What is Tax Evasion and What are the Penalties?
Tax evasion is a heinous crime that has put many behind bars. It refers to fraudulent filing for tax by using unfair means to reduce tax liability in a given financial year. Section 80C of the Income Tax Act allows and limits various tax exemptions based on investments made in the year to Rs. 1.5 lakh per individual. This exemption is applicable on specified securities including government bonds, FDs, ELSS, NPS, etc. However, when individuals try to evade applicable taxes through unlawful means, it brings them under the IT department’s radar for tax evasion. This article talks about tax evasion and its penalties.
What is Tax Evasion?
Tax evasion is a malpractice where entities or individuals avoid paying their tax liabilities to the Income Tax department. In India, evading tax could lead to hefty penalties and even imprisonment.
Also known as tax fraud, tax evasion includes practices like concealing or fabricating income and falsifying deductions without proof. Failing or not disclosing cash transactions is another method of evading income tax.
Tax evasion penalties are severe and can cause a huge impact not only in the income of the company or an individual, but also to their public image that may impact future engagements.
How do People Evade Tax?
In the past, people have tried to make use of every possible loophole in the system to evade tax in various ways. Here are some of the most common ways by which people try to evade tax, ones you should definitely steer clear of:
- Failing to Pay the Due Tax: This is one of the most common ways of evading tax. For instance, an individual or a company doesn’t pay the government the necessary taxes even when the tax dues are pending. This may be done by an individual or a company intentionally or unintentionally. In either case, failure to pay requisite dues could be translated as an action to evade taxes, and the responsible may be liable for penalties and even imprisonment. This ill-practice is mostly found among individual taxpayers.
- Filing Incorrect Forms of Income Tax Returns: Filing wrong income tax returns is also considered a way of trying for tax evasion. Individuals or companies, in order to circumvent income from other sources or to avoid tax evasion penalties, file either false reports of their income tax returns or willfully use wrong tax filing forms that do not cover all the income bases. This tax evasion technique stemmed from a loophole in the tax declaration system that has now been rectified by the Income Tax Department through clear demarcation of the forms and their purposes. However, the debate is rife whether use of incorrect IT form to file tax can be penalized for tax avoidance and evasion.
- Providing Fake Financial Statements: Financial records like a company balance sheet or audit reports are often manipulated to display a lower annual income than actuals. There are certain companies that do not maintain bookkeeping practices stringently despite being the rule and do not keep receipts. This goes towards manipulating the annual income and paying fewer taxes. Another common practice the government has taken cognisance of is that companies create offshore accounts to facilitate tax evasion and divert company earnings to generate an impression of perceived losses in order to avoid taxes in the country of origin.
- Offering Bribe to a Tax Official: Offering bribes whether in cash or via any other form to an officer of the concerned tax department also amounts to a method of tax evasion. For instance, an individual or a company might bribe an official to eliminate or reduce any tax records that have been found under their names. This could potentially be a more dangerous way of avoiding taxes because if found guilty, apart from tax evasion, one could also face charges of bribing a public servant in the course of duty.
- Hoarding Money Outside India: Since International banks do not come under the direct purview of the examination under the Income Tax Department of India, many organisations and individuals are found maintaining bank accounts outside of India to reduce taxes. The most common bank in this regard is the Swiss Bank with their infamous policy of maintaining absolute secrecy of bank accounts. The government is working in tandem with the bank to find a workable solution to reign in this form of tax evasion in India.
- Not Complying with TDS Regulations: If an individual or an enterprise is not complying with the regulations put forward by the government on Tax Deducted at Source or TDS, then the company or the individual has to pay an amount of Rs. 200 each day from the day of delay.
Also Read: Personal Loan Tax Benefits: 4 Ways To Claim Tax Exemptions On Personal Loan In India
What is the Difference between Tax Exemption And Tax Evasion?
Tax evasion and tax exemption are two entirely different concepts. While tax evasion is an illegal activity with repercussions, tax exemption is a facility provided by the government that corporates and individuals can avail to legally and lawfully save tax. The difference between the two concepts lie, therein, in the terms – saving tax and hiding income. Below is a table that distinguishes tax evasion and tax exemption:
| Tax Exemptions | Tax Evasion |
| Refers to the concept of income generation, investment or expenditure without getting levied with heavy taxes. | Is an illegal activity that avoids making any payment of taxes by fraudulence. |
| Tax exemptions help in reducing the overall income liable to be paid in the form of tax. | Taxable income remains unaltered, but a part is hidden from authorities unlawfully. |
| Tax exemptions are done by using government provisions such as those under Section 80C of the Income Tax Act. | Tax evasion is a fraudulent activity done by illicit means. |
| Taxpayers can save their money by getting exempted through lawful means. | Taxpayers save their money by employing different illegal methods of hiding, bribing and smuggling among others. |
| No penalties are made if adhered to the correct provisions. | Tax evasion penalties can be severe with the graveness of the crime. |
What is the Penalty for Tax Evasion in India?
Tax evasion or income tax evasion is a serious crime and several businessmen and individuals have been penalised and even imprisoned for avoiding payment of taxes. Here are some tax evasion penalties provisioned by The Income Tax Act of 1961, implemented by the Enforcement Directorate:
- Under Section 44A of the Income Tax Act of 1961, a penalty of Rs.25,000 will be levied if an individual or an organisation intentionally or unintentionally fails to maintain their accounts properly.
- If the company fails to audit its accounts properly, then a penalty of Rs.1.5 lakh will be charged or 0.5% of the sales turnover, whichever is deemed to be less by a court of law under Section 44AB.
- If an income tax return is filed late, then the officer can penalise the company or the individual with a penalty up to Rs. 5,000.
- If a taxpayer is trying to conceal their earnings, the penalty will be made of 100% or 300% of the evaded tax as per Section 271(C) of the Income Tax Act of 1961.
- If a taxpayer willfully attempts to evade taxes, then they will be charged under Section 276(C) with the amount of Rs. 25 lakh or more alongside imprisonment of at least six months or more.
- If a taxpayer files a wrongful TDS or TCS return before the due dates, the penalty ranges from Rs.10,000 to Rs.1,00,000.
Tax Evasion vs. Tax Avoidance
There is a thin line that differentiates Tax evasion and Tax avoidance. While both are immoral, the difference in both of these terms is determined by the legality of the activities. Here are some ways in which you can understand the basic difference between Tax avoidance and evasion.
| Features | Tax Evasion | Tax Avoidance |
| Nature | Evading tax is illegal and is sought by unfair means. | Tax Avoidance is a method where the income and expense is planned to lawfully reduce tax bearing. |
| Attributes | It is illegal and can be penalised in the eyes of the law. | Tax Avoidance is not penalised but may be considered immoral in some cases. |
| Objectives | Tax fraud is done by reducing the liability of taxes of the taxpayer by using fraudulence. | Tax avoidance is done by looking for loopholes in the law to reduce tax liability. |
| Consequences | If caught, can lead to a penalty or imprisonment, depending on the graveness of the crime. | Tax avoidance usually defers to any tax liability. |
| Motive | Tax evasion is a way to conceal tax liability by illicit means. | Tax avoidance is usually conferred to dodging tax liability within legal ambit. |
How to Avoid Tax Evasion?
Tax evasion is a criminal offence that can lead to severe penalisation of the individual with a lump sum penalty and even imprisonment.
- Tax evasion can be avoided if the taxpayer is well versed with tax liabilities.
- Tax evasion can also be avoided if the taxpayers maintain transparency of accounts and follow bookkeeping processes as described by the government.
- It is important that the taxpayers keep daily track of their incomes and expenditures and get their annual earnings audited in time.
- Correct income tax return or ITR form should be filed so that tax evasion and tax avoidance can be avoided.
Also Read: Taxation In Mutual Funds: Mutual Fund Tax Calculation
Final Word
Tax evasion is a serious offence that can cause imprisonment and have several repercussions on business as well as business image that may affect future engagements. Tax evasions should be avoided at any cost and should not be encouraged. You can avoid tax evasions by filing your taxes on time, following lawful practices to maintain records and undertaking timely audits to abide by the rules and regulations prescribed by the government. It is also important that taxpayers should file the right tax returns forms to avoid chances of offence. This could be done with the help of a financial advisor if you need assistance.
FAQs on Tax Evasion
Ans: Taxpayers are fully responsible for ensuring that the tax credit statements will be available in TDS/TCS certificates. While companies should submit the TDS to the income tax department in time, the liability falls on the taxpayers to ensure there is no discrepancy. One may claim a refund after first paying up should the employer file late. Section 271C of Income Tax Act lays down the law relating to the penalty on companies imposed by the Income Tax Department for failure to deduct TDS or remit TDS before the applicable due date.
Ans: If a taxpayer fails to file income tax returns by the due date, they may receive intimations for non-filing from the IT Department, after which they may be charged for tax evasion or avoidance as per the Income Tax Act of 1961.
Ans: As per the Income Tax Act of 1961, a taxpayer has to pay a late fee up to Rs. 5,000.
Ans: If a taxpayer conceals their income statement, they will be charged for tax evasion under the Income Tax Act of 1961. The percentage of the penalty or severity of punishment, including duration of imprisonment will be decided depending on the graveness of the crime.
Ans: If the taxpayer is hiding their audit statements or misreporting their income, the income tax officer can raid a location to uncover the discrepancies. The penalty will then be concluded according to the provisions in Section 271AAB in such cases.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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