Tax Evasion: What is Tax Evasion, Methods and Penalties

Written by : Knowledge Centre Team

2024-08-02

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You may be a working professional or a businessman, in either case, you need to pay the tax to the government. Many people want to reduce their tax liability. To support such individuals, the government has laid down provisions one can use to reduce the taxes.

However, many people follow the wrong route to reduce their tax liability - tax evasion. According to a report by the State of Tax Justice, India is losing more than Rs 75,000 crore in taxes every year due to international corporate tax abuse and private tax evasion. Penalties for such acts are high, and hence you must avoid practising tax evasion.

What is Tax Evasion?

Tax evasion is an illegal act where you as an individual or company avoid paying the tax liability. Tax evasion is a serious offence and comes under criminal charges and substantial penalties. For example, not paying taxes or paying less than what you should pay is considered tax fraud and comes under tax evasion. It may also include fabricating income, claiming deductions without proof, failing to declare cash transactions, etc.

The penalty for not disclosing income can be anywhere between 100% and 300% of the tax amount. You must pay the due taxes to avoid such penalties and criminal charges.

How does Tax Evasion Occur?

Tax evasion is not paying the taxes when they are due, and it is illegal in India. Below are some ways tax evasion occurs in India:

Different ways	Details
Non-payment of due taxes	It is one of the common ways one evades taxes. An individual or a company deliberately does not pay the taxes even when they have a due tax.
Smuggling to save different taxes	To avoid taxes like state taxes, custom duties, and import-export taxes, many businesses resort to smuggling. As per Indian law, smuggling is a punishable offence, and if done for tax evasion can result in a higher penalty.
Submit incorrect tax returns	An individual files tax but submits false or incorrect information to reduce tax liability or not pay tax at all. It also comes under tax evasion since the individual did not share the complete information and paid less tax.
Maintaining fake financial statements	Businesses may keep inaccurate financial documents like accounts books and balance sheets to project a low annual income. For example, a business may not disclose sale receipts to understate their total income and reduce their tax for the year.
Keep money outside India	International bank accounts are not under the purview of the IT department. Some people keep an international bank account to store money and not show their total income.
Fake documents to claim exemption	The government provides exemptions to an individual to ensure they have more liquidity at hand. However, people take advantage of these exemptions by producing fake documents even when they do not qualify for such exemptions.
Bribery	One of the other ways a tax evasion can happen is by bribing the income tax official to change the due tax amount. Individuals bribe to eliminate or lower tax records under their name.

Penalties for Tax Evasion

If one is found guilty of tax evasion, the income tax department can impose various penalties. The penalties can apply to an individual or a company failing to pay their due taxes. Below are some penalties for tax evasion:

a) You may have to pay 100% to 300% of the tax on the undisclosed income.
b) If you fail to pay the due tax, the income tax department may impose a penalty amount, but it cannot exceed the amount due in taxes.
c) If a company fails to deduct tax (like TDS) while making payments, then the penalty could be payment of the tax due.
d) A company needs to get itself audited and provide an audit report. If it fails to do so, a penalty of Rs 1.5 lakh or 0.5% of sales turnover (the lesser of the two) may be charged.
e) The company may have to pay a Rs 1 lakh fine if a report from an accountant is not provided as directed.
f) An individual will have to pay a penalty of Rs 200 per day every day if he fails to file tax statements within the time allotted.
g) Section 44AA states the rules on how an individual or a company should maintain their accounts. If they fail to follow the guidelines, a Rs 25,000 penalty may be charged.

How to Reduce your Tax Outflow?

There are ways available through which you can reduce your tax outflow. Below are some of the completely legal ways to reduce your tax liabilities:

a) Tax Saving Investments

The Indian Income Tax Act provides individuals with deductions for various investments, savings and expenditures incurred. For example, you can reduce your taxable income up to Rs 1.5 lakh by investing in investment options that come under Section 80C. You can invest in 5-year bank fixed deposits, ELSS funds, Unit Linked Insurance Plan (ULIP), etc. Similarly, there are other sections to help you save taxes.

b) Capital Gains Accounts

Capital gain is a profit you make by selling a capital asset. The gains can be made by selling property, shares, or mutual funds. You have to pay taxes on your capital gains. Since capital goods often command substantial value, capital gains can amount to huge tax outflows.

However, if you plan your capital gains well, you can avoid or postpone depleting your gains in taxes. One of the methods is to use a Capital Gains Account. You can reduce your capital gain tax by investing in the Capital Gains Account Scheme (CGAS), setting off capital losses, or investing in bonds.

A capital gains account is the best option when you need to reinvest the gains into another capital asset. For example, you can reinvest your gains from the sale of a residential property into another property within three years of the sale.

Parking the money in a capital gains account allows you to research and find a suitable property before investing.

c) Double Taxation Avoidance (DTAA)

In some cases, you may attract taxes in India and in the country where you reside as NRI. You can use the Double Tax Avoidance Agreement (DTAA) to avoid paying taxes in two countries and cut down your tax implications on the income earned in India.

Tax evasion is a transaction best to avoid in your life. It is not only a punishable offence it can cost you more than the penalties and prison time. If you want to reduce your tax liability, you should plan your taxes with the experts. Indian income tax laws allow you to postpone and reduce your tax outflows with multiple legal channels.

Proper tax planning can help you reduce your tax liability while building your wealth.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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