Penalty for Tax Evasion

Akansha Gupta

27 Sep, 2021

In India, evading income taxes is a crime. Tax evasion is punishable by severe fines under Chapter XXII of the Income-tax Act of 1961, and in some circumstances may even lead to imprisonment. The below mentioned are some of the situations in which non-compliance with Income Tax regulations can lead in a severe penalty for tax evasion or possibly a prison sentence of up to 7 years.

Penalty for Tax Evasion in India

The penalty for tax evasion might vary depending on the type of fraud perpetrated and the amount of tax owed. Following are some examples of scenarios and the punishments imposed in each case:-

• Failure to file the income tax return by the due date – Penalty for Tax Evasion

All taxpayers are required to file their income tax returns within the tax filing period for each fiscal year, according to Section 139 (1) of the Income Tax Act of 1961. If someone fails to file their income tax return for any reasons, they must pay a Rs. 5,000 penalty. In certain circumstances, the assessing officer can also determine the penalty amount, which might be less or greater than Rs. 5,000.

• Providing an erroneous pan card number or concealing a pan card number

At the time of employment, several businesses request the employee’s pan card number. This information is used to calculate TDS, or tax deducted at source, from the salary of the employees. The punishment for 2 situations involving a pan card is as follows:

1. Concealing the pan card number: In the absence of a pan card number, the employer will deduct 20% TDS rather than 10% TDS.
2. Giving an inaccurate pan card number: If you provide an incorrect pan card number, you would be fined Rs. 10,000.

• Failure to Retain Information and Documents as Required by the Income Tax Act

Failure to keep relevant information, documents, and other materials relating to an international or domestic transaction will result in a 2% penalty. The 2% must be computed on an amount equal to the total value of each foreign or domestic transaction. The taxpayer must enter the transaction information. Every transaction copy must be kept for an 8 year period. When requested by Income-tax authorities, the documentation must be delivered to the officer within 30 days. Failure to do so will result in a fine.

• Income concealment or misreporting

According to Section 271(C) of the Income Tax Act of 1961, if you hide or understate your earnings, the penalty can range between 10% and 200% of the amount of tax which was due but not paid, as specified in Section 271AAB. The percentage is calculated as follows:-

1. If the taxpayer admits to the unreported income and discloses it, a 10% penalty is imposed on the prior year’s income that was hidden or underestimated. Interest may also be levied in this case.
2. A penalty of 50% is assessed on the amount of income that is hidden or underestimated if the reason for the under-reporting was a genuine error or a bonafide one. It pertains to legitimate faults that are not done with the intent of evading taxes.
3. If the error was made on purpose to evade tax, a penalty for tax evasion of 200% is assessed on the amount of income that was hidden or underestimated. This is also called as a legitimate error or malafide ones.

• Noncompliance with TDS Regulations – Penalty for Tax Evasion

A tax deduction account number (TAN) is essential for enterprises or employers who deduct and collect tax at the source. Failure to get a TAN might result in a Rs. 10,000 fine. There are 2 types of fraud that can occur here:-

1. Failure to collect tax at source: The penalties is the same as the tax that was not deducted at source.
2. Failure to file a TDS return: TDS returns, like income tax returns, have a due date. In case the TDS return is not filed within the specified time frame, the taxpayer must pay tax for each day beyond the due date until the whole payment is completed. In this scenario, the penalty might range from Rs. 10,000 to Rs. 1,00,000.

• Not reviewing Form 26AS before submitting your income tax return

One must double-check the information on Form 26AS since any discrepancy might result in hefty penalties. Mismatches in income, expenditures, and investments data will be punishable in the same way.

• Noncompliance with a demand notice – Penalty for Tax Evasion

In case of any discrepancies in the income tax return, the income tax (IT) department^[1] can issue a demand notice u/s 142(1) or 143(2). If this occurs, the assessing officer could issue a demand notice indicating the amount of tax still owing and requesting either the filing of a return of income or the provision of all asset and liability information in writing. The taxpayer has 30 days from the date of receipt of the document to reply to the demand notice. A penalty may be imposed in case it is not answered and pay the tax owed.

• Not paying tax according to self-assessment – Penalty for Tax Evasion

Under Section 140A (1), failure to pay tax (in whole or in part) according to self-assessment or interest is deemed tax evasion or fraud. In this situation, the assessing officer has the authority under Section 221(1) to impose a penalty on the defaulter equal to the whole amount of tax owing to the government. The penalty must not be more than the amount owed in arrears. The amount of tax owed to the Income Tax Department by the assessee is referred to as the arrear amount. Self-assessment tax, interest, surcharge, and cess are all included in the total. The assessing officer may waive the penalty if there is a genuine justification for not paying tax according to self-assessment.

• Failure to Get Accounts Audited – Penalty for Tax Evasion

1. An organisation must pay a penalty of 1.5 lakhs or 0.5% of its sales turnover, whichever is greater, in case it does not have itself audited or does not submit an audit report u/s 44AB. Furthermore, if the taxpayer fails to produce a report from an accountant to the above-mentioned department within 30 days as required by Section 92E, they must pay a penalty of at least Rs. 1 lakh or higher.
2. To avoid the penalty, the taxpayer must document all domestic and foreign transactions and obtain a report from a chartered accountant in India on or before the deadline. A penalty of 2% of the value of the transaction (international or domestic) shall be levied if any papers required by the Act are not supplied or attached u/s 92(D) 3.
3. It should be emphasised that the assessing officer is not required to impose a penalty in all situations when there is a default. The assessee may have been experiencing difficulty due to circumstances beyond his or her control. The assessee may have been unable to carry out normal business activities, such as maintaining books of account, due to the hardship. Natural disasters like cyclones, floods, and other natural disasters may have contributed to the misery. In these kind of situations, the assessing officer has the authority to exclude the assessee from the Act’s punitive penalties.

Impact of tax evasion in India

Taxes are the government of India’s primary source of revenue. Tax evasion contributes to economic inequality, since some individuals become wealthier while others become poorer. Many government reform measures and initiatives have to be shelved, and social services are suffering as a result. Inflation and value erosion are caused by black money.

Tax Evasion: Judicial Interpretation

There are a variety of cases involving the notion of penalty for tax evasion.

The court ruled in Union of India v. Play world Electronics Pvt. Ltd. that “It is the responsibility of every person to pay taxes honestly without resorting to subterfuges”.

The Hon’ble SC said in another case, Calcutta Cromotyoe Ltd. V. Collector of C. Ex, Calcutta, that “Colourable devices cannot be used in determining tax in the nation.”

In contemporary society, there are questionable tactics that are used to deceive the authorities in order to avoid paying taxes. These methods cannot be classified or commended. Such behaviour would be regarded as illegal in nature.”

Concluding Remarks

Read our article:Best Methods to Prevent Tax Evasion