Understanding Tax Evasion and Penalties in India

Updated on: Jan 30th, 2023 - 11:58:42 AM

12 min read

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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. The Income Tax Act has introduced several penalties for individuals attempting to evade paying income taxes. The penalties for such acts are severe, ranging from 100% to 300% of the tax for undisclosed income. Hence financial experts recommend considering income tax compliance seriously.
To provide an in-depth insight into tax evasion, this article has pointed out several instances where non-compliance with income tax rules can lead to a hefty penalty.

Tax Evasion Meaning

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.

Common Methods of Tax Evasion and Penalties in India

Here’s the lowdown on a few broad categories of tax evasion, which can invite penalties, as per the Income Tax Act, 1961.

  • Late filing of income tax return

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.

  • Concealing income to evade tax

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).

  • Not getting accounts audited

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.

  • Non-compliance with TDS regulations

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.

  • Wilful attempt to evade tax

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. 

  • Providing incorrect PAN number or not furnishing PAN card number

It is punishable to provide inaccurate information, including PAN details, when filling an ITR. All tax deductors, including employers, ask for PAN card numbers. This information is utilised while deducting TDS from the payment. There are two types of penalties for two scenarios:
Providing an incorrect PAN: In this scenario, you will have to pay Rs.10,000 as a penalty amount.
Not providing PAN: In this scenario, higher TDS will be deducted. E.g: Deductor will deduct 20% TDS instead of 10%. 

Difference between Tax Planning, Tax Avoidance and Tax Evasion 

ParameterTax PlanningTax AvoidanceTax Evasion
DefinitionReducing tax liability through various provisions in the tax laws, such as deductions, credits, rebates, and exemptions.Reducing tax liability within the limits of the law but in an unacceptable manner to the government,The deliberate and illegal method for reducing taxes.
LegalityLegal and EthicalLegal but unethicalIllegal and unethical
ConsequenceNo penalties or finesNo penalties or finesCriminal prosecution, fines, and/or imprisonment
Example
  • Investing in tax-saving instruments, such as a tax-saving mutual fund or a fixed deposit,
  • Claiming HRA, LTA
  • Transferring income to a lower tax jurisdiction
  • Delaying tax payments.
  • Not declaring all income,
  • falsifying tax returns or
  • hiding relevant documents or assets.
PurposeMinimizing tax liability within the bounds of the lawMinimizing tax liability within the bounds of the lawAvoiding payment of taxes altogether

Tech Power to Track Tax Evasion

The Transparent Taxation Platform deploys data analytics, artificial intelligence (AI) and machine learning (ML) to track tax fraudsters and evaders.

With big data analysis 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.
 

Frequently Asked Questions (FAQs)

What happens if an individual fails to file the income tax return before the due date?

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.

Is my responsibility under the Income-tax Act over once taxes are 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.

Are all receipts, that is, revenue and capital receipts, charged to tax?

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’).
 

What happens in case a person fails to comply with the income tax notice issued under Section 142(1) or 143(2)?

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.

What is the difference between tax planning, tax avoidance and tax evasion?

Tax Planning: It is a legal process of reducing tax liability through various provisions in the tax laws, such as deductions, credits, rebates, and exemptions. It is legal and recommended for taxpayers to reduce tax burden.

Tax Avoidance: Reducing tax liability within the limits of the law but in an unacceptable manner to the government, such as using tax deductions for business expenses or delaying tax payments.

Tax Evasion: Illegally reducing tax liability through false statements, hiding relevant documents, improper record keeping, or claiming personal expenses as business expenses. It is an unlawful act.

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