Tax Evasion

Understand what tax evasion is and the penalties imposed for it.
Tax Evasion
3 min
23-March-2024

Taxes are the lifeblood of any nation. They fund roads, schools, hospitals, and countless other services that enhance our lives. When individuals or businesses evade taxes, they deprive India of resources essential for its development. Tax evasion is not a victimless crime; it undermines economic progress and unfairly burdens honest taxpayers. Let us understand into what tax evasion means and the severe penalties involved.

What is tax evasion?

Tax evasion is the illegal practice of avoiding paying one's true tax liability. Unlike tax avoidance, which involves using legal strategies to minimise your tax burden, tax evasion involves deliberate dishonesty. Tax evasion is considered a criminal offense and is subject to penalties, fines, and legal consequences.

Instead of finding ways to evade taxes, one should consider investing that money. A reliable option is a fixed deposit, as it offers competitive interest rates with guaranteed returns.

Common methods of tax evasion in India

Unfortunately, tax evasion remains a widespread problem in India, with individuals and businesses using various tactics to dodge their tax obligations. Here are some of the most prevalent methods:

  • Not reporting all earnings: One of the most basic forms of tax evasion involves deliberately concealing sources of income or understating one's earnings. This could include not reporting cash transactions, under-invoicing sales, or failing to declare income from investments or foreign sources.
  • Inflating expenses or claiming false deductions: Businesses might exaggerate their expenses to reduce their taxable profits. Others might claim ineligible deductions or create fraudulent documentation to support these false claims.
  • Hiding assets and offshore accounts: Some individuals hide income and assets by stashing them away in undisclosed offshore bank accounts or shell companies. This results in a significant loss of tax revenue for the government.
  • Smuggling: Smuggling goods across borders to avoid customs duties and taxes is another way of evading taxes. The profits from such black-market operations often remain under the radar of tax authorities.
  • Loopholes: Complex tax laws can sometimes contain loopholes or areas open to interpretation. While tax avoidance through legal means is valid, some individuals and corporations deliberately misrepresent their transactions or situations to take advantage of exemptions they do not genuinely qualify for.

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
 

Difference between tax evasion, tax avoidance, and tax planning

Feature

Tax evasion

Tax avoidance

Tax planning

Definition

Illegally reducing tax liability by hiding income, records, or deliberately failing to pay taxes.

Utilising legal strategies and loopholes within the tax code to minimise tax liability.

Arranging your finances in the most tax-efficient manner, strictly adhering to tax laws and regulations.

Legality

Illegal

Legal

Legal

Intent

Deliberate deception for financial gains

Finding permissible ways to reduce tax burden

Optimising tax situation within legal boundaries

Methods

Under-reporting income, claiming false deductions, hiding assets, not filing returns

Taking advantage of deductions, credits, exemptions, specific investment choices

Investing in tax-advantaged schemes, choosing a suitable business structure, timely retirement planning

Consequences

Fines, imprisonment, damage to reputation

Generally, none, but aggressive strategies might draw scrutiny

None


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.

Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.