Income Tax Taxation

Best Methods to Prevent Tax Evasion

Tax evasion is an unlawful conduct in which an individual or business avoids paying a genuine tax due on intentionally. Tax evasion is committed to reflect less profit in order to avoid paying taxes. It includes concealing or fabricating income, exaggerating deductions without proof, failing to disclose cash transactions, and so on. Tax evasion is a severe violation that may result in criminal prosecution and significant fines.

Under the Internal Revenue Service (IRS) tax code, deliberately failing to pay taxes is a federal crime.

Taxes are never simple to support since most people dispute the idea of handing up a portion of their earnings to a government, but the truth is that taxes are an essential source of revenue for the government. This is the investment money in various development projects aimed at improving the condition of the company. However, the country has always struggled with tax evasion. Those who must be paying taxes have discovered means to avoid paying them, which as a consequence, the country’s income may be considered to be suffering.

Tax Evasion in India

Smuggling, evasion of income tax, evasion of sales and value added tax, evasion of customs duty, evasion of wealth tax and evasion of excise duty are all ways for people to avoid paying taxes in India. Furthermore, administrators accept bribes and assist in fabricating claims rather than reporting to tax authorities. To avoid tax, idealists deliberately neglect to file returns, submit fraudulent returns, submit fake certificates to get deductions, exemptions, and claim low income, charging personal costs to revenue, failing to pay dues on time, and so on.

Reasons for Tax Evasion

• The populace has a low level of education
• A lack of clarity and reliability in tax legislation
• Inflation
• High rates and Tax pressure
• A substantial informal economy
• Regimes of permanent regularisation (moratoriums, whitewashing, etc.)
• The possibility of failing to comply without incurring larger consequences.
• Promotional schemes (tax incentives, exemptions and tax expenses).
• Inadequate communication on the usage of tax-funded resources.
• A lack of citizens and fiscal honesty.
• Inefficiency of the Tax Administrations (AATT).
• The presence of international corporations engaged in extreme tax planning.
• Tax havens and jurisdictions with no or minimal taxation, often known as non-cooperating jurisdictions in several nations.
• The high weight of intangibles makes assigning their real worth and determining their origin challenging.
• A financial system with several complex figures that enable money to be mobilised quickly and easily.
• The spread of special tax regimes aimed at luring investments (e.g. tax rulings)
• Difficulty in controlling the transfer prices of connected multinational businesses: presently, these enterprises handle more than 60% of global commerce, with 50% being intragroup transactions.
• With substantial technical development: electronic commerce, collaborative platforms, digital currencies, and new means of commercialising products and services, taxation and regulating are becoming increasingly challenging.

Common Techniques

There are 2 categories to failing to pay taxes once they are due. The first is tax evasion, whereas the second is tax avoidance. The distinction between both of them is that tax avoidance is just discovering a loopholes that exempts someone from paying their taxes and is not strictly criminal, but tax evasion is simply failing to pay taxes when they are due, which is completely unlawful. Below mentioned are a few ways people can avoid/evade paying taxes.

• Failure to make a payment when it is due

This is the most basic technique for someone to evade paying taxes. They just will not pay it to the government, even when required. An individual who engages in this type of tax evasion will not pay the tax, willingly or unwillingly, before or after the due date.

• Smuggling

Whenever particular articles are moved from one place to another, across international or state boundaries, a tax or fee may be levied. Yet, many people may shift these products in secret in order to avoid paying such taxes, therefore evading the tax entirely.

• Filing fake tax returns

In certain circumstances, when an individual files their taxes, they may provide misleading or inaccurate information to reduce or avoid paying the tax. This is also considered tax evasion because comprehensive information is not supplied, and they may be paying less than they need to.

• Incorrect financial statements

The taxes that an individual or organisation shall pay may be determined by the financial transactions that occurred during the assessment year. If fake financial papers or accounts books are provided, showing incomes that are less than what was originally generated, the tax may be reduced.

• Using forged documents to obtain exemption

Particular exemptions and privileges may have been granted by the government to certain strata or sections of society to guarantee they have a bit more financial flexibility to advance. In certain circumstances, members who do not qualify for such benefits will have documentation prepared to support their claim of being a member of such group, allowing them to claim exemptions when they are not qualified.

• Failure to report earnings

This may be considered one of the most frequent ways of tax evasion. In this scenario, the individual simply does not record any income received throughout the fiscal year. They successfully evade tax by not reporting any income and without paying any tax. The most basic illustration will be a landlord who has maintained tenants but has not told the officials that he has rented the home and is earning money from it.

• Bribery

There could be a case when a particular amount of taxes is owed and the individual is unwilling to pay it. In that scenario, he or she may really propose a bribe to officials in order to avoid paying the tax and making it ‘disappear.’

• Keeping assets outside of the state

We’ve all heard stories about Swiss bank accounts. Offshore accounts are accounts kept outside of the nation, and information about transactions in these accounts is not reported to the income tax department, allowing the owner to avoid paying any and all taxes on the wealth.

The Most Effective Ways to Avoid Tax Evasion

1. Lowering tax rates.
2. Simplify rules/laws and the system as much as possible.
3. Create a well-structured tax administration organisation.
4. Reinforce anti-corruption policies.
5. Raise awareness amongst taxpayers via seminars, conferences, and the media.
6. Create a long-term tax framework.
7. Guarantee that political changes do not have an impact on a well-defined tax system. Increase the independence and autonomy of tax administration without losing final control of the government.
8. Strengthening and updating audit, tax collecting, depositing, and filing provisions.
9. Strengthen penalty provisions to avoid non-implementation.
10. Make it easier for people to pay their taxes through more enticing methods.
11. Provide relief provisions for large tax payers.

Indian Government’s Efforts to Reduce Tax Evasion

The Indian government has taken the following efforts to combat tax evasion. Tax evasion is considered a crime in India. The government imposes prosecution and penalties under several Acts. The Income Tax Department has implemented an income tax reward scheme that compensates informants on tax evasion. Recently, India and the United States reached an agreement to prevent Americans from evading taxes through Indian financial institutions. The Special Bearer Bond Scheme (Immunities and Exemptions Act, 1981^[1]) allows those who have black money to invest in special bonds. Another was the Voluntary Compliance Scheme (Amnesty Scheme).

The government raised the tax bracket, lowered the deduction rate, and expanded lawful tax evasion techniques. Recently, the government established the Tax Administration Reform Commission to make fundamental changes to tax affairs in order to simplify and streamline tax operations. Previously, India established various committees such as the Taxation Enquiry Committee, the Indian Tax Reforms Committee, and the Direct Taxes Enquiry Committees, among others. The Finance Bill included a provision for auditing concealed transactions in order to combat tax evasion.

Conclusion

In India, people adopt a variety of techniques to evade paying taxes, ranging from filing false tax returns and smuggling to forging papers and bribes. The government has imposed different punishments for tax evasion. The penalties for this are severe, ranging from 100 – 300% of the tax for unreported income.

Read our article:The Concept of Tax Evasion and Tax Avoidance: Definition and Differences