Understanding Tax Evasion and Penalties in India

Tax evasion is the wilful act of not paying the taxes a person is liable to pay to the government. There are many illegal ways of deliberately avoiding tax payment, such as underreporting income, overreporting expenses through false deductions, and misrepresenting assets. Under section 276C of the Income Tax Act, 1961, any person (individual, HUF, AOP, firm, company, etc) will be penalised for not paying taxes, penalties, interest deliberately. 

 Tax Evasion Meaning

Tax Evasion means an unlawful act of not paying taxes owed by underreporting income, inflating deductions, or hiding money and is considered a serious offence subject to legal penalties. 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 that a director is using 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.

Tax Avoidance

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 Planning

Tax planning involves the 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 the 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). 

Difference between Tax Evasion vs. Tax Avoidance v/s Tax Planning

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 of 1961.

Not Filing Income Tax Return within the due date 

As per section 139(1), the late filing fee is designed to encourage timely compliance with tax filing requirements. Here's a breakdown of the late filing fee:

• If your total income is up to ₹5 lakh: The late filing fee is ₹1,000. This fee applies to individuals whose total income is below the taxable limit.
• If your total income exceeds ₹5 lakh: The late filing fee increases to ₹5,000. This applies to taxpayers who have higher incomes and, therefore fall into the taxable bracket.

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 200% of the tax evaded  for misreporting of income and, a penalty of 50% of the tax liability is levied on underrepoting of income under section 270A.

Not getting accounts audited

Section 44AB mandates that a taxpayer get the account audited or furnish a report of the audit. In case of failure to do so, the penalty is charged under section 271B. In this case, the minimum penalty levied is 0.5% of the total sales or turnover or gross receipts. Again, the maximum penalty charged is INR 1,50,000, whichever is lower. 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 or collects tax at source is also required to collect the tax deduction and collection account number (TAN). Failure to do so will result in a penalty of Rs 10,000.

If the company or organisation fails to file tax deducted at source (TDS) or tax collected at source (TCS) within the deadlines, then late filing fee of 200 per day is charged for the delay in filing the TDS return until the fee equals the TDS amount. In addition, As per Section 271H 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. For amount less than 25 lakh, the imprisonment of at least 3 months and up to two years is imposed along with a fine.

Providing incorrect PAN number or not furnishing PAN card number

According to section 272B(2), 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 as per section 206AA. For example, the Deductor will deduct 20% TDS instead of 10%. 

Non-compliance with the demand notice

If the Income Tax department finds any discrepancies in the Income Tax Return, it will send you a demand notice. The demand notice states the tax liability owed, interest or penalties. The taxpayers need to take action on the demand notice within 30 days of receiving it. Failure to respond to the demand notice within the stipulated time will impose interest (simple interest) at the rate of 1% per month or part thereof.

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 of 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.

Conclusion

As discussed above, tax evasion is illegal, and the individual who evades tax has to pay a hefty penalty imprisonment, and damage to your name. Financial experts always advise that individuals pay tax according to the provisions of the act. Introducing a strong legal framework and transparency will help prevent tax evasion.

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