TAX EVASION, TAX AVOIDANCE AND
ROLE OF ADMINISTRATION
TAX PAY IN INDIA
The Constitution of India in schedule VII in the Union List ( Entry
82) has given the power to the Central Government to levy a tax on
any income other than agricultural income, which is defined in
Section 10(1) of the Income Tax Act, 1961.
The citizens of the country are governed by tax laws integrated in
Income Tax Act, 1961, Income Tax Rules, 1962, Notifications and
Circulars issued by the Central Board of Direct Taxes (CBDT),
Annual Finance Acts and judicial pronouncements by the Supreme
Court and High Courts..
TAX EVASION AND TAX AVOIDANCE
The term “tax evasion” refers to the evasion from paying tax. It is a
method by which taxpayers evade from paying income tax and
illegally reduce their tax burden by reducing their income or
increasing their expenditure. These two factors help the tax payers
to assign a reason to evade from paying income tax. Tax evasion is
illegal in India as it goes against tax laws in India which mandates
for all persons to pay income tax.
To check an eye on the evasion of tax on account on taxpayers, the
Income Tax Department accurately collects data and analyze on the
basis of older data and compare with the data collected on the
present number of tax payers in the financial year.
Under section 271(C) of Income Tax Act, there is a 100% to 300%
penalty of the tax evaded if someone is caught evading tax. The tax
evasion varies under certain conditions.
TAX PAYERS IN INDIA
The government imposes payment of tax on taxable income of all
the persons from individuals, Hindu Undivided Families ( HUF’s),
companies, firms, LLP, association of persons, body of individuals,
local authority and any other artificial juridical person (Section
2(31) of Income Tax Act, 1961). Imposition of tax depends upon the
residential status of the individuals in the society.
The Central Board of Direct Taxes administers the Income Tax
Department, which is a part of department of revenue under the
Ministry of Finance, Govt. of India.
The income tax is filed aggregating incomes from various sources.
The sources are-
Salary income, House Property income and Business Income,
Long term capital gains, Short term Capital gains and other
sources of income.
CAUSES OF TAX EVASION
Illegal Activities- It includes the criminal component of black
money involving a host of host of activities of anti-social in nature
as smuggling of goods, forgery, embezzlement, counterfeit currency
and other financial frauds, production or trade of contraband goods
, illegal mining and falling of forests, hoarding and black marketing
of price-controlled materials and services, theft, robbery,
kidnapping and extortion, human trafficking, sexual exploitation,
and blackmailing, bribes to public offices to secure factors such as
altering land use, regularizing authorized constructions, speed
money to circumvent/fast-track procedures, and commission to
secure government orders. These illegal activities reflect the
declining social and moral values and are punishable under the
various acts of the Central and State Governments and also the
schedule of Prevention of Money Laundering Act, 2002.
Legal Activities- Due to the high level of tax rates, tax payers tend
to evade from paying taxes. The tax laws appear to be lenient in the
countries where there high tax rates of tax evasion. The people pay
less heed to the tax laws and prospect of the government with
regard to the growth of the economy. Tax evasion by politicians,
bureaucrats and industrialists sends wrong signals to the
middlemen who opt for not paying taxes. The non-compliance to
the rules and regulations to regulation of taxable income leads to
high number of tax evasions in an economy. It often occurs due to
the failure on the part of the government to implement schemes and
laws to tackle the problem of tax evasions. The high tax evasion
may account due to the lacunas in the tax laws about imposing
taxation on certain sections of the economy and exempting a
specific class. Since India is an agricultural economy, large
population is engaged in the agricultural activity. It also leads to
evasion in the significant taxable income.
Tax evasion increases the concentration of black money into the
hands of undeserving groups of the society. This concentration is
likely to cause harm to the growth of the economy and restricts the
improvement in the downtrodden sections of the society.
Unsocial activities like bribery, intimidation, blackmailing,
tampering with official records, submitting fake documents, etc. are
all abuses degrading social and moral values that ultimately go with
Tax evasion makes it difficult for the Income tax officers to detect
the tax dodgers and analysis because every time, data collection
may not be accurate and may lead to waste of time.
CONSEQUENCES OF TAX EVASION
Tax evasion results in black money prevents the resource
mobilization efforts of the government. Shortage of funds distorts
implementation of developmental plans and forces the government
to resort to deficit financing in case of public funds are required.
Tax evasion act in contradiction with the economic policies of the
government resulting in distortion in the investment patterns of
investors in India. Thus it leads to less availability of resources in
Tax evasion undermines the efforts of honest taxpayers in India. So
they do deliberate returns filing whiling disclosing the incomes
from various sources. The increase in tax evasion uplifts the tax
burden of tax bearers in India.
Tax evasion yields the hoarding of money acquired through illegal
means. The counterfeiting of the Indian currency along with the
black money is transacted to other countries to execute criminal
Tax avoidance basically means making use of the tax laws by a
taxpayer to minimize his tax liability. There are various deductions
a taxpayer can claim from his total income which would bring down
his taxable income and thereby reduce his taxation. There are
important deductions which can be claimed under the provisions of
Income Tax Act, 1961. There are important deductions under
Section 80C of Income Tax Act, 1961 through which a taxpayer can
reduce his tax liability.
Section 80C of Income Tax Act
Under section 80C, a deduction of Rs 1,50,000 can be claimed
from your total income. In simple terms, the taxable income can be
reduced up to Rs 1,50,000 through section 80C. This deduction is
allowed to an Individual or a HUF. A maximum of Rs 1,50,000 can
be claimed for the FY 2018-19.
PROVISIONS IN INCOME TAX ACT, 1961
So if one has paid excess taxes, but have invested in LIC, PPF,
Mediclaim, incurred towards tuition fees etc., and have missed
claiming a deduction of the same under 80C, one can file their
income tax return, claim these deductions and can get a refund of
these excess taxes paid.
Section 80CCC- Insurance Premium
Deduction for premium paid for Annuity Plan of LIC or other Insurer
This section provides a deduction to an individual for any amount paid
or deposited in any annuity plan of LIC or any other insurer. The
plan must be for receiving a pension from a fund referred to in
Section 10(23AAB). Pension received from the annuity or amount
received upon surrender of the annuity, including interest or bonus
accrued on the annuity is taxable in the year of receipt.
Section 80CCD- Pension Contribution
Deduction for contribution to Pension Account
a. Employee’s contribution- Section 80CCD(1) is allowed to an
individual who makes deposits to his/her pension account.
Maximum deduction allowed is 10% of salary( in case the taxpayer
is an employee) or 20% of gross total income( in case the taxpayer
being self-employed ) or Rs 1,50,000, whichever is less.
PROVISIONS IN THE INCOME TAX ACT, 1961
b. Deduction for self-contribution to NPS- Section 80CCD(1B)
A new section 80CCD (1B) has been introduced for an additional
deduction of up to Rs 50,000 for the amount deposited by a
taxpayer to their NPS account. Contributions to Atal Pension Yojana
are also eligible.
c. Additional deduction is allowed for employer’s contribution to
employee’s pension account of up to 10% of the salary of the
employee. There is no monetary ceiling on this deduction.
Section 80D- Medical Insurance
Deduction under this section is available to an individual or a HUF. A
deduction of Rs. 25,000 can be claimed for insurance of self,
spouse and dependent children. An additional deduction for
insurance of parents is available to the extent of Rs. 25,000 if they
are less than 60 years of age or Rs 50,000( has been increased in
Budget 2018 from Rs 30,000) if parents are more than 60 years
PROVISIONS IN THE INCOME TAX ACT, 1961
Section 80D- Disabled dependent
This deduction is available to a resident individual or a HUF and is
a. Expenditure incurred on medical treatment (including nursing),
training and rehabilitation of handicapped dependent relative.
b. Payment or deposit to specified scheme for maintenance of
dependent handicapped relative.
(i) Where disability is 40% or more but less than 80%- fixed
deduction of Rs.75,000.
(ii) Where there is severe disability ( disability is 80% or more)-
fixed deduction of Rs.1,25,000.
To claim this deduction a certificate of disability is required from
prescribed medical authority.
DOUBLE TAXATION AVOIDANCE
Double taxation refers to imposition of taxation on a taxpayers if he
is a resident of one country and earning income in other country.
Double tax liability can be avoided by many ways. India has signed
DTAA treaty with 88 countries out of which 85 have entered into
force. There is variation of tax rates and jurisdiction for specified
types of income between India and other country. Under the Income
Tax Act, 1961 there are two provisions, Section 90 and Section 91,
which provide specific relief to taxpayers to save them from double
taxation. Section 90 provides bilateral relief to the taxpayer which
means if a tax payer has paid tax in a country with India has signed
a DTAA and Section 91 provides unilateral belief to the taxpayer
which means if a tax payer has paid tax in a country with which
India has not signed a DTAA. Thus India gives relief to both kinds
of taxpayers. The rates differ from country to country. In addition
to the provisions, if any conflict arise between the provisions of
Income Tax Act or DTAA, the provisions of DTAA would prevail.
DIRECT TAX COLLECTIONS BEFORE AND
There has been literal decrease in the number of tax evaders post
demonetisation. The direct tax collection before demonetisation
was much lesser than what it comes to be now. The number of tax
payers has increased from 3 crores to more than 5 crores ( FY:
2013-14: 3,31,47,372 to FY: 2017-18: 5,43,91,232).There has been
growth in direct tax collections after demonetisation.
BENEFITS OF DECLARATION
No wealth tax on assets declared
No scrutiny or enquiry under Income-Tax Act and Wealth Tax Act
in respect of declaration.
Immunity from prosecution under Income-tax Act and Wealth-tax
Act in respect of declaration.
Immunity from Benami Transactions (Prohibition) Act, subject to
transfer of assets by the benamidar to the real owner.
Explanation- The benefits of the declaration exempts the taxpayer
from liability of paying wealth tax. There will no scrutiny or
enquiry under Income Tax Act and Wealth Tax Act in respect of
declaration as there are already lot of complexities by collating
information about assets from various sources. Moreover, it creates
a lot of confusion while doing calculations. There will be no
prosecution if a taxpayer honestly declares his undisclosed income.
This scheme can be seen as a relief to the taxpayers or even tax
evaders to get a chance to skip legal proceedings.
INCOME DISCLOSURE SCHEME, 2016
This scheme was designed to declare the undisclosed income.
Who can make a declaration?
According to this scheme, all ‘persons’, such as individuals, HUF,
companies, firms, association of persons (AOPs) etc., are eligible to
make declaration under the scheme.
Scope & Coverage of Scheme
Declaration can be made in respect of-
any undisclosed income
Investment in any asset representing undisclosed income.
Amounts payable by declarant
45% of undisclosed income declared.
Scheme does not apply if:-
If the notification has been issued under Section
142(1)/143(2)/148/153A/153C of Income Tax Act, 1961.
Determination of fair market value under the scheme
Rule 3 of IDS Rules prescribe the method of determining Fair
Market Value (FMV) assets, including:-
Drawings, Paintings, Sculptures or any other
work of art
Bullion, Jewellery or precious
Shares & Securities
Interest in a
PENALTIES UNDER THE INCOME TAX ACT
A timely and consistent paying of taxes is very necessary for any
taxpayer to avoid any future liability or legal proceedings. To ensure
that no taxpayer does default on disclosing his income or asset, the
Income Tax Act has been legislated to keep an eye on the tax
dodgers. There are several provisions prescribed under the Income
Tax Act. The penalties which are imposed on a taxpayer to evade
1. Default in making payment of tax
The amount of penalty imposable will be as determined by as
determined by the assessing officer. However, the amount will not
exceed the amount of tax in arrears.
2. Under-reporting of income
If the income assessed/reassessed exceeds the income declared by
the assessee, or in cases where return has not been filed and
income exceeds the basic exemption limit, penalty at 50% of
PENALTIES UNDER THE INCOME TAX ACT
tax payable on such under reported income shall be levisable.
200% of tax is payable if under-reporting resulted from
misreporting of income.
3. Failure to maintain books of accounts and other documents
Normally, the amount of penalty will be Rs.25,000.
In case, the assessee is a person who has entered into international
transaction, penalty will be 2% of the value of each international
transaction or specified domestic transaction.
4. Undisclosed Income
Where the income determined includes undisclosed income,
penalty will be leviable, if such income was included in the return,
and tax was paid before the end of the relevant previous year.
PENALTIES UNDER THE INCOME TAX ACT
5. Audit and Audit Report
If the assessee fails to get his accounts audited, or obtain audit
report, or furnish audited report, or furnish report of such auditor,
penalty will be leviable at the Rs.1,50,000 or ½ of the total
sale/turnover/gross receipts whichever is lesser.
Where a person fails to deduct tax at source, he will be liable to
pay a penalty equal to amount of tax which he has failed to
Where a person fails to collect tax at source, he will be liable to
pay a penalty equal to the amount of tax which he has failed to
TAX EVASION AFTER GST
GST has made the detection of tax evasion easier. In the FY 2018-
19, there are detections of tax evasion by the I-T department. The
first nine months of the current fiscal year had increased tax
evasions and its detection has become more efficient under the GST
regime. The Income Tax Department has detected evasion of GST
and CGST of up to Rs 48,555 Crores,, up 50% over comparable
evasion detected in the whole of FY 2017-18. The interim budget
presented recently this year exempts liability of the small traders,
manufacturers and enterprises from paying tax if the turnover of
their business does not exceed 1.5 crores. Moreover, the TDS is
now deducted from the interest income from the deposits in the
banks and post-offices up to 40,000 as against Rs. 10,000 earlier. It
can be conclusively said that it is likely to invite more evasions in
the future. According to some experts, this annual return seems to
be cramped up with too many details which can breed confusion
among the taxpayers.
Principal Commissioner of Income-tax v. Aarham Softronics (2019)
The Supreme Court held that an assessee who sets up a new industry
of a kind mentioned in sub-section (2) of Section 80, I-C of the Act.
(admissible for 5 years) and starts availing exemption of 100 per
cent tax under sub-section (3) of Section 80 can start claiming
exemption at same rate of 100 per cent beyond five years on ground
that assessee has now carried out substantial expansion in terms of
clause (ix) of sub-section (8) of Section 80 within aforesaid period
of ten years in its manufacturing unit. The said previous year in
which substantial expansion is undertaken would become ‘initial
assessment year’ and from that assessment year assessee would
become ‘initial assessment year’, and from that assessment year,
assessee shall been entitled to 100 per cent deductions of profits and
gains. Such deduction, would be for a total period of 10 years, as
provided in sub-section (6).
DIFFERENCE BETWEEN TAX EVASION AND TAX AVOIDANCE
S.NO. TAX AVOIDANCE TAX EVASION
1. Payment of tax is
Payment of tax is
evaded by illegal
2. It is undertaken by
taking advantage of
provisions of the law
and policies of the
It is undertaken by
3. It is not performed
intention but by
the provision of law.
It is performed
way of paying taxes
and defaulter may
So it can be concluded that both the concepts, tax
evasion and tax avoidance may appear similar but they
are very difficult in the context of tax liability. If one
enables a person to exempt his tax liability, by adopted
legislation, the other makes the person to evade from
paying liabilities which would help economy grow
better in the global perspective. For the purpose of tax
avoidance, the government has provided various ways in
which a person can legally restrain tax and release his
tax burden to some extent, on the other hand it also
imposes penalties on the ones who try to evade tax by
being engaged in illegal means of earning income.