases and errors in judgment, which can influence taxpayer behaviour.
Moral factors can also have a role in taxpayer behaviour. For example, taxpayers may perceive tax evasion as unethical or immoral, which can dissuade them from engaging in this behaviour. However, some taxpayers may regard tax evasion as an acceptable means to minimise their tax burden, especially if they believe that the tax system is unfair or if they believe that others are not paying their fair share of taxes[9].
Types of Tax Manipulation
1. False income reporting
False income reporting in India refers to the purposeful misrepresentation or hiding of income to avoid paying taxes. This can occur in different ways, such as underreporting income, overstating deductions, or exaggerating expenses. Underreporting income is a prevalent kind of false income stating, where taxpayers deliberately declare lower income than they have actually received to reduce their tax liability. For instance, Ritika, a waitress at a restaurant, underreported her tip revenue to reduce her tax burden. Similarly, John, a businessman in Mumbai, shifted his income into numerous bank accounts in other countries to avoid taxes[10].
Another way taxpayers may participate in misleading income reporting is by overstating deductions or inflating costs. This can involve claiming deductions for expenses that were not incurred or misrepresenting the amount spent on qualifying expenses. For example, taxpayers may claim bogus deductions for personal expenses, such as claiming an exemption for a car used for personal reasons as a business expense. In rare situations, taxpayers may also exaggerate expenses by claiming a greater amount than they actually spent. For instance, a business owner may claim a bigger amount for office supplies or equipment than they actually purchased.
The repercussions of incorrect income reporting in India can be severe. The Income Tax Department may levy penalties, fines, or even imprisonment for tax evasion. The degree of the fraud performed and the amount of the unpaid tax may determine the penalties for tax evasion. Therefore, it is advised to take income tax compliance seriously in order to prevent any legal issues.
Tax evasion may be tracked using Artificial Intelligence (AI), Data Analytics, and Machine Learning (ML). The Transparent Taxation Platform utilises these technologies to track tax frauds and evaders. The Central Bureau of Direct Taxation and the Central Board of Indirect Taxes and Customs use big data analysis to assess the tax liability of taxpayers and assure compliance with tax laws.
2. Shell companies and nominee entities
Shell companies and nominee firms are commonly used to disguise the true ownership of assets and to assist financial fraud. A shell company is a firm without active business operations or substantial assets, which can be used for unlawful objectives such as tax evasion, money laundering, disguising ownership, and Benami properties . Nominee entities, on the other hand, are individuals or corporations that function as agents of principals in control of shell firms.
The use of shell companies and nominee entities can be exploited to cover up the identity of individuals in control of these companies, making it difficult for law enforcement officers to discover and investigate financial crimes. According to a research by the Stolen Asset Recovery Initiative, nominee arrangements are an important yet overlooked point of vulnerability in corporate beneficial ownership transparency[11].
Shell firms can be discovered by several red-flag signs, such as low paid-in minimum capital, little dividend income, high liquidity, and a lack of physical presence or operational activity
In India, the government has detected approximately 2.38 lakh shell firms between 2018 and 2021, and has undertaken a specific campaign to kill off these companies and set up a specialised task force to look into the matter[12].
To address the problem of shell businesses and beneficiaries , policy makers need to enhance the supervision of nominee arrangements and raise the transparency of shell enterprises. This may be done by enhanced attention to the openness of nomination arrangements, more practical enforcement of norms, and a more multijurisdictional approach in national reviews . In India, the government has proposed new rules for private corporations to demat shares, which would produce a digital ownership trail and uncover shell companies . This is a critical step towards enhancing corporate ownership transparency and lowering financial crime. However, more needs to be done to tighten the regulation of nominee arrangements and increase the transparency of shell corporations[13].
3. Hiding assets offshore
Hiding assets offshore is a popular method adopted by individuals and businesses to conceal their riches and avoid paying taxes. This strategy involves shifting assets to jurisdictions with favourable tax regulations, such as low or no taxes, and stringent bank secrecy laws that make One approach to hide assets offshore is by opening offshore bank accounts. These accounts are commonly maintained in jurisdictions known as tax havens, such as the Cayman Islands, Switzerland, or Belize, where account ownership confidentiality and privacy safeguards are strong[14]. Offshore bank accounts can be used to hold numerous types of assets, including cash, securities, and real estate. However, it is crucial to understand that it is not illegal to have overseas bank accounts, but it is criminal to hide them during divorce processes or while filing taxes.
Another technique to hide assets offshore is by employing shell companies and nominee entities. Shell corporations are legal entities that have no major assets or business operations, while nominee entities are individuals or companies that operate as agents of principals in control of shell companies. These corporations can be used to obscure the true ownership of assets and make it challenging for authorities to trace the movement of payments.
Hiding assets offshore can have substantial legal ramifications, including penalties, fines, and jail. In the United States, for example, the Internal Revenue Service (IRS) has the jurisdiction to impose fines on persons who fail to register offshore accounts or income. The IRS can also impose fines and penalties on taxpayers who participate in tax evasion or fraud.
In addition to legal implications, hiding assets offshore can also have negative effects on personal relationships and financial stability. For example, during divorce procedures, couples may hide assets offshore to avoid sharing them fairly. This can lead to mistrust and legal fights
To prevent hiding assets offshore, authorities have developed different legislation and steps to combat tax evasion and money laundering. These measures include the Common Reporting Standards (CRS), the Foreign Account Tax Compliance Act (FATCA), and blacklists that exclude jurisdictions that fail to cooperate with international financial legislation[15].
4. Transfer pricing manipulation
Transfer pricing is a tax strategy used by multinational firms to regulate the prices of goods and services sold across affiliated organisations in various countries. The goal is to relocate profits from high-tax to low-tax nations, hence minimising the total amount of the organization’s tax obligation.
Transfer pricing manipulation involves generating transfer prices on a non-market basis, as opposed to the arm’s length requirement. This may be achieved by deliberately boosting or deflating the price of products and services transferred between affiliated companies. For instance, a firm may sell things to its foreign subsidiary at a greater price than the market price, therefore decreasing its taxable earnings in the high-tax jurisdiction and enhancing its profits in the low-tax country[16] .
Transfer pricing limits are meant to prevent a loss of the tax base by prohibiting the transferring out of profits from one nation to another. In India, the Transfer Pricing (TP) Regulations were implemented in 2001 to avert the erosion of the Indian tax base. The limits are included in Chapter X of the Income-tax Act, 1961, and are based on the idea of arm’s length. This principle dictates that the price charged for products and services transferred between connected businesses should be same as the price charged in the same transaction between unrelated entities[17].
The Indian TP Regulations respect the arm’s length notion and require revenue from an overseas transaction to be evaluated in relation to the arm’s length pricing. The regulations specify six techniques for computation of the arm’s length price, comprising the equivalent uncontrolled pricing method, the price of resale , the cost plus method, the profit split method, the transaction-based net margin method, and the other approach.
The other way is any method which takes into consideration the price charged or paid, or the amount received or expenditure, in an arrangement in which the provision of goods or services is INR 20 million or more during relevant year .
Faceless assessment, or audits by tax officials, is a practice used in India to facilitate tax compliance and reward genuine taxpayers. The Government of India introduced the “Transparent Taxation – Honoring the Honest” platform in August 2020, which incorporates faceless assessments and appeals and the Taxpayer’s Charter. The Indian government has suspended the adoption of faceless evaluation process for transfer pricing problems till 31st March2024[18].
“ Transfer pricing manipulation can have substantial legal ramifications, including penalties, fines, and imprisonment. In India, the Income-tax Act, 1961, provides penalties for failing to comply with the TP Regulations. The fines can be up to 50% of the tax payable on the underestimated income, or up to 200% of the tax payable on the underestimated income in situations of concealment of income [19]”.
5. Tax shelter schemes
Tax shelter schemes are legal strategies used to minimize or lower an investor’s taxable income and tax burden. These methods are widely utilised by investors to lower their tax burden.
One common sort of tax shelter strategy is the employment of National Savings Schemes (NSS) in India. These schemes are designed to offer tax benefits to investors while simultaneously boosting savings and investment[20]. The NSS comprises several investment alternatives such as National Savings Certificates (NSC), Public Provident Fund (PPF), and Senior Citizens Savings Schemes (SCSS). These plans give tax benefits under Section 80C of the Income Tax Act, 1961, and also offer tax-free returns on maturity. Another form of tax shelter plan is the utilisation of equities to create tax-free dividends. In India, profits received from equity investments are tax-free in the hands of the investor up to a specific maximum. However, profits in excess of Rs.10 lakh in a financial year are taxed at 10%. Investors should concentrate on low income yield stocks to avoid incurring dividend tax . In addition to these schemes, there are many other tax-free investment choices available in India, such as life insurance policies, pension plans, and mutual funds. These investment alternatives give tax benefits under several sections of the Income Tax Act, such as Section 80C, Section 80CCD, and Section 10(D). These investment alternatives give tax-free income and can assist consumers accomplish numerous financial goals, such as kid schooling, child marriage, buying a house, and retirement planning[21].
Case studies
1. Enron Corporation: Accounting fraud and tax evasion[22]
The Enron Corporation was an American energy corporation that participated in accounting fraud and tax evasion in the early 2000s. The scandal implicated the company’s top executives, including CEO Jeffrey Skilling and CFO Andrew Fastow, who utilised special purpose organisations (SPEs) to hide debt and inflate earnings. The corporation also participated in tax fraud by constructing sophisticated tax-reduction agreements that inflated reported revenues by over $1 billion between 1995 and 2001. The deception was revealed after Enron’s board of directors authorised an investigation, which determined that the company had employed accounting tricks employing SPEs to exaggerate revenues by nearly $1 billion since 1997. The probe also found that Enron’s tax practices were meant to cut the company’s tax costs and raise earnings. The company’s tax section was under great pressure to generate reportable earnings, and the tax transactions had been authorised by Skilling and other top officials.
The controversy led to the downfall of Enron and the conviction of numerous top executives, including Skilling and Fastow, on charges of securities fraud, insider trading, and conspiracy. The Sarbanes-Oxley Act of 2002 was passed in reaction to the Enron scandal, which established new oversight organisations for corporate auditors, placed additional disclosure requirements on firms, and enhanced criminal penalties for securities fraud. The Enron disaster also emphasised the need for broad closure of loopholes that permit U.S. businesses to evade taxes on tens of billions of dollars. An probe into Enron’s tax payments is underway by federal tax committees. The scandal has triggered widespread reform to the accounting profession, corporate governance, and the structure of investment banks.
2. Panama Papers: Offshore tax evasion schemes[23]
The Panama Papers refer to a massive leak of secret financial and legal information from the Panamanian law firm Mossack Fonseca, which provides corporate services to individuals and corporations looking to incorporate offshore companies . The papers, which were released to the International Consortium of Investigative Journalists (ICIJ) in 2016, exposed the financial transactions of wealthy individuals and public officials who utilised offshore companies for probable illegal activities, including tax evasion, money laundering, and fraud . The Panama Papers exposed the offshore assets of 140 politicians and public personalities from over the globe, including the prime minister of Iceland, the president of Ukraine, and the king of Saudi Arabia . The documents also exposed the involvement of huge banks in constructing hard-to-trace organisations in offshore havens, allowing illegal activities including fraud, tax evasion, and sanctions evasion. The use of offshore entities for tax evasion and other criminal activities is not new, but the Panama Papers attracted attention to the scope and complexity of the problem. Offshore financial centers and tax havens offer low tax rates and confidentiality, making them attractive to people and organisations trying to escape detection by tax authorities . However, the use of offshore businesses for illicit purposes can have serious implications, including criminal prosecution, penalties, and damage to reputation . The Panama Papers also emphasised the need for increased openness and accountability in the financial sector. The ICIJ and other media organizations who reviewed the records called for measures to prevent the exploitation of offshore entities and to ensure that individuals and companies pay their fair amount of taxes . Governments and international organizations have also taken attempts to address the issue, including tightening anti-money laundering and tax evasion procedures and increasing transparency in the ownership and management of firms.
3. Vodafone Tax Dispute[24]
The Vodafone tax issue is a long-standing court dispute between the Indian tax authorities and the British telecom giant, Vodafone Group Plc, regarding capital gains tax liability arising from Vodafone’s acquisition of an Indian telecom business in 2007. The disagreement centred around the application of Indian tax laws and their applicability to cross-border transactions involving Indian assets.
In 2007, Vodafone purchased a majority ownership stake in Hutchison Essar, an Indian telecom corporation, for $11 billion. The transaction took happened outside India and involved two non-Indian entities. However, the Indian tax authorities contended that Vodafone was accountable for capital gains tax in India, since the purchase comprised a transfer of shares of an Indian corporation. Vodafone argued that the transaction was not taxable in India, since it was a transfer of shares between two non-Indian corporations and did not have a direct or indirect influence on India’s economy . The dispute moved through the Indian judicial system, with the Bombay High judicial first determining in Favor of the tax authorities, and the Supreme Court of India eventually pronouncing in Favor of Vodafone in 2012 . In reply to the Supreme Court’s judgement, the Indian government adopted retroactive taxation legislation, which were meant to require taxes to be paid retrospectively on transactions that took place before the rules were formed . These rules were backdated with effect from 1962 and were disputed by Vodafone via arbitration under the Bilateral Investment Treaty between the Netherlands and India . In 2020, the arbitration panel rendered a ruling in favor of Vodafone, stating that the execution of the tax demand was a breach of the fair and equitable treatment (FET) requirement under the treaty . The tribunal additionally directed India to halt its actions in issue and reimburse the bulk of Vodafone’s expenses.
4. Adani Group Tax Evasion Allegations[25]
The Adani Group, a multinational company established in India, has been the subject of various tax evasion claims over the years. One of the most significant cases concerns the Directorate of Revenue Intelligence (DRI) investigating the group for almost a decade, alleging that the Adani Group avoided taxes and laundered money while trading in cut and polished diamonds and gold jewellery . The DRI has issued show-cause notices to entities in the category, alleging evasion of taxes to the tune of around ₹1,000 crore . An examination by the Directorate of Revenue Intelligence (DRI) and the Customs agency in 2004-2006 claimed that Adani Exports (later renamed Adani Enterprises) and other Adani-associated companies fraudulently claimed INR 6.8 billion in government export credit initiatives by over-inflating the value of goods and massively boosting export turnover . The investigation also stated that the strategy resulted in Adani Exports collecting fraudulent tax credits.
In addition, the DRI has been examining the Adani Group for allegedly over-valuing imported machinery, leading to a greater claim for tax depreciation. A preliminary probe has been begun, as an over-valuation of capital equipment by Rs 2,000 crore could entail massive under-reporting of income . The Adani Group has also been accused of exploiting offshore tax haven nations to drain funds and assets, often owned by Vinod Adani, brother of Adani Group Chairman Gautam Adani . Despite thorough investigative records, including bank statements, emails, witness evidence, and invoices, government actions have been postponed, stonewalled, or ignored by other branches of the government . The Adani Group has disputed these charges, and the investigations are ongoing. The group has experienced major legal and regulatory issues, which might have a material adverse effect on its company, prospects, financial condition, results of operations, and reputation.
Detection and Prevention Strategies
The Detection and Prevention Strategies section could focus on the essential steps targeted at boosting tax compliance and combatting tax crimes. It would highlight the important steps undertaken to increase tax enforcement, promote transparency, simplify tax legislation, develop international collaboration, and impose penalties for offenders. This section lays the stage for addressing the proactive efforts used to handle tax evasion successfully and assure compliance with tax legislation.
Strengthening tax enforcement agencies
Strengthening tax enforcement agencies requires boosting operational efficiency, enforcement programs, and taxpayer services. Improving operational ability through contemporary information systems and data analytics boosts audit processes, aiding in spotting non-compliance . Strengthening enforcement programs with targeted audits and fines deters tax evasion, encouraging voluntary compliance and boosting revenue collection. Providing high-quality taxpayer services, such as clear rules and rapid processing, supports compliance by simplifying tax procedures and boosting taxpayer experience. Additionally, accountability and transparency are vital, as transparent tax authorities promote trust and confidence in the tax system, promoting voluntary compliance . Investing in enforcement capacity, including staff training and contemporary systems, enhances tax authorities’ ability to enforce laws efficiently and collect taxes, especially in low-income countries . Strengthening international cooperation is crucial, as partnership with other countries boosts information exchange and enforcement actions against tax evasion . Overall, these policies collectively contribute to a more strong tax enforcement system which encourages compliance and deters tax evasion[26].
Improving transparency and information exchange
Enhancing openness and information sharing is a significant technique to enhancing tax compliance and minimising tax evasion. Transparency in taxation refers to accountability and openness in the tax system, ensuring sure people understand how taxes are administered and enforced. Data exchange, on the other hand, entails exchanging essential tax information between tax authorities to guarantee that taxpayers pay the appropriate amount of taxes. Improving information exchange between tax authorities is vital in identifying and preventing tax evasion, especially in cross-border transactions. Automatic reporting and exchange of information are being researched to better the taxation of cross-border interest flows, which may aid decrease tax evasion costs and encourage tax compliance.
The OECD additionally created tools for fighting tax evasion and avoidance in developing countries, such as the Multilateral Convention on Administrative Assistance in Tax Matters, which supports spontaneous sharing of data in international tax fraud cases and includes anti-treaty shopping provisions in tax treaties with developing countries. International cooperation is also vital in improving transparency and information sharing. The G-20 has pledged to pushing MNEs to enhance tax transparency and compliance in developing countries, placing good tax compliance more firmly at the core of their corporate governance and risk assessment systems. International groups are also requested to advise G-20 leaders on how to create breakthroughs in the transparency of MNEs’ operations in impoverished countries, taking into account the current discussion on country-by-country reporting, best practice in business, and advancements in national law[27].
Enhancing international cooperation against tax evasion
Enhancing international cooperation against tax evasion means developing coordination between governments to address tax offences effectively. This partnership attempts to address the issues created by tax evasion, which can have enormous economic effects globally. By cooperating together, governments may share information, efficient procedures, and resources to detect and prevent tax evasion more efficiently. International cooperation against tax evasion is vital due to the international nature of tax crimes. Tax evaders sometimes use gaps and mismatches between different countries’ tax systems to avoid paying their fair share of taxes. By partnering, countries may close these loopholes and ensure that tax evaders are held responsible for their activities. One major part of strengthening international collaboration is the exchange of tax information between countries. The exchange of information allows tax authorities to access essential data on taxpayers with cross-border activity, helping them to identify potential cases of tax evasion. Additionally, coordinated efforts can lead to the creation of shared standards and practices that enable the flow of information and streamline cooperation processes. Furthermore, international collaboration might encompass cooperative investigations, sharing of expertise, and mutual support in executing tax rules. By sharing resources and expertise, countries can increase their capacity to tackle tax evasion successfully. This joint approach not only boosts the efficacy of tax enforcement efforts but also promotes fairness and integrity in the global tax system[28].
Implementing penalties and sanctions for offenders
Implementing penalties and consequences for offenders is a critical component of enforcing compliance with tax rules and preventing tax evasion. Penalties and fines act as repercussions for non-compliance, seeking to protect the integrity of the tax system and guarantee that taxpayers complete their duties. The implementation of fines and sanctions entails setting clear repercussions for various sorts of non-compliance, such as failing to pay taxes or willful evasion.
Penalties and punishments can take different forms, including fines, restitution, community work, probation, and even incarceration in serious circumstances. These repercussions are supposed to be appropriate to the transgression committed, taking into account criteria including the severity of the infraction, the taxpayer’s history of compliance, and the amount of tax evaded. By implementing penalties and sanctions, tax authorities strive to deter future non-compliance, promote justice in the tax system, and maintain public trust in the integrity of tax administration[29].
Furthermore, the efficacy of penalties and sanctions rests on their continuous implementation and execution. Tax authorities must ensure that fines are applied fairly and publicly, without prejudice, to maintain the credibility of the tax system. Additionally, the adoption of penalties and punishments should be supported by measures to assist compliance, such as taxpayer education programs, streamlined tax procedures, and accessible channels for resolving disputes
Legal Regulations
1. Concealing Or Misreporting Your Income
Legal constraints in India regarding tax manipulation include regulations requiring penalties and punishments for fenders under Section 271(C) of the Income Tax Act of 1961. The penalty for hiding or understating income may vary from 100% to 300% of the amount of tax that was due but not paid, based on the facts surrounding the under-reporting or non-disclosure.
If the taxpayer recognises the unreported income and declares it, a penalty of 10% on the previous year’s hidden or exaggerated income is levied. This penalty is implemented as a disincentive to encourage taxpayers to disclose their concealed income.
If the basis for the under-reporting was a bona fide mistake, a penalty of 50% on the amount of income that is hidden or underestimated is levied. This penalty is levied if the taxpayer can establish that the under-reporting was due to a genuine mistake that wasn’t done with an intent to escape tax. If the miscalculation was willfully made to escape tax, a penalty of 300% on the amount of disguised or underestimated income is assessed.
This penalty is applied as a harsh deterrent to discourage taxpayers from willfully altering their tax returns to dodge tax[30].
2. Not Complying With TDS Regulations
For enterprises or employers in India who deduct and collect tax at source, owning a Tax Deduction Account Number (TAN) is vital to comply with tax legislation. Failure to have a TAN can lead to a penalty of ₹10,000. Two sorts of deception can occur in this context: not collecting tax at source and not reporting a TDS return. In the instance of failing to pay tax at source, the penalty is equal to the tax amount that was not deducted. If a TDS return is not filed on time, fines can vary from ₹10,000 to ₹1,00,000, with extra daily costs until the full amount is made. To avoid these fines, taxpayers have to guarantee timely filing of TDS returns as per the statutory due date. Compliance with TAN criteria and timely submission of TDS returns are vital to avoid financial penalties and maintain adherence to tax rules in India[31].
3. Failure To Comply With A Demand Notice
The Income Tax (IT) department might issue a demand notice if anomalies are identified in the income tax return. If this happens, the IT department issues a demand notice detailing the entire amount of tax still owed. The taxpayer has 30 days to reply to the demand notice from the day the taxpayer obtained the document. A failure to answer and pay the tax owing could result in a penalty.
4. Not getting audited
If a business does not get itself audited or fails to produce an audit report under Section 44AB, it is required to pay a penalty of ₹1.5 lakhs or 0.5% of its sales turnover, and whatever is larger. In addition to this, if the taxpayer does not present a report from an accountant as mentioned under Section 92E, they’re obligated to pay a penalty of at least ₹1 lakh or more.
To evade the penalty, the taxpayer must record all domestic as well as foreign transactions and acquire a report from a competent public accountant in India prior to the date. In addition, a penalty of 2% of the value of the transaction (international or domestic) shall be charged if any documents required by the Act are not delivered or attached under Section 92(D)3. It should be noted that the assessing officer is not obligated to apply a penalty in all circumstances when there is a default. The assessee may have been enduring hardship owing to factors beyond their control.
Conclusion
In India, tax manipulation is a serious topic that involves both tax evasion and tax avoidance. Tax evasion is a criminal activity that comprises adopting fraudulent and illegal practices to evade tax responsibilities, including the purposeful underreporting of income, hiding assets, inventing transactions, and tampering with documents. Tax avoidance refers to the authorised use of tax planning tactics to lower tax liabilities within the confines of the law, even if it may be regarded unacceptable by the government.
The Income Tax Act of 1961 allows for penalties for different sorts of non-compliance, such as failure to file income tax returns, failing to pay tax as per self-assessment, and failing to have oneself audited or provide an audit report under Section 44AB. The penalty for not collecting tax at source is the same as the tax that was not deducted at the source, while the penalty for not filing a TDS return can start from ₹10,000 and go up to ₹1,00,000[32]. The Indian government has also introduced the Black Money (Undisclosed Abroad Income and Assets) and Imposition of Tax Act, 2015, to fight tax evasion related to undeclared overseas income and assets. The act provides for penalties for non-compliance, including fines and imprisonment[33].
In conclusion, tax manipulation is a severe problem in India, and the government has taken several steps to prevent tax fraud and avoidance. The Income Tax Act of 1961 allows for penalties for non-compliance, and the government has enacted additional rules and regulations to make sure that taxpayers comply with their tax duties. It is crucial for taxpayers to understand their tax duties and to ensure that they comply with the law to avoid fines and legal implications.
Reference
- Kagan, J. (2023) What is tax avoidance and how is it different from tax evasion?,
- Richupan, S. (1987) 6 determinants of income tax evasion role of tax rates, shape of tax schedules, and other factors
- Diaz, J. (2021) Tax evasion – causes and consequences of not submitting your return
- Acharya, M. (2024) Understanding tax evasion and penalties in India, cleartax.
- Raje, A. (2024) Tax evasion & penalties in India, Kotak Life.
- Chen, J. (2024) What is tax fraud? definition, criteria, vs. tax avoidance, Investopedia.
- Walsh, K. (2012) Understanding taxpayer behaviour
- Mu R, Fentaw NM, Zhang L. Tax evasion, psychological egoism, and revenue collection performance: Evidence from Amhara region, Ethiopia. Front Psychol. 2023 Feb 8
- Kassa, E.T. Factors influencing taxpayers to engage in tax evasion: evidence from Woldia City administration micro, small, and large enterprise taxpayers. J Innov Entrep 10, 8 (2021).
- HSBC India client indicted for tax evasion and failing to report foreign bank accounts (2014) Office of Public Affairs | HSBC India Client Indicted for Tax Evasion and Failing to Report Foreign Bank Accounts
- Jason Sharman. and Neilson. D. (2022) Signatures for sale: How nominee services for Shell Companies are abused to conceal beneficial owners, Signatures for Sale: New report on concealment of beneficial owners.
- Doshi, M India’s New Rules For Private Firms To Expose Shell Companies, 09.2023
- Centre identifies over 2.38 lakh shell companies between 2018-2021 (2021) Business Today
- Rentz , S. (2023) How to find offshore bank accounts in a high-asset divorce, Pennsylvania Family Law Blog – The Law Offices of Sheryl R. Rentz.
- Eifling, S. and Shaw, C. (2021) The memo you’re not supposed to see: 11 ways to hide money offshore, Mother Jones.
- LLP, L.L. (2023) Transfer pricing in india – transfer pricing – india, Transfer Pricing In India – Transfer Pricing – India
- Gupta, Pradeep. (2012). Transfer Pricing: Impact of Taxes and Tariffs in India. Vikalpa. 37. 29-46. 10.1177/0256090920120403
- F Transfer pricing – India 30 JUL 2023
- BBC allegedly diverted profits by violating “transfer pricing” rules. what are they?, The Indian Express (2023),
- Hardeepsinh L Vaghela, Tax Sheltered Schemes, (Oct. 21, 2020),
- Vivek Dwivedi, Tax Sheltered Schemes, Investing (oct. 14, 2012)
- T Enron: Scandal and Accounting Fraud ( April 09 2024 )
- The Impact of Schemes revealed by the Panama Papers on the Economy and Finances of a Sample of Member States, European Parliament (Mar. 4, 2017),
- Dispute over the 2007 acquisition, (Mar. 15, 2007),
- V I-T probe into alleged tax evasion by Adani (May 21 2014)
- Emilio Pineda, International tax cooperation: Main advances and opportunities for Latin America and the Caribbean, Inter-American Center of Tax Administrations (Oct. 11, 2022).
- Author, Intermediate Sanctions, Office of Justice Programs
- Kotak Life, Tax Evasion & Penalties In India, Kotak Life (Feb. 28, 2024),
- CA Abhishek Soni, What is a TAN and How to Apply for TAN, Tax2win (Jan. 16, 2024),
- Gautam, Khagesh and Jaishal, Vernita (2019) “Tax Avoidance Jurisprudence in India: Questioning the
- Traditional Narrative,” National Law School Business Law Review: Vol. 5: Iss. 1, Article 3.
- Advocate Tanwar, The legal ramifications of tax avoidance in India, Advocate Tanwar (Nov. 30, 2023),
- https://www.investopedia.com/terms/t/tax_avoidance.asp (Accessed: 15 April 2024).
- https://www.elibrary.imf.org/display/book/9780939934911/ch006.xml (Accessed: 15 April 2024).
- https://blog.gbsgroup.net/en/blog/tax-evasion-causes-and-consequences-of-not-submitting-your-return
- https://cleartax.in/s/tax-evasion-and-penalties-in-india (Accessed: 15 April 2024).
- https://www.kotaklife.com/insurance-guide/savingstax/what-is-tax-evasion-and-what-are-the-penalties-for-tax-evasion-in-india (Accessed: 15 April 2024)
- Available at: https://www.communitytax.com/tax-blog/tax-fraud-vs-tax-evasion-exploring-the-differences/ (Accessed: 15 April 2024).
[1] Kagan, J. (2023) What is tax avoidance and how is it different from tax evasion?,
[2] Richupan, S. (1987) 6 determinants of income tax evasion role of tax rates, shape of tax schedules, and other factors
[3] Diaz, J. (2021) Tax evasion – causes and consequences of not submitting your return
[4] Acharya, M. (2024) Understanding tax evasion and penalties in India, cleartax.
[5] Raje, A. (2024) Tax evasion & penalties in India, Kotak Life.
[6] Chen, J. (2024) What is tax fraud? definition, criteria, vs. tax avoidance, Investopedia.
[7] Walsh, K. (2012) Understanding taxpayer behaviour
[8] Mu R, Fentaw NM, Zhang L. Tax evasion, psychological egoism, and revenue collection performance: Evidence from Amhara region, Ethiopia. Front Psychol. 2023 Feb 8
[9] Kassa, E.T. Factors influencing taxpayers to engage in tax evasion: evidence from Woldia City administration micro, small, and large enterprise taxpayers. J Innov Entrep 10, 8 (2021).
[10] HSBC India client indicted for tax evasion and failing to report foreign bank accounts (2014) Office of Public Affairs | HSBC India Client Indicted for Tax Evasion and Failing to Report Foreign Bank Accounts
[11] Jason Sharman. and Neilson. D. (2022) Signatures for sale: How nominee services for Shell Companies are abused to conceal beneficial owners, Signatures for Sale: New report on concealment of beneficial owners.
[12] Doshi, M India’s New Rules For Private Firms To Expose Shell Companies, 2.09.2023
[13] Centre identifies over 2.38 lakh shell companies between 2018-2021 (2021) Business Today.
[14] Rentz , S. (2023) How to find offshore bank accounts in a high-asset divorce, Pennsylvania Family Law Blog – The Law Offices of Sheryl R. Rentz.
[15] Eifling, S. and Shaw, C. (2021) The memo you’re not supposed to see: 11 ways to hide money offshore, Mother Jones.
[16] LLP, L.L. (2023) Transfer pricing in india – transfer pricing – india, Transfer Pricing In India – Transfer Pricing – India
[17] Gupta, Pradeep. (2012). Transfer Pricing: Impact of Taxes and Tariffs in India. Vikalpa. 37. 29-46. 10.1177/0256090920120403
[18] Hunaid. F Transfer pricing – India 30 JUL 2023
[19] BBC allegedly diverted profits by violating “transfer pricing” rules. what are they?, The Indian Express (2023),
[20] Hardeepsinh L Vaghela, Tax Sheltered Schemes, (Oct. 21, 2020),
[21] Vivek Dwivedi, Tax Sheltered Schemes, Investing (oct. 14, 2012)
[22] Segal. T Enron: Scandal and Accounting Fraud ( April 09 2024 )
[23] The Impact of Schemes revealed by the Panama Papers on the Economy and Finances of a Sample of Member States, European Parliament (Mar. 4, 2017),
[24] Dispute over the 2007 acquisition, (Mar. 15, 2007),
[25] Beniwal. V I-T probe into alleged tax evasion by Adani (May 21 2014)
[26] Annette Chooi for the Asian Development Bank, Mobilizing Revenue: Strengthening Large Taxpayer Administration (Governance Brief 48), (Dec. 22, 2022),.
[27] Supporting the Development of More Effective Tax Systems — A report to the G-20 Developement Working Group by the IMF, OECD, UN and World Bank; November 3, 2011., (Nov. 2, 2011),
[28] Emilio Pineda, International tax cooperation: Main advances and opportunities for Latin America and the Caribbean, Inter-American Center of Tax Administrations (Oct. 11, 2022).
[29] Author, Intermediate Sanctions, Office of Justice Programs
[30] Kotak Life, Tax Evasion & Penalties In India, Kotak Life (Feb. 28, 2024),
[31] CA Abhishek Soni, What is a TAN and How to Apply for TAN, Tax2win (Jan. 16, 2024),
[32] Gautam, Khagesh and Jaishal, Vernita (2019) “Tax Avoidance Jurisprudence in India: Questioning the
Traditional Narrative,” National Law School Business Law Review: Vol. 5: Iss. 1, Article 3.
[33] Advocate Tanwar, The legal ramifications of tax avoidance in India, Advocate Tanwar (Nov. 30, 2023),
Author Bio
Really a detailed study. It is like a research paper. The pains taken by the author in collecting the particulars are much appreciable.