The illegal avoidance of taxes by people companies and trusts is tax evasion.
Tax evasion often involves taxpayers intentionally misrepresenting to the tax authorities the genuine state of their affairs to reduce their tax liability and involves dishonest tax reporting, such as reporting less income, profits or earnings than the quantities actually acquired or excessive deduction.
Tax evasion is an event that is generally related to the informal economy. The amount of unreported income, which is the discrepancy between the amount of income that should be reported to the tax officials and the actual amount reported, is one indicator of the level of tax evasion (the ‘tax gap’).
Tax prevention, by comparison, is the legal use of tax regulations to minimise one’s tax burden. Tax evasion and tax avoidance can also be recognised as ways of tax non-compliance, as many cities are identified.
Corruption committed by tax officials
Corrupt tax officials work together with taxpayers who want to stop taxes. They refrain from publishing it in exchange for bribes when they suspect an example of evasion. Corruption by tax officials in less developed countries is a vital issue for the tax authority.
Tax Avoidance vs. Tax Prevention
Although tax evasion involves the use of illegal methods to avoid paying appropriate taxes, tax prevention uses legal means to minimise a taxpayer’s responsibilities.
This could include efforts such as making a charitable contribution to an authorised organisation or a tax-deductible mechanism for the investment of income, before-mentioned as an individual retirement account (IRA).
In the situation of an IRA, the taxes on the capital invested are not collected until the funds have been paid and any dividend payments in question have been removed.
Tax farming is a historical form of revenue generation. In approach, governments collect a lump sum from a private company, which then receives and preserves revenue and carries the burden of taxpayer evasion.
Tax farming has been proposed to eliminate tax avoidance in less developed countries. If they are not subject to political restrictions, this mechanism can be accountable for misuse by “tax-farmers” trying to make a profit.
Abuses by tax farmers (together with a tax system that exempted the aristocracy) were the main reason for Louis XVI’s overthrow of the French Revolution.
Impact on Economy in India
In the process of promoting and increasing the Indian economy, taxation plays a requisite role. Tax avoidance happens when citizens purposely refuse to comply with their tax duties.
The resulting loss of tax revenue will cause significant harm to the public sector’s proper functioning, jeopardizing the public sector’s ability to fund its necessary expenses.
India has faced major problems to tax evasion, black money, and a parallel economy showing that the Indian tax system requires few big changes to fix all these problems.
This research offers an overview of the efficacy of tax laws, the effects on the Indian economy of tax avoidance, delineates the factors responsible for tax evasion, and looks at potential solutions to mitigate the problem of tax evasion.
Some of the situations where non-compliance with Income Tax laws will result in a heavy penalty or even a maximum sentence of 7 years in prison are as follows:
1) Not filing a return on income tax
The assessing officer may penalise you with a Rs 5,000 or more penalty if you do not apply for an income tax revenue as prescribed under Section 139, subsection (1) of the Income Tax Act.
2) Not having a PAN or citing an inaccurate PAN
If you do not satisfy your employer with your PAN number at the time of work, 20% TDS would be deducted from your salary instead of 10% usually.
If the PAN you quoted is wrong, you could be slapped with a penalty of Rs 10,000.
3) Not reviewing Form 26AS before filing income tax returns
As every detail mismatch can lead to severe punishment, you should review the Form 26AS details multiple times. In sales, expenditure and investment data, a similar penalty would be levied mismatch.
4) Not paying tax in compliance with self-assessment
Under Section 140 A(1) of the Income Tax Act, if the taxpayer does not pay the self-assessment tax or interest wholly or partially, the taxpayer will be viewed as a default. Section 221(1), the assessing officer can charge a defaulter with a penalty.
However, if you have justified explanations for the delay in paying the tax, you might be exempted by the assessing officer from paying the penalty.
5) Revenue concealment to evade taxes
In compliance with section 271(C) of the Income Tax Act, the penalty for not proving accurate information of your income or concealing income tax would be 100 per cent to 300 per cent of the tax avoided. The penalty can vary under section 271 of the AAB under different scenarios:
(a) If the taxpayer acknowledges the undisclosed revenue, then only 10% of the undisclosed sum of the prior year will be charged along with interest.
(b) If the taxpayer does not report the undisclosed sum, but does so in the return on revenue provided in the past year, a penalty of 20% of the undisclosed amount shall be imposed, together with interest.
(c) If the amount for the preceding year is undisclosed, then a minimum penalty of 30 per cent and a maximum penalty of 90 per cent may be levied.
6) Not complying with the Notice of Income Tax
Suppose a taxpayer fails to comply with the income tax department’s notice issued under Section 142(1) or 143(2). In that case, the assessing officer may circulate a notice either demanding the return of income or providing all details of assets and liabilities in writing.