tax evasion in india research paper

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Volume 8 Issue 8 August-2021 eISSN: 2349-5162

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Tax Evasion And Tax Avoidance: Impact On Indian Economy

Understanding the term: tax, direct and indirect taxes:, tax evasion and tax avoidance:.

• Tax Evasion: It is commonly known that the vast majority of Indians do not file their taxes. They attempt to avoid this by employing illegal strategies or Indian tax system weaknesses. The word "tax evasion" refers to the unlawful methods used by individuals, corporations, trusts, and other entities to avoid paying taxes. In order to reduce or avoid their tax liability, individuals intentionally or deliberately misrepresent to the tax authorities the true condition or state of their affairs, either by overstating their costs and expenses or by declaring less income, earnings, or gains than they actually received. As a result, money that could have been allocated to social and economic advancement is instead being spent on antisocial behaviours. All this creates black money and social evils in the development of country but also harmful for the country. The level of evasion tax also depends on the chartered accountants and tax lawyers who help companies, firms and individuals evade paying taxes. Tax evasion is a crime in all major countries and the guilty parties are subjected to imprisonment and fines.  
• Tax Avoidance: Tax avoidance means reducing our tax liability without breaking any law. In this an individual looks for loopholes in the law and makes most of those loopholes to reduce the tax liability. Tax avoidance is a legal means of reducing our tax liability by exploiting gaps or taking advantage of loopholes in the law, resulting in us paying less tax. By utilizing Tax Avoidance, we are able to comply with all legal requirements while also lowering our tax liability. We are not penalized or fined for tax avoidance because we are not breaking any laws. We are simply taking advantage of legal loopholes in order to decrease our tax burden.
• To understand the difference between tax avoidance and tax evasion in India.
• To explore common strategies used for tax avoidance by individuals and businesses in India.
• To examine real-life cases of tax evasion in India and their implications.
• To identify the factors that influence taxpayer behaviour regarding tax avoidance and evasion in the Indian context.
• To assess the effectiveness of government initiatives in curbing tax avoidance and evasion in India.
• To provide straightforward policy recommendations for improving tax compliance in India.

Tax Avoidance in India

Tax avoidance strategies and examples.

• Income Splitting: This strategy involves distributing income among family members in a way that minimizes the overall tax liability. The Hindu Undivided Family (HUF) structure is often used to split income.
• Tax Credits and Deductions: Leveraging tax credits and deductions allowed under the Income Tax Act, individuals and companies can legally reduce their taxable income. For example, deductions for home loan interest, education expenses, and investments in specific financial instruments offer opportunities for tax savings.
• Offshore Tax Planning: Indian residents often explore offshore financial structures to reduce tax liability. This includes setting up companies or trusts in tax havens to channel income, capital gains, or assets offshore.
• Capital Gains Management: Structuring investments to manage capital gains tax is a popular tax avoidance technique. Individuals may invest in tax-saving instruments, such as Equity-Linked Savings Schemes (ELSS), to avail of capital gains tax exemptions.
• Transfer Pricing: Multinational corporations operating in India may use transfer pricing techniques to manipulate intra-group transactions and minimize tax liability.
• Treaty Shopping: Companies may use tax treaties between India and other countries to reduce withholding tax on cross-border payments.

Legal Aspects of Tax Avoidance

• Section 90 and Double Taxation Avoidance Agreements (DTAA): India has entered into DTAA with many countries to prevent double taxation and facilitate the exchange of information between tax authorities. Tax avoidance strategies that involve international transactions must comply with the DTAA provisions.
• General Anti-Avoidance Rule (GAAR): The Indian government introduced GAAR to combat aggressive tax avoidance schemes. GAAR allows tax authorities to scrutinize transactions and recharacterize them if they are found to be artificial or lacking commercial substance.
• Judicial Interpretations: Indian courts play a significant role in shaping the legal landscape of tax avoidance. Landmark judgments, such as the Azadi Bachao Andolan case, have provided guidelines on the legality of tax avoidance practices.
• Recent Developments: The government continues to introduce measures to address aggressive tax avoidance. The introduction of the 'Equalization Levy' on certain digital services is an example of such measures aimed at ensuring that multinational corporations pay their fair share of taxes in India.

Tax Evasion in India

Tax evasion methods and cases.

• Underreporting Income: This method involves declaring a lower income than what is actually earned, thus reducing the taxable amount. Notable cases of underreporting income have been observed in sectors such as real estate, where property transactions are often undervalued.
• Offshore Accounts and Shell Companies: Individuals and businesses may use offshore accounts and shell companies to hide income and assets from tax authorities. The Panama Papers leak and the subsequent investigations exposed several Indian individuals involved in such practices.
• Bogus Invoices and Fake Expenses: This method involves creating false invoices and expenses to inflate deductions and lower taxable income. The 'hawala' transactions, an informal system of transferring money, have been used in such cases.
• Black Money and Unaccounted Wealth: The accumulation of unaccounted wealth, often referred to as "black money," is a prevalent form of tax evasion in India. Individuals may hoard cash or investments that are not disclosed to tax authorities.
• Money Laundering: Money laundering techniques are used to legitimize income derived from illegal activities, making it appear as legal income. The Nirav Modi PNB scam is an example where money laundering played a significant role.
• Benami Transactions: Benami properties are those held by one person on behalf of another, without the legal owner's knowledge or consent. Benami transactions can be used to evade taxes and hide assets.

Legal and Ethical Implications of Tax Evasion

• Penalties and Prosecution: Tax evasion in India can result in penalties, fines, and even criminal prosecution. The Income Tax Act, 1961, provides a legal framework for dealing with tax evasion cases.
• Asset Seizure: Tax authorities have the power to seize assets, including bank accounts and properties, in cases of tax evasion.
• Double Taxation Avoidance Agreements (DTAA): India's DTAA provisions can also be invoked to share information and recover taxes in cases of offshore tax evasion.  
• Impact on Society: Tax evasion deprives the government of resources required for public services and infrastructure development, affecting society at large.
• Business and Investor Confidence: A high incidence of tax evasion can undermine business and investor confidence, potentially deterring foreign investments and economic growth.
• Moral Responsibility: Tax evasion raises questions of moral and ethical responsibility, as it violates the social contract of contributing to the nation's welfare.
• One such case is the Vijay Mallya scandal, where the liquor baron and former chairman of Kingfisher Airlines was accused of wilfully defaulting on bank loans amounting to billions of rupees. The investigation revealed a complex web of offshore entities and shell companies used to siphon off funds and evade taxes. Mallya's case highlights the need for robust mechanisms to detect and prevent financial fraud and tax evasion.
• Another notable case is the Panama Papers leak, which exposed the involvement of several prominent Indian individuals and companies in offshore tax evasion schemes. The leaked documents revealed the existence of thousands of offshore entities used to hide assets and evade taxes. This global investigation shed light on the extent of tax evasion and avoidance prevalent among the wealthy elite.
• The "Vodafone" Case: One of the most famous tax avoidance cases in India involved Vodafone's acquisition of Hutchison Whampoa's telecom assets in India in 2007. Vodafone used a structure that routed the transaction through Cayman Islands-based entities to avoid capital gains tax in India. This case brought attention to the issue of retrospective taxation and led to significant debates and legal battles.
• The "Google and Apple" Double Irish Dutch Sandwich: Multinational technology giants like Google and Apple have employed complex tax avoidance strategies, known as the "Double Irish Dutch Sandwich." By routing profits through Ireland and the Netherlands, they have reduced their effective tax rates in India. While these strategies are not illegal, they raise questions about the fairness and effectiveness of the global tax system.
• The "Nirav Modi and the PNB Scam": The Punjab National Bank (PNB) scam, orchestrated by jeweler Nirav Modi, involved fraudulent issuance of letters of undertaking (LoUs) to obtain loans and evade taxes. This case revealed a significant tax evasion and banking fraud scheme, highlighting the links between financial fraud and tax evasion.
• HSBC Bank's Swiss Accounts Scandal: The HSBC Bank's Swiss accounts scandal exposed Indian account holders who were involved in tax evasion. The leaked data revealed a significant number of Indians who had concealed funds in offshore accounts to evade taxes.

Government measures and initiatives to combat tax evasion and avoidance

• Introduction of the Goods and Services Tax (GST): The implementation of GST has brought about significant changes in the tax system, reducing the scope for tax evasion and avoidance. It has simplified the tax structure and increased transparency in transactions.
• Demonetization: In 2016, the government demonetized high-value currency notes to curb black money and promote digital transactions. This move aimed to discourage cash-intensive transactions, which are often associated with tax evasion.
• Benami Transactions (Prohibition) Act: The government enacted the Benami Transactions (Prohibition) Act in 2016 to deter individuals from holding properties in the names of others to evade taxes. This act provides for stringent penalties and confiscation of benami properties.
• Strengthening tax administration: The government has taken steps to strengthen tax administration and improve tax collection. This includes increasing the use of technology, such as online tax filing systems, data analytics, and e-assessments, to detect and prevent tax evasion.
• International cooperation and information exchange: The government has actively pursued international cooperation to combat tax evasion. India has signed tax information exchange agreements with various countries and has become a member of international initiatives like the Global Forum on Transparency and Exchange of Information for Tax Purposes.
• General Anti-Avoidance Rule (GAAR): The government has introduced GAAR to curb aggressive tax planning and tax avoidance schemes. GAAR empowers tax authorities to deny tax benefits if the primary purpose of a transaction is to obtain tax benefits.
• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act: In 2015, the government introduced this act to tackle the issue of undisclosed foreign income and assets. It provides for stricter penalties and prosecution for those who do not disclose their foreign assets and income.
• Special investigation units: The government has established special investigation units, such as the Directorate of Criminal Investigation and the Central Economic Intelligence Bureau, to investigate cases of tax evasion and money laundering.

Penalties for Tax Evasion and steps taken by government on curbing Tax Avoidance: Penalties for tax evasion in India: The Income Tax Act, in India, identifies penalties for the taxpayers for various acts of omission, wilful neglect and purposeful evasion of taxes due in any financial year. For corporate, it also identifies penalties for lapses in maintaining the right documentation and compliance requirements in a financial year. Below are some of the examples and relevant sections of the identified penalties:

• Section 270A of the act makes the taxpayer liable for penalty if the taxpayer tries to reduce the tax liability by reducing the reportable income (under reporting the income). The penalty can be up to 200% of the tax payable on the unreported income.
• Section 271A imposes a penalty of Rs. 25,000 to a taxpayer in case of failure to maintain the book of accounts as per the requirements in section 44AA.
• Penalty can be imposed by an assessing officer for default in payment of taxes from a taxpayer, as per section 220 (1) and 221 (1) of the income tax act.
• The sole cause of introducing GAAR became to lessen tax avoidance techniques through a provision Section 96. Impermissible avoidance arrangement, which was imbedded in Income Tax Act. According to the provision, arrangements or offers made to gain a tax benefit were impermissible.
• Amendment of section 6(3) of Finance Act, 2015 was done in order to replace a new test of corporate residence, which provided that if the place of effective management (POEM) is found to be situated in India, then a foreign company will be considered a tax resident of India. Before this amendment, for tax purposes, a company that was not a resident of India was only considered resident if it was managed and controlled in India.  
• Indian authorities in 2017 took diverse steps in order to align the rules and recommendations as per the Base Erosion and Profit Shifting (BEPS) suggested by the Organization for Economic Co-operation and Development (OECD).
• The Concept of Tax Evasion and its Impact on National Economy

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TAX EVASION IN INDIA: CAUSES AND REMEDIES

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