Tax is a common contribution towards the government according to everybody's
ability to pay for raising revenue that's for the benefit of society. The
dictionary definition states that “a compulsory contribution to state revenue,
levied by the government on workers' income and business profits, or added to
the cost of some goods, services, and transactions.” They are levied by the
state and central government. Tax plays an integral part of any economy.
taxes are collected in many forms: state taxes, central government taxes, direct
taxes, indirect taxes, and much more. The government gets a large sum of money
from the income tax. A part of the income is contributed to the government every
year. Everyone does not need to pay the same amount. Higher the income, higher
the tax you have to pay. Any person who earns below 2.5 lakhs in India does not
need to pay tax. As the income tax of a person increases he has to pay a certain
percentage of his income that has been set by the government.
Through taxes, the government runs the country. The government uses these taxes
to pay for public expenditure and to provide the best facilities and
infrastructure in the general interest of the society. With the taxes collected,
the government invests in health services, primary education, better
infrastructure like roads, street lights, public parks etc.
These taxes are also used to pay income to public servants like police, fire
force, government staffs etc.
Taxes affect the economic growth of any country. It contributes to the GDP of
the country. For any business to flourish in the country, there has to be a good
infrastructure. The taxes are used in such developments which promote economic
activities. It helps in raising the standard of living of its citizens. What the
government takes from its citizens, it gives back to them through services. It
is like a give and take
Tax evasion is an illegal activity in which a person deliberately makes an
underpayment or non-payment of tax. It means deliberately hiding and
misrepresenting their income from the authorities to reduce their tax liability.
It is a white-collar crime. Tax evasion and tax avoidance are often confused by
the people. Tax avoidance means using legal methods to decrease the percentage
of tax payable.
In general understanding tax avoidance is legal whereas tax
evasion is illegal. Tax avoidance is making small changes that help one to
minimize his tax. It's finding the loophole and making optimum use of it. People
generally avoid tax by creating a legal entity like trust/ foundation or
changing their country or by escaping double taxation.
Tax evasion is a criminal offence in India. Chapter XXII of the Income Tax Act,
1961 states provisions related to the prosecution of such offences, failure to
file a timely return, false information, deliberate attempt to evade tax,
fabrication of numbers etc. The burden of proof in such cases lies on the
Tax evasion is majorly done by higher income group, business persons,
politicians etc. In India, people generally evade tax because of the high tax
rate, inflation, inefficiency of tax administration, corruption in the
government sector. Politician and government officers evade tax since that money
is out of bribery or illegal means. The tax department believes that tax evaders
are high among the non-salaried people.
Tax evasion is done in various ways, some are stated below:
- Purposefully not paying the required tax by hiding or misrepresenting their
- Smuggling the goods to avoid taxes. A smuggler does not pay the customs duty
since it is not authorized through any ports because it is an illegal activity.
Hence, they are not subjected to any duty or tax.
- Escaping the custom duty by faking the number either by under-invoicing or by
misdeclaration of the quality of products.
- By submitting the false financial statement. It is generally done by
manipulating the book of accounts, statement of income, cash flow or by
maintaining multiple books of accounts.
- Using fake documents to claim exceptions: The government has provided various
privileges for some financial benefits to underprivileged citizens. Some people
who don't qualify for such privileges create fake documents to claim those
- Not reporting the income, i.e. hiding them or bribing. This is the most common
method of tax evasion.
- Storing wealth outside the country. (there are legal ways available)
The offender is given a penalty or punishment of minimum rigorous imprisonment
to a minimum of 6 months to a maximum period of seven years and fine if tax
evaded exceeds 25 lakhs. The penalty of not proving correct details or
concealing the income tax will be 100% to 300% of the tax evaded as per section
271(C) of the Income Tax Act 1961. In case of not paying the tax due, a penalty
is imposed which cannot exceed the due amount. Out of 130 population of the
country only 1.46 crore, people pay the tax. That is a little over 1% of the
country's population. [2020 report]
The difference between the estimated tax revenue and the actual tax revenue
collected is called as “tax gap”. It is the estimation of total tax evaded,
tax avoided and corruption. Generally, the tax gap is referred to as the
estimated amount of tax evaded. The tax gap can be estimated by direct method
and the indirect method of calculation. The total tax can be calculated using
macroeconomic data, this is an indirect method. This method links tax evasion to
the underground economy i.e. through illegal activities.
The direct method is
more for the VAT (value-added tax). It is done by comparing the input-output
revenue and the actual VAT collected. Calculation of tax evasion through
macroeconomic aggregates gives us less information on the reasons for revenue
loss, whereas the estimation of tax evasion given by the use of microeconomic
aggregates is often less comprehensive
Tax evasion has an ill effect on the country. It manipulates the efficiency of
an economy. The capacity of an economy is severely affected due to tax evasion.
This is because of the lower availability of resources. This leads to the
inefficiency of the country which leads to slower growth of the economy. This,
in turn, affects the development of the country because of the underestimation
of the GDP.
The main effect of tax evasion is that it is a loss of revenue but an increase
in inflation. It brings disequilibrium in the country that means the rich become
richer and the poor becomes poorer, which leads to a poor standard of living,
which affects the global reputation of the country. For any country to develop
foreign investment is very important. A bad economy does not attract good
Measures To Fight Tax Evasion:
Reduction in tax rates: High tax rate is the primary reason for tax evasion
since this makes the tax evasion benefit able despite the risk. The high tax
level leaves the government with less scope for raising additional resources
during emergencies e.g. Pandemic of Covid-19. A reduction in tax rates will help
in increasing the demand which would lead to higher productivity and higher
Minimizing the corruption activities:
By lifting off the ban on donation to
various persons to political parties, giving them a reasonable grant in aid and
appropriate criteria should be made which would help the government to determine
the extent of such donations and keep track of it. In such ways, corruption will
decrease by a certain percentage and help in raising the revenue towards the
Building trust among small tax group:
Generally the burden of the tax falls on
small taxpayers because usually, the high taxpayers evade the taxes. By creating
confidence among the small taxpayer, we ensure that what they pay is used
efficiently and effectively.
Changes in the punishment, legal provisions:
The law should be more stringent in
order to create a fear among the taxpayer. There should be serious repercussions
to the tax evaders because ignorance of the law is not an excuse.
Taxation outside the central tax:
Income such as agriculture and donation offers
a scope to hide the black money. Such incomes need to be subjected to uniform
taxation or by creating a new category to avoid the scope of tax evasion.
Compulsory maintenance and audit of accounts:
A statutory provision may be made
requiring maintenance of accounts by all persons in the profession, and by
businessmen where the income from the business is in excess of exempted limit or
turnover. A provision may be introduced in the law-making presentation of
audited accounts mandatory in all cases of business or profession where the
sales /turnover /receipts exceed the exemption limit.
Permanent Account Number The absence of a uniform system of indexing all
taxpayers in the country on a permanent basis has to some extent been
responsible for the difficulties experiences by the department in tackling tax
evasion. It will be necessary to have an additional code, a ‘Records Locator
Code', to help locate the records of a taxpayer when the case is transferred
from one circle to another after the permanent account number has been allotted.
To avoid confusion with the permanent numeric code, this records locator code
may be a short alphabetic code
Educating about tax laws: Many citizens to date have very less knowledge about
taxes. By educating the citizens about the Indian Tax system and the importance
of tax for a country and creating an environment where everyone is willing to
contribute towards the society will make a big difference in the number of
taxpayers in this country.
There are very famous cases of tax evasion. Water Anderson is known as the guy
who wanted to turn the Russian Mir Space Station into a tourist attraction
destination. However, he was charged for hiding $365 million of his personal
income. It was the biggest tax evasion case in the United States.
The famous Portuguese footballer Cristiano Ronaldo has accepted the punishment
of a two-year suspended prison sentence and a fine of 12.1 million pounds in a
tax evasion case and paid a total of 16.8 million pounds to evade the prison
sentence in which he was found guilty by the Spanish authorities.
India has the famous case of Cadbury and Vodafone, the former case was for
the allegation of bribing the authorities for tax evasion and the latter turned
out to be the case of tax avoidance.
For an economy to grow together, they should give back what they get from
society. Being aware of the effects of tax evasion on the economy, it is the
citizens' responsibility to support the government by abiding the tax laws and
paying taxes on time. Just like every drop of water makes an ocean, the
contribution of every citizen makes a difference in the economy. The changes
that we demand from our government can only be done if we change ourselves and
fulfil our responsibilities.
These taxes are for the benefit of society. if we want to live in a better
place, we need to contribute towards it. Only by fulfilling our duties, we can
ask for what is rightfully ours. The first step to a better economy is to pay
tax. If we take the first step in the proper direction, everything will fall in
place eventually.-Ragma Ramesan
- Oxford Dictionary definition
- Financial Express 13th Feb 2020.
- Tax Gap: Causes and Solutions- Stephen PHAU
- The Vodafone Case: A Critical Analysis- Harsha Agraval