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Tax evasion and tax avoidance

Tax evasion and tax avoidance.

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Tax evasion and tax avoidance

  2. 2. 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..
  3. 3. TAX EVASION AND TAX AVOIDANCE TAX EVASION  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.
  4. 4. 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.
  5. 5. 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.
  6. 6. CONT..  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.
  7. 7. CONT.  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.  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.
  8. 8. 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 the economy.  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 activities.
  9. 9. TAX AVOIDANCE 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.
  10. 10. 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.
  11. 11. 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 old.
  12. 12. PROVISIONS IN THE INCOME TAX ACT, 1961  Section 80D- Disabled dependent This deduction is available to a resident individual or a HUF and is available on: 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.
  13. 13. DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) 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.
  14. 14. DIRECT TAX COLLECTIONS BEFORE AND AFTER DEMONETISATION 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. 0 200000 400000 600000 800000 1000000 1200000 Rs.(inCrores) Direct Tax Collections
  15. 15. 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.
  16. 16. 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.
  17. 17. 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 stone Archaelogical Collections Shares & Securities (quoted &unquoted) Immovable property Interest in a partnership firm
  18. 18. 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 tax are:- 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
  19. 19. 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.
  20. 20. 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. 6. TDS/TCS  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 deduct/ pay.  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 collect.
  21. 21. 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.
  22. 22. CASES  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).
  23. 23. DIFFERENCE BETWEEN TAX EVASION AND TAX AVOIDANCE S.NO. TAX AVOIDANCE TAX EVASION 1. Payment of tax is avoided through legal means. Payment of tax is evaded by illegal means. 2. It is undertaken by taking advantage of provisions of the law and policies of the government. It is undertaken by employing unfair means. 3. It is not performed with malafide intention but by complying through the provision of law. It is performed through unlawful way of paying taxes and defaulter may get punishment.
  24. 24. CONCLUSION 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.
  25. 25. THANK YOU