Common methods of tax evasion in India
Tax evasion, however, is illegal and addressed strictly under various sections of the Income Tax Act, 1961. Below are some common tax evasion practices and the penalties they can attract:
1. Late Filing of Income Tax Returns
Filing your ITR after the due date can attract the following penalties:
If your total income is less than Rs. 5 lakh, the late filing fee is Rs. 1,000.
If your income exceeds Rs. 5 lakh, the fee increases to Rs. 5,000.
Additionally, if the return is not filed in full compliance, the Assessing Officer may impose a penalty of up to Rs. 5,000 under the Act.
2. Concealing Income to Evade Tax
If a taxpayer hides income to reduce tax liability, a penalty under Section 271(C) applies. The penalty ranges from 100% to 300% of the tax evaded, making this one of the most serious offenses.
3. Failure to Get Accounts Audited
Under Section 44AB, certain taxpayers must get their accounts audited. Non-compliance attracts penalties under Section 271B:
Minimum penalty: 0.5% of total sales/turnover/gross receipts
Maximum penalty: Rs. 1,50,000
If the taxpayer fails to furnish an audit report under Section 92E (applicable for international or specified domestic transactions), the penalty is Rs. 1,00,000.
4. Non-Compliance with TDS/TCS Regulations
Failure to comply with TDS rules can result in the following penalties:
Not obtaining TAN: Penalty of Rs. 10,000
Late filing of TDS/TCS returns: Rs. 200 per day of delay, up to the amount of TDS
As per Section 271H, incorrect or non-filing of TDS/TCS returns can attract a penalty between Rs. 10,000 and Rs. 1,00,000
5. Wilful Attempt to Evade Tax
As per Section 276C, a willful attempt to evade tax or under-report income above Rs. 25 lakh is a criminal offense. It may lead to imprisonment from 6 months to 7 years, along with a fine.
6. Incorrect or Non-Furnishing of PAN
Providing wrong or missing PAN details while filing returns or for TDS purposes can result in:
Incorrect PAN: Penalty of Rs. 10,000
No PAN: Higher TDS deduction, usually 20% instead of 10%
Also read: What is tax planning
Penalties for tax evasion
1. Non-compliance with TDS regulations
Any individual responsible for deducting or collecting tax at source must also obtain a tax deduction and Collection Account Number (TAN). Failure to do so will result in a penalty of Rs. 10,000.
In case a company or organisation fails to submit tax deducted at source (TDS) or tax collected at source (TCS) within the stipulated deadlines, they will incur a penalty of Rs. 200 per day for the delay. This penalty cannot exceed the TDS amount. Additionally, tax authorities may impose penalties for providing incorrect information or not filing TDS or TCS returns before the due dates, ranging between Rs. 10,000 and Rs. 1,00,000.
2. Misreporting Income
Hiding or understating your income on tax returns can bring severe penalties under Section 271(C) of the Income Tax Act 1961. The exact penalty depends on the circumstances:
- Voluntary disclosure: If you come forward and admit to the undisclosed income, the penalty will be 10% of that amount, along with interest charges.
- Genuine mistake: If the under-reporting was due to an honest error rather than an attempt to evade taxes, the penalty is 50% of the understated income.
- Intentional evasion: If you deliberately misreport income to avoid taxes, the penalty charged is 300% of the unpaid tax on the concealed amount.
Note: These penalties are in addition to the actual tax amount you owe on the unreported income.
3. Failing to file the ITR
Every taxpayer needs to file their Income Tax Return (ITR) by the official due date under Section 139 of the Income Tax Act, 1961. If you miss this deadline, you'll face a late filing fee. Currently, this fee is set at Rs. 5,000, but the assessing officer may adjust this amount.
4. Failing to get audited
Auditing your organisation's financial accounts is crucial. If you're required to have an audit and fail to comply, you could face substantial penalties:
- Section 44AB: For businesses and professionals with a turnover exceeding specific limit, failure to get an audit and submit the report will result in a penalty of either Rs. 1.5 lakh or 0.5% of the sales turnover, whichever is lower.
- Section 92(E): Not providing a report from an accountant regarding international transactions or specific domestic transaction can lead to a hefty penalty of Rs. 1 lakh.
- Section 92(D)3: Skipping out on required documentation for certain international or domestic transactions carries a penalty of 2% of the total transaction value.
5. Failing to comply with the demand notice
If the Income Tax Department finds discrepancies in your tax return, they can send a demand notice. To avoid penalties, it is crucial to quickly address the issues raised in the notice.
Note: Always double-check the Income Tax Department guidelines for the most up-to-date information
Also read: Tax avoidance
Difference between tax evasion, tax avoidance, and tax planning
Feature
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Tax Evasion
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Tax Avoidance
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Tax Planning
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Definition
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The deliberate, illegal act of avoiding tax payments.
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Reducing tax liability through legal means, but in a way that may be disapproved by authorities.
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Minimizing tax liability by using deductions, rebates, and exemptions permitted by law.
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Purpose
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To escape paying taxes entirely.
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To lower tax payments using legal loopholes.
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To optimize tax savings using legitimate tax provisions.
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Legality
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Illegal and punishable under law.
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Legal, but sometimes considered ethically grey.
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Fully legal and encouraged under tax laws.
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Methods
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Hiding income, falsifying records, bribing officials, dealing in cash.
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Routing investments through tax havens, exploiting ambiguities in tax law.
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Investing in tax-saving instruments, claiming eligible deductions and exemptions.
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Consequences
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Heavy penalties, fines, imprisonment, loss of reputation or business licenses.
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No legal punishment, but actions may attract scrutiny or raise ethical questions.
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Leads to reduced tax burden and improved financial efficiency.
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Ethics
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Highly unethical.
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Often seen as questionable.
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Generally accepted as ethical.
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Example
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Not reporting actual income or holding undeclared foreign accounts.
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Structuring income to reduce tax outgo or using loopholes in interpretation.
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Buying health insurance for Section 80D benefits or investing in ELSS for 80C deductions.
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Role of tech power in tracking tax evasion
The Transparent Taxation Platform leverages advanced technologies like AI, machine learning, and data analytics to detect tax fraud and evasion with greater precision.
By analysing large volumes of data—including social media activity and financial patterns—officials can identify discrepancies in income declarations or false claims of input tax credit. Additionally, collaboration between the CBDT and CBIC allows seamless data sharing, enabling tax authorities to consolidate GST-related information on a unified platform and improve oversight.
Conclusion
Understanding the complexities of the Indian tax system is crucial. Tax evasion has severe consequences, including hefty fines, potential imprisonment, and damage to your reputation. By maintaining accurate records, seeking professional help when needed, and fulfilling your tax obligations honestly, you avoid serious trouble and contribute to the development of India.
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