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Tax planning, tax avoidance, and tax evasion are terms that fall within the parlance of the Income-tax Act, 1961. However, tax evasion is illegal and Chapter XXII of the Income Tax Act, 1961, is clear about penalties.
Tax planning involves optimal utilisation of tax deductions, exemptions, or planning for income, expenditures, allowances, and rebates to reduce tax liability in a financial year. Examples of deductions are investments under Section 80C, such as Public Provident Fund (PPF), National Pension Scheme (NPS), etc. Similarly, the Income-tax Act allows exemptions for certain allowances such as house rent allowance (HRA) and leave travel allowance (LTA).
On the other hand, tax avoidance is the practice of taking advantage of the gaps and mismatches in the tax rules to prevent or lower tax liability. It is not illegal as it is not well-defined in tax laws. For example, many companies channel their funds through offshore branches to avoid paying taxes in their home country.
Tax evasion, however, is illegal and Chapter XXII of the Income Tax Act, 1961, is clear about penalties. A few examples of tax evasion are, an individual, a firm, or a company intentionally avoiding payments of tax liability, misreporting of income, and willful attempts to evade tax are cases of tax evasion.
For instance, a company claims depreciation on a motor car, which is being used by a director for personal purposes. This is not allowed under Section 32 of the Income-tax Act, 1961 and is a case of tax evasion.
Similarly, a company installs an air-conditioner at the residence of a vice-president but treats it as fitted in the quality control section. This is also a case of tax evasion as the air-conditioner at the residence is furniture, depreciable at 10%, whereas the rate of depreciation applicable for plant and machinery fitted in the quality control section is 15%. The wrong treatment raises the amount of depreciation and reduces profit unlawfully.
In short, tax evasion is blatant fraud initiated after the tax liabilities arise.
Here’s the lowdown on a few broad categories of tax evasion, which can invite penalties, as per the Income Tax Act, 1961.
In the condition of non-filing of the income tax return in full compliance with the relevant provisions of the Income Tax Act, 1961, the assessing officer can penalise the taxpayer with a penalty of up to Rs 5,000.
In cases wherein the taxpayer tries to conceal the original earnings or income, the penalty is between 100% and 300% of the tax evaded, as per Section 271(C).
Section 44AB mandates a taxpayer to get the account audited or furnish a report of audit. In case of failure to do so, the penalty incurred will be 0.5% of total sales, turnover of the gross receipts, or Rs 1,50,000, whichever is more. If the taxpayer fails to present a report from an accountant, as required under Section 92E, the penalty imposed is Rs 1,00,000 or more.
Any individual who deducts tax at source or collects tax at source is also required to collect the tax deduction and collection account number (TAN). In case of failure to do so, a penalty of Rs 10,000 will be imposed.
If the company or organisation fails to file tax deducted at source (TDS) or tax collected at source (TCS) within the deadlines, they have to bear a penalty of Rs 200 per day for the delay. Such a penalty cannot exceed the TDS amount. In addition, the tax authorities may impose a penalty for incorrect information or non-filing of TDS or TCS returns before the due dates. The penalty may range between Rs 10,000 and Rs 1,00,000.
As per Section 276C, if a taxpayer willfully attempts to evade tax or under-report income with the amount exceeding Rs 25 lakh, it invites imprisonment for a term of at least six months up to seven years along with a fine.
The Transparent Taxation Platform deploys data analytics, artificial intelligence (AI) and machine learning (ML) to track tax fraudsters and evaders.
With big data analyses and tracking a person’s social media activity, tax officials mine data to pinpoint which taxpayers have been unscrupulous in revealing information about their profits or have been fraudulent in claiming the input tax credit.
The Central Bureau of Direct Taxation (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) will share data, making it easier for tax officials to aggregate data of all Goods and Services Tax (GST) assessees on a single platform.
As per Section 139 (4) of the tax act, you can file after the due date, which will be known as a belated return and a late fee of up to Rs 5,000 is to be paid.
No, you are thereafter responsible for ensuring that the tax credits are available in your tax credit statement and TDS/ TCS certificates received by you and that full particulars of income and tax payment are submitted to the Income-tax Department in the form of Return of Income which is to be filed before the due date prescribed in this regard.
The general rule under the Income-Tax Law is that all revenue receipts are taxable unless they are specifically granted exemption from tax, and all capital receipts are exempt from tax unless there is a specific provision for taxing them (certain capital receipts are chargeable to tax under the head ‘Capital gains’).
If you fail to comply with the notice issued under Section 142(1) and Section 143(2), the assessing officer is under an obligation to make the best judgement assessment after considering all the relevant material which he has gathered and after giving an opportunity of being heard.