Tax Evasion: Meaning, Methods and Penalties

Tax Evasion is an illegal activity where an individual or a company avoids paying the tax liability. Tax plays an important role in the growth of a nation, funding essential services, and driving social development. Yet, in the complex financial world, many people follow the wrong path to reduce their tax liability. India faces loss in big amounts in taxes every year due to private tax evasion. Penalties are high for such acts, and hence practising tax evasion must be avoided. Understanding the concept of tax evasion is crucial since individuals and businesses navigate the intricate web of financial responsibilities.

Geeky Takeaways:

• Tax Evasion refers to either illegal non-payment or underpayment of actual tax liabilities due.
• It can be determined by the Internal Revenue Service (IRS) regardless of the fact whether tax forms were filed with the agency or not.
• To determine tax evasion, the agency must be able to prove that the avoidance of tax was willful on the part of the taxpayer.
• It also includes fabricating income, claiming deductions without proof, failing to declare cash transactions, etc.
• The penalties are high for not disclosing income.

What is Tax Evasion?

Tax Evasion is an illegal act in which a person or entity deliberately avoids paying a true tax liability. Tax Evasion is a serious offense and those caught evading taxes are generally subject to criminal charges with substantial penalties including jail time. In other words, when individuals or businesses use illegal methods to avoid paying taxes that they owe to the government, it is termed Tax Evasion. Further, it also includes fabricating income, claiming deductions without proof, failing to declare cash transactions, etc.

Tax Evasion vs. Tax Avoidance

Tax Evasion requires the illegal use of methods in order to avoid paying proper taxes, while Tax Avoidance refers to the use of legal means to lower the obligations of a tax payer.

Common Methods of Tax Evasion

Individuals or businesses resort to various ways to evade tax payments. Some of the commonly used methods of tax evasion are as follows:

1. Misreporting in the Income Tax Returns:

As per the applicable laws in India, filing an income tax return is mandatory. To avoid paying the exact income tax amounts, some individuals and business entities report false information in their income tax returns by providing false data relating to income, investments, and other deductions.

2. Concealing Income:

At times, some individuals avoid showing a source of income by hiding cash transactions. For example, a landlord might accept rent in cash instead of any online mode of payment. This is done when the landlord has not informed the appropriate authorities that the property has been rented out and he is receiving any kind of income against it.

3. Storing Funds in Accounts Outside India:

This is a very common method of tax evasion since information about offshore accounts or accounts in international banks is not disclosed to the Indian government.

4. Falsification of Financial Statements:

The amount of taxes that are to be paid by a company or an individual is determined by the figures shown in the financial statements. By providing false information on balance sheets and profit and loss statements to show a lesser income, tax evasion can be done. This will lessen the amount of tax that is payable.

5. Not Paying Taxes:

The simplest way to avoid the payment of taxes is not to pay the amount and the dues will not be paid to the government. This is one of the most common and known methods of tax evasion.

6. Fake Documentation for Exemption:

The government has provided certain exemptions to the underprivileged section of society to provide them with more financial freedom. As a result of this, some citizens create false documents to show they are underprivileged to claim the benefits despite not actually belonging to that section.

7. Bribery:

Another method is bribing the tax official to either change the tax liability or to make it disappear altogether. Corruption within the government system is one of the subtle reasons for tax evasion. Some tax evaders use this method to make their income disappear and hence, prevent being taxed upon.

Penalties for Tax Evasion

As per the Income Tax Act 1961, tax evasion can invite penalties such as:

1. Late filing of Income Tax Returns:

In case of non-filing of income tax returns in full compliance with relevant provisions of the Income Tax Act 1961, the assessing officer can levy a penalty upon the taxpayer of upto ₹5,000.

2. Concealing Income to Avoid Tax:

In such cases, as per Section 271(c), the penalty is between 100% and 300% of the tax evaded.

3. Not getting Accounts Audited:

Section 44AB mandates a taxpayer to get the account audited or furnish a report of the audit. In case of non-compliance, the penalty levied will be 0.5% of total sales, turnover of the gross receipts, or ₹1,50,000, whichever is more. If the taxpayer fails to present a report from an accountant as required under Section 92E, the penalty imposed is ₹1,00,000 or more.

4. Non-compliance with TDS Regulations:

Any individual who deducts tax at source or collects tax at source is also compelled to collect the tax deduction and Tax Collection Account Number (TAN). In case of failure to do so, a penalty of ₹10,000 will be levied. In case of delay in filing TDS or TCS, the company will have to bear a penalty of ₹200 per day till the delay continues and such a penalty should not exceed the TDS amount. Additionally, the tax authorities may impose a penalty for providing incorrect information or non-filing of TDS or TCS before the due dates, and the penalty may range between ₹10,000 to ₹1,00,000.

5. Willful attempt to Evade Tax:

As per Section 276C, if a taxpayer willfully attempts to evade tax or under-report income with the amount exceeding ₹25 lakh, it states imprisonment for a term of at least six months upto seven years along with a fine.

6. Providing incorrect PAN number or not furnishing PAN card number:

For providing an incorrect PAN no, the penalty levied will be ₹10,000, and for not providing a PAN card number, higher TDS shall be deducted. For example, the amount deducted will be 20% TDS instead of 10%.

Conclusion

In conclusion, tax evasion happens when individuals or organizations play tricky games to lower their taxes. This can lead to heavy fines as per the provision of the Income Tax Act of 1961. It is important to do things right and pay the proper amount of tax as specified, to avoid penalties for non-compliance.

Frequently Asked Questions (FAQs)

1. What is Tax Evasion?

Answer:

Tax evasion is when people or businesses use illegal methods to avoid paying the taxes they owe to the government. This is a serious crime and those who do it can be charged with serious offences and have to pay big fines.

2. What are the common methods of Tax Evasion?

Answer:

Some commonly used methods of tax evasion include misreporting in income tax returns, concealing income, storing funds in accounts outside India, smuggling, falsification of financial statements, not paying taxes, fake documentation for exemption, and bribery.

3. Why is it important to follow tax laws and regulations?

Answer:

Following tax laws and regulations is crucial to ensure fair and proper funding for government services, infrastructure, and social development. It helps maintain the integrity of the tax system and prevents legal consequences such as fines and imprisonment that can arise from tax evasion.

4. What is Tax Fraud?

Answer:

Tax Fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return to limit tax liability.

5. What happens if an individual fails to file the income tax return before the due date?

Answer:

As per Section 139(4) of the act, you can file after the due date, which will be known as a belated return, and a late fee of upto ₹5,000 is to be paid.