An Analysis Of Tax Evasion In India

An Analysis Of Tax Evasion In India

Author: Livya P. Lalu from Delhi Metropolitan Education, Noida.

In today’s society, taxes are said to be the most important source of financing goods, and it is one of the most powerful tools used for the development of economic and social activities in the economy and in addition, it reduces the imbalance or inequality of salary distribution. There are various types of taxes like income tax, corporate tax, property tax, inheritance tax and they are either classified as direct or indirect tax. Researchers studied the perception of tax professionals with regard to the Indian Income System and they found that the presence of inefficient tax collectors was due to the increase in tax evasion in India. Tax evasion happens when the efforts are made by an individual, a firm’s trust and various other entities to avoid paying taxes by illegal and unfair methods. Evasion usually takes place when people intentionally hide their incomes or a part of it from the tax authorities to reduce their tax liability. As a result of evasion, the amount which was to be used for the development of social and economic activities is in turn used for other anti-social activities which are harmful to the economy. Black money and tax avoidance encourage or pave way for control over financial power by undesirable groups in the country. Different kinds of manipulations of financial statements resulting in tax evasions are out of book transactions, parallel books of accounts, manipulation of books of accounts, manipulation of sales/receipts, under-reporting of production, manipulation of expenses, and other manipulation of accounts. With the relaxation of foreign exchange controls, a lot of new opportunities emerged for tax evasion and because of globalization, money kept flowing in and out of the country creating tax havens.

Therefore, it is of the incredible enthusiasm for the government to actualize a financial strategy that fortifies tax compliance. So, as to structure an ideal strategy, it is vital to comprehend the choice procedure of citizens and the fundamental inspirations that impact their conduct. In such manner, the best approach to order and treat the different reactions to tax collection is of crucial significance for scholastic specialists as well as for customary citizens who are installed in social structure and affected by social portrayals.

Tax is the compulsory public contribution and primary source of government revenue. Tax evasion is an unlawful act which results in inequality of income distribution and brings economic growth to a halt, leading to economic instability. The act of tax evasion is usually associated with the informal economy. The inequality in the income distribution widens the tax gap, the amount of unreported income of an individual. This is the sum of the total difference between the amount to be reported and the actual amount reported. 

Tax refers to the compulsory exaction from the public by public authorities for public purposes. There are various types of taxes, such as income tax, corporate tax, property tax, inheritance tax and they are classified as direct or indirect taxes. Singh and Sharma (2007) studied the perception of tax professionals with regard to the Indian Income System. They found that the presence of incompetent tax collectors was due responsible for high tax evasion in India. The problem arises at the time of tax collection, during which the person or an entity may unlawfully and intentionally avoid tax by not paying it. This act is referred to as tax evasion. The inefficient tax collection system is also a reason for tax evasion in a developing country.
Tax evasion is an act of evading taxes illegally and refusing to pay taxes. The gap between the amount of tax owed and the amount of tax that is paid is huge.

Tax avoidance is the use of methods that are of legal methods to reduce an individual’s financial status to lower the amount of tax, especially income tax to be paid. This is generally accomplished by claiming plausible and permissible deductions and tax credits. People generally confuse tax evasion and avoidance. Tax evasion is clearly depended on four major determinants, namely demographic variables (age, gender, education and occupational status), culture and behavioral variables (complexity, fairness, revenue authority contact, compliant peers and ethics or tax morale), legal and institutional variables (Legislation) and finally economic variables( income level, income source, marginal tax rates, sanctions and probability of detection). However, tax morale is considered as the primary determinant in a developing country Tax evasion unlike tax avoidance, uses the illegal methods. Tax avoidance is encouraged and complicates the tax code. 

Sources And Causes Of Tax Evasion

Mainly tax evasion has three main sources

1. Exorbitant rates of taxes
2. Lack of transparency/simplicity in tax laws
3. Corrupt government administration

In India, corporate try and evade or avoid paying taxes in order to keep some black money to be utilized for exchanges with government bodies and hirelings. Experts avoid paying taxes to save the money for the future as tax rates are very high. Politicians and other lawmakers for the most part dodge charges since their salary is mainly out of fixes and illicit methods. Tax avoidance is the result of individual citizen behavior and social standards on the supply side, and inadequacies in tax administration on the interest or demand side. To start with, the tax structure needs to see as fair and equal over different gatherings of citizens. Likewise, if marginal rates are very high, people are going to find ways to evade taxes. Over the world, these viewpoints are all around perceived today, and the result of international tax harmonization has been in lowering in the rate structure (to improve inducements), and attempts at widening the tax base (to lessen disparities).

Effects Of Tax Evasion

Tax evasion has numerous ill effects on the payer, society and total revenue.

1. It’s most unfavorable influence maybe on equity. A blue-collar assembly-line laborer pays tax. A restaurant worker whose salary is the equivalent yet who gets some portion of his salary in tips does not uncover it during payment of tax. Along these lines, one worker gains to the detriment of others. This is horizontal disparity or inequity. A salaried employee in a company earns the same, as their incomes appear to be equivalent for tax purposes.
2. The tax evasion misshapes economic efficiency. In sectors, that are less subject to the director’s investigation, there will be more investment. That may be one motivation behind why certain administration sector-activities for example, construction companies have developed so sensationally as the organization moves crosswise over national boundaries in a globalized world economy. Similarly, the unorganized sector might try and avoid taxes much more easily than the organized sector. Small taxpayers have stayed extremely hard to assess and keep up a steady presence in regulatory corners.
3. The functional capacity, efficiency, and effectiveness of a sector suffer because of tax evasion as inequity and inefficiency can lead to lower government revenue. Capacity endures because of lower accessibility of assets. The outcome could in all likelihood be an increase in tax rates, or the burden of distortive charges, in this manner starting an endless loop of inequity and disparities.
4. Tax evasion being under revealing of pay suggests underestimation of GDP and all its proportionate large scale economic ramifications. Since the denominator is under-evaluated, the proportion of assessment to GDP, the financial deficiency to GDP, and open obligation to GDP are all over evaluated. The perceived higher GDP proportion prompts false solace, yet overstated deflationary action might be made to rein back an overstated financial shortfall or public debt ratio.
5. Tax evasion has had a reducing effect on the economy’s growth.
6. Reduction in revenue and increase in inflation are the direct effects of tax evasion.
7. There has been transferring funds or black money between India and other foreign countries through secret channels, affecting the country’s reputation all around the world.
8. There would be disequilibrium in the country as the rich get richer and the poor become poorer. 
9. Due to tax evasion by the rich society of the economy, the government is forced to increase tax rates to increase the outcome of revenue every year.
10. This leads to poor standards of living for the BPL as the government doesn’t have enough revenue to take welfare measures. 

Some Of The Measures That Can Be Taken To Fight Tax Evasion Are:

1. Reducing tax rates

The predominance of high tax rates is the first and foremost purpose of tax evasion because this is the thing that makes evasion so profitable or beneficial furthermore, notwithstanding the risks. The present high rates of tax collection leave the government with little extension for mobility for bringing extra assets in the midst of the crisis. The maximum marginal rate of tax ought to be bought down so as to make an effect; the decrease in the rate of tax collection should be at one stroke.

1. Minimization of controls and licenses 

A committee of professionals must be appointed to investigate the utilization of all permit systems and existing controls and suggest which all are to be eliminated, whichever is not necessary. This committee must also be given the power to alter laws in such a way that these laws are healthy for the economy and which can be administered efficiently and effectively without any ill effects on the public.

1. Regulation of donations to public parties

Nowadays, it is very essential to keep political parties away from corruption. If selected with suitable criteria and evaluating the amount to be given to each one, it would bring about a huge change in this situation. Irrespective of whether the government funds the parties or not, their accounts must be checked on a regular basis showing all transactions important. 

1. Creating confidence among small taxpayers

The act of being too careful in small cases, when there is no advantageous revenue involved, has done a lot of harm to this division in general. The guidelines issued by the Central Board Of Direct Taxes on the new system for making evaluations in small income cases make a bold departure from the past and are probably going to achieve more huge outcomes than the earlier small income schemes.

1. Allowance of certain business expenses

Entertainment expenditure incurred for the advancement of taxpayers business which is directly identified with its dynamic direct has to be permitted to be deducted up to the segment 37(2A) of the Income Tax Act, 1961.

1. Changes in penal provisions 

The penalty is needed just as much as it is within the sensible limit. Once it crosses that limit, it is bound to increment the inflexibility of the citizen’s stubbornness than to reform him. A penalty that’s dependent income rather than tax hits the small taxpayers more harshly.

1. Intelligence and investigation

To adapt to the expanding refinement and advancement of the procedures of tax evasion, there is a requirement for complete reorientation in the division’s way to deal with its strategies of intelligence and investigation. The machinery for intelligence and investigation has to be completely upgraded and streamlined to handle sufficiently the hazard of tax evasion.

1. Taxation of agricultural income 

Agricultural income which is presently outside the central tax net paves easy ways for camouflaging black money and it should be urgently subjected to a uniform tax which is more or less on par with other incomes so as to eliminate scope for evasion. 

1. Permanent account number

It is necessary to index all the taxpayers on a permanent basis reduces difficulties and confusion.

Having known about the ill effects of tax evasion on our economy, it turns into every single one of our duty to help the government by conforming to the tax procedures and pay taxes immediately. Out little commitment will have a huge impact on the welfare of our economy and let us be the people who bring the change for development and betterment. Tax evasion can be eliminated completely if we take the proper measures to fight it, further reducing the burden of payment on the existing payers. It is also important to further educate the people about the Indian Tax Laws and create an environment where everybody pays their dues efficiently and feel proud of their contribution to their economy. Tax evasion is the primary cause of low government revenue. This is due to the fact that there exists corrupt tax collectors, inefficient tax structure that most of the developing countries around the world suffer tax evasion. This results in accounted for money and the creation of a parallel economy. The tax structure and collection tiers are to be changed if there needs to be changed in a country’s economy. Tax relaxation is required for reducing the amount of tax evasion and stricter punishments are to be enforced for the crimes of tax evasion to reduce the gap. People do consider paying taxes, even if the person is economically sound. It may be due to the fact that their tax money doesn’t reach the government for social welfare measures.