By Sachika Vij
Published On: November 26, 2021 at 13:20 IST
Taxation’s most fundamental role is to fund government spending. Throughout history, several justifications and explanations for taxes have been provided. The proceeds from early taxes were used to sustain the ruling elite, recruit armies, and construct defences. The power to tax was frequently derived from divine or supranational powers.
Utilitarian, economic, and moral explanations have all been advanced in the past. Taxing high-income individuals more progressively encourages a more egalitarian society, according to proponents.
Increased taxes on certain items and services, such as cigarettes and gasoline, have been justified as a consumption deterrent. Taxes, according to proponents of the public goods theory, may be essential in circumstances when private supply of public goods is deemed sub-optimal, such as lighthouses or national defence.[i]
Tax evasion is the use of deceptive practises such as under-reporting taxable income or exaggerating expenses to reduce one’s tax burden. It’s not a legal attempt to lower one’s tax bill. The goal of tax evasion is to display less profits in order to avoid paying taxes. Making false claims, concealing key papers, failing to keep accurate records of transactions, concealing revenue, overstating tax credits, or presenting personal costs as business expenses are all examples of unlawful acts. Tax evasion is a felony for which the assessed may face legal consequences.[ii]
The present article specifically deals with tax evasion by companies and the consequences of such evasion.
Taxation and its Types
Taxation occurs when a taxing agency, usually a government, assesses or imposes a financial obligation on its citizens or residents. It’s frequently referred to as an act, and the income it generates is usually referred to as “taxes.”
Direct taxes and indirect taxes are the two types of taxes that exist in India. When it comes to direct taxes, they are charged on the earnings of various sorts of corporate organisations over the course of a fiscal year. A taxpayer who is both an individual and a corporation is not taxed at the same rate. Corporate income tax is a type of income taxpaid by both local and international corporations on their earnings in India (CIT). The CIT is set at a certain rate set by the income tax statute, which is subject to annual rate adjustments in the union budget.
A corporate entity, often known as a corporation, is a legal body that is regarded to have specific rights and responsibilities and hence has its own legal identity apart from that of its stockholders.
Below are the corporate entities that must pay tax in India:
- Incorporated corporations in India
- Corporations that obtain revenue from India and conduct business with that revenue.
- Other international companies that have made a permanent presence in India.
- Corporations that have obtained the status of being an Indian resident only to pay taxes.
Distinction is significant between Domestic Corporations and Foreign Corporations (defined below) because local firms in India are taxed on their total income, but international corporations are only taxed on the money generated from their Indian activities.
A Domestic Corporation is a firm founded in India and is registered under India’s Companies Act, 2013. If the Indian arm’s management and control is entirely headquartered in India, even a foreign firm might be called a local corporation. As the name implies, a foreign corporation is a firm that is headquartered outside of India. A foreign corporation is also referred to as such if a portion of its management and control is located outside of India.
Tax Evasion and Methods to carry out such Evasion
When certain items are transported from one area to another, whether across international or state boundaries, a tax or charge may be imposed. Some people, on the other hand, may shift these commodities in secret in order to evade paying the taxes or to avoid paying the tax entirely.
There may be a case when a particular amount of taxes is owed and the individual is unwilling to pay it. In this instance, he or she may propose a bribe to officials in order to avoid paying the tax and make it ‘disappear.’
- Storing wealth outside the country
Offshore accounts are accounts kept outside of the country where information about transactions is not given to the income tax department, allowing the owner to avoid paying any and all taxes owed on the wealth.
- Inaccurate financial statements
The taxes that an individual or an organisation must pay may be determined by the financial transactions that occurred during the assessment year. The tax may be reduced if fake financial papers or accounts books are filed, showing incomes that are less than what was actually obtained.
Impact of GST on Tax Evasion
The Goods and Services Tax (GST) was introduced into the Indian economy on July 1, 2017, to replace the several indirect taxes and levies that existed before to that date with a single tailored tax system. These measures are intended to formalise the Indian economy and eliminate the parallel sector. The Goods and Services Tax (GST) was also expected to assist boost tax revenue. According to research, the government identified nearly 20,000 crores in GST evasion between April and February 2018-19, with 10,000 crores recovered. These have the effect of reducing corporate tax outflows at the expense of government income.
The government of India periodically changes its tax regulations. It confuses taxpayers and government employees on the applicable provisions. Tax rules are complicated, and there are loopholes to evade tax in-laws: The Indian tax code is complicated. People might discover provisions to avoid paying taxes in the same statute.
The government has begun (to some extent) to integrate various tax, legal, and regulatory authorities (such as GST and Income-tax authorities, Customs authorities with other regulatory agencies involved in international trade, and so on) in order to conduct a 360-degree analysis of taxpayer risk profiles, collaborate with private sector fraud analytics experts, and so on.
Furthermore, the government should consider consolidating the “various GST rates applicable to a single product” into a single rate to prevent tax evasion through invoice splitting.
Legal Consequences of Tax Evasion in India
Tax evasion is a criminal offence under Chapter XXII of the Income-tax Act, 1961, and non-compliance with Income Tax laws can result in a penalty or perhaps a maximum sentence of seven-year prison can be awarded.
Following are various such consequences:
- All companies are required to submit an ITR on October 30th each year. If you do not file an income tax return under Section 139 (1) of the Income Tax Act, tax officials may impose a fine of 5,000 rupees or more.
- According to Section 140A (1), if the taxpayer fails to pay all or part of the self-assessed tax or interest, the taxpayer will be treated as a defaulting party.
- According to Section 221 (1), the defaulter may be fined by the assessor. Officers may exempt you from paying fines if you provide appropriate justification. According to Section 142 (1) or 143 (2), the tax office may issue a notice that requires an income tax return to be filed if the individual does not follow the notice issued by income tax.
- If you provide false information under Section 271 (C) of the Income Tax Act, tax evasion may be fined 100% to 300%. Section 271 AAB lists various penalties depending on the scenario.
- A taxpayer’s 10% penalty allows not to disclose the amount for the previous year.
- 20% penalty if the amount of the previous year is not disclosed but is disclosed in exchange for the income generated in the previous year.
- If the previous year’s amount is not listed, 30% to 90% of the penalty may be levied.
- If an organization fails to audit or provide the Section 44AB Audit Report, you are obliged to pay a fine of 1.5 Lark, or 0.5% of sales, whichever is greater. In addition, taxpayers must pay a fine of at least Rs 10,000 if they do not submit an accountant’s report under Section 92E.
- The Central Goods and Services Tax (CGST) Act, 2017, Chapter XIX, Section 122, lists 21 penalties-able offences, and Section 122(1) of the same talks about tax evasion or non-payment, which includes the following:
- GST is being collected, but it is not being submitted to the government within three months.
- Obtaining CGST or SGST by deception.
- Suppressing sales in order to avoid paying taxes
- Taking use of a tax benefit without having received a tax receipt
- As per Section-122(2) any registered person who supplies any goods or services or both on which tax has not been paid or short-paid or erroneously refunded, or where the Input tax credit has been taken or used incorrectly:
- For any reason, other than the reason of fraud or any wilful misstatement or suppression of facts to evade tax, shall be liable to a penalty of ten thousand rupees or ten per cent. of the tax due from such person, whichever is higher;
- For reason of fraud or any wilful misstatement or suppression of facts to evade tax, shall be liable to a penalty equal to ten thousand rupees or the tax due from such person, whichever is higher.
- On the recommendations of the Council For such class of taxpayers and under such mitigating circumstances as may be indicated therein, the Government may waive any penalty referred to in Sections 122 or 123 (penalty for failure to produce information/return) or Section 125 (general penalty) or any late charge referred to in Section 47.[iii]
The corporation may seek legal redress through the Income Tax Appellate Tribunal (ITAT), a quasi-judicial entity created specifically to hear appeals concerning income tax concerns.[iv]
These large corporations’ tax avoidance strategies save them billions of dollars each year, but they also cost the government a lot of money and create an unfair market, because a person working for a salary or running a small business has very little knowledge or intellect for devising tax avoidance strategies and ends up paying taxes in full. Large corporations, on the other hand, continue to reduce their tax burden through tax evasion. It’s tough to establish that big multinational behemoths avoid taxes since they do so within the confines of the law.
Hence, tax fraud, noncompliance of the rules and disputes arising from the is something that happens every day in the system and there are punishments and authorities to resolve issues. In India, tax evasion is a serious felony that must be avoided at all costs. Repeated attempts to evade tax can result in severe punishments.
ABOUT THE AUTHOR
This article is written by Sachika Vij , a student, studying at Dr. Ram Manohar Lohiya National Law University, Lucknow. The Author is in her first year and has recently started her law school journey. She owns a keen interest in understanding and penning down her opinions and has a special interest in getting adept at writing and blogging.
Edited by: Aashima Kakkar, Associate Editor, Law Insider
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[ii] “Tax Evasion: News, Photos, Latest News Headlines About Tax Evasion – The Indian Express.” The Indian Express, Indianexpress.com, (Retrieved November 16, 2021)
[iv] ClearTax. “Offences Under GST And Penalties Involved- A ClearTax FAQ.” Offences Under GST And Penalties Involved- A ClearTax FAQ, Cleartax.in, (Retrieved November 16, 2021)