We always noticed that during every return filing season the newspapers are flooded with advertisements by income tax department reminding, requesting & warning you to file your returns, pay your taxes and refrain from any tax evasion.

Over the past couple of years, India’s leaders have raised the issue of tax evasion & the need to widen India’s tax base over and over at various forums.

The government’s intentions are loud and clear through its reforms too, whether it be big bold moves like demonetisation, GST, cashless economy, mandatory linking of PAN with Aadhaar or as simple as the new one-page ITR-1 (Sahaj) to ease the return filing process for salaried individuals.

Tax evasion “a way of life” in India

Undoubtedly the problem is one worthy of all the attention. Ours is a largely tax non-compliant society. If we take an example of FY 2015-16, out of the total population of 130 crores, only 3.7 crore individuals filed income tax returns. Of these, only 76 lakh people showed income above Rs.5 lakhs and amongst them, 56 lakh were salaried individuals. The numbers don’t flatter much because salaried individuals cannot easily evade taxes as every month a certain amount of TDS is deducted from their earnings anyway. Hence, they have to disclose their true income. It is the businessmen & professionals who are the biggest evaders. And we must not only think about direct taxes, businesses evade indirect levies (say customs) through a number of manuevers.

Not just individuals, companies, trusts & other entities don’t report or under report their true income through manipulation of accounts and by use of shell companies.

Why do people evade taxes?

The answer is simple – because they can! The existing legal & administrative framework is ineffective in identifying & punishing tax evaders. Besides, a large part of the Indian economy is unorganized and involves heavy use of cash transactions, which do not leave audit trails. This provides an easy outlet for people to park their undisclosed income (mostly in real estate, jewellery, hotels, retail and betting).

Also, the popular mindset is such that there is an acceptance of tax evasion as ‘normal’. Most people just don’t want to pay taxes even though they have legitimate income. Some, however, cannot disclose their true income or its true source. These are the people who have inflows from crime, bribery or other unlawful activities. They don’t mind giving away a third of their illicit income in taxes but are afraid of being imprisoned for having carried out illegal activities.

Need to widen tax base in India to avoid tax evasion

According to ‘A Study on Widening of Tax Base and Tackling Black Money‘ published by FICCI in February 2015, widening of tax net helps in achieving higher tax to GDP ratio, achieve fiscal consolidation, meet the targeted tax collection and reduce the shortfall in tax collection with budget estimates.

Further, it helps the government to undertake planned investments in infrastructure and other important areas for growth & development.

Above all, it will shift the revenue pressures from honest taxpayers. If everybody started paying their fair share of taxes, there is a strong possibility to reduce the direct and indirect tax rates in the future. If the opposite happens, even the honest persons will be forced to resort to tax evasion.

What needs to be done to avoid tax evasion?

  • A big chunk of the eligible taxpayers in India don’t even file their ITRs out of ignorance & As a society and at individual levels, we need to evolve our mindset to refuse to accept tax evasion as a normal practice.
  • Many people are discouraged by the complex tax laws & tax administration in India that is difficult and costly to comply with. Reducing the number of conditions attached to a deduction/exemption, standardising the varying rates & thresholds for TDS/TCS, reducing the amount of interface with the tax officials are some ways. The taxmen need to approach the taxpayers with a soft and sober
  • Cash is the biggest facilitator of black money and shadow economy. Promoting electronic payments is the right thing. However, the government can make digital payments (UPI, debit/credit card, e-wallet, cheques) mandatory for payment of wages & salaries for some sectors and in case of payment of statutory dues like property taxes, stamp duty, utility bills etc.
  • For cases where both parties are committed to using cash to benefit from evasion of taxes, the government made cash transactions above Rs.2 lakhs illegal in the Finance Act 2017. The next step is providing lucrative tax incentives to both merchants and consumers to ensure voluntary reporting.
  • There is a debate on whether to tax agricultural income beyond a very large threshold limit. In my opinion, it is necessary to bring rich farmers under the tax net.
  • The scope of TDS, TCS and presumptive income needs to be expanded to include more goods & services as these allow the transactions to be reported into the system and reduce revenue leakages.
  • Inter-agency coordination, cross-seeding of PAN, CIN, GSTIN etc, will help in analysing the information furnished to various departments. For example, where a businessman claims exemption from charging GST based on turnover below threshold limit, the same may be compared with the financial figures furnished by him in his income tax return. The turnover based on GST paid by a company can be compared with the revenue from operations as disclosed in its financial statements. This will help in identifying apparent non-compliances for further scrutiny.
  • Most importantly, there is a strong need to develop a robust IT/ data analytics infrastructure. Learning from America’s IRS, India’s revenue authorities need to use information technology to track consumption & investment patterns and link production with consumption.

Consider this success story of the state of Maharashtra. Due to improved IT infrastructure, the Maharashtra VAT department was able to identify the dealers that merely existed on paper and were only issuing fictitious invoice (also known as Hawala Dealers). The customers were claiming credit on the strength of such fictitious invoice and utilised to discharge their tax dues. The State department cross verified the sales submitted by such Hawala Dealers against the corresponding information of purchases shown by the other dealers.

Overall, before taking big bold reforms like demonetisation, the government must first address the underlying structural issues in the revenue collection machinery. It is not difficult to ensure compliance if people know that the government is watching them closely. An able and highly efficient revenue department should be the first priority.

Role of GSTR 3B Form

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(Republished with Amendments)

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Qualification: Student - CA/CS/CMA
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Location: Delhi, New Delhi, IN
Member Since: 26 Jul 2017 | Total Posts: 1

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    I am really shocked that most of the authors forget or NOT aware of the fact Agricultural income is a State Subject. Already Agri Income is taken for IT calculation. If the States start levying even Re.1/-, the Central; Govt will lose even this.

    Secondly, it is everybody’s knowledge that cash vanishes into Buildings and Gold. They are all powerful personalities and get away easily either by bribing or by prolonged litigation till their death. Kindly cite me one case of powerful personalities being jailed or huge amounts collected as tax. It is the law abiding citizens who are harassed by the IT Dept.

    In Tamil Nadu, atleast nearby where I live, I know that the Educational Institutions receive huge bribes in the order of 50 lakhs for appointments besides capitation fee.. All of them go towards more construction and more income.. What does the IT Dept do?; Look away ??

    1. Riya Garg says:

      Mr. Bharti, I thank you for reading my article.
      In regard to your comments, I know that agricultural income is a state subject. To correct you, agricultural income is not included in IT. It is not taxed directly but is only used in partial integration. The idea is that states charge it directly. This way the burden of the centre to support state finances will be reduced. Also taxing rich farmers is in line with the principle of ability to pay. Centre will not lose any thing. In fact overall there will be a positive impact on government finance.

      Secondly, the aim of this article is to bring out the structural issues in enforcing tax complaince. True, corruption in IT dept is a fact. If we are able to eliminate structural issues like shadow economy & start closely monitoring financial transactions, even the corrupt officials wont be able to park their black income from bribery. Somebody will be watching them too! Plus, just like gst there will be automated matching of prdn & consumpn . The corrupt wont be able to collude.

      Once we solve fundamental problems, corruption will automatically be eliminated.
      Let me know what you have to say !

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February 2021