Understanding Tax Evasion And Penalties In India – A Complete Overview

Last Updated : March 13, 2023, 6:41 p.m.

Tax planning, tax evasion, and tax avoidance are specific terms that fall within the provisions of the Income Tax Act 1961. However, the task of tax evasion is not legal, and the Chapter XXII of the Income Tax Act 1961 has depicted the penalties. In addition, the Income Tax Act has provided various penalties for people who try to evade paying income taxes. Hence, financial advisors recommend considering income tax compliance seriously.

There are various ways that individuals use for tax evasion in India that range from a false tax return and even bribery and smuggling to fake documents. The penalties for this can be from 100% to 300% of the tax for undisclosed income. So, to offer an in-depth insight into tax evasion, let us discuss some important facts regarding tax evasion meaning and penalties in India.

Tax Evasion Meaning

Tax evasion is an entirely illegal activity in which a person or company avoids paying tax liability. It includes false income or hiding, not reporting cash transactions, without proof of inflating deductions, etc. Tax evasion is a grave offense that falls under criminal charges and substantial penalties.

Paying taxes is never easy, as many people question the task of giving away a significant part of their earnings to the Government. However, the fact is that taxes are a vital source of income for the Government. This is the specific amount of money that needs to be invested in different types of development projects that are required to improve the situation of the company.

However, the country has been facing a significant issue with tax evasion. Individuals who need to pay taxes have found various ways not to pay them. Hence, as a result, the country’s income has been suffering. So, let us discuss the ways how individuals are evading taxes and what the penalties for them are.

Usual methods of tax evasion

There are two ways of not paying taxes when taxes are due. One is tax evasion, and the other is tax avoidance. The difference between these two is that tax evasion is not paying the taxes when they are due, which is entirely illegal. In contrast, tax avoidance is mainly finding a loophole that can exempt individuals from paying taxes, and is not simply forbidden. So, let us discuss how individuals can evade or avoid taxes.

Smuggling

When some specific goods move from one place to another, across borders or international states, a charge or tax can be payable to move those goods. However, some people may move those goods in several ways to avail tax evasion or even avoid paying taxes. Thus, they try to do this after knowing all about tax evasion meaning.

Failing to pay the due amount

This is one of the very popular and straightforward ways in which an individual can enjoy tax evasion. They just won’t pay it to the government, not after the dues are called for. A person engaged in this method of tax evasion won’t unwillingly or willingly pay their tax after or before the due date.

Incorrect financial statements

The taxes that need to be paid by a person or an organization can be decided on the financial dealing that has occurred during the assessment year. For example, if incorrect account books or financial documents are submitted that show incomes less than what they actually are, the tax may decrease significantly.

Submitting an inaccurate tax return

In some situations, when a person needs to file taxes, they can submit incorrect or false information to either not pay it at all or lessen the amount of tax they need to pay. This is also a way of tax evasion because complete information is not given, and they may be paying less than they should.

Not reporting income

It could be depicted that this is another standard method of tax evasion. In this method, a person doesn’t report any income that they get during a financial year. By not reporting their income, they don’t need to pay any tax, and hence, they can evade tax successfully. The most common example of this method is a landlord who has tenants but has not informed the authorities that he is receiving income from his property.

Using fake documents

The Government may have offered several privileges and exemptions to certain members of society to make sure they have more financial freedom to progress. In some situations, people who don’t qualify for those privileges can get documents created to support their claim of being a person who belongs to that group and hence can claim tax exemptions.

Bribery

There can be a situation where some individuals are not willing to pay a certain amount of due taxes. In those cases, that person can offer a bribe to officials to make the tax “disappear.”

Now, let us discuss the penalties of tax evasion, after knowing all about tax evasion meaning.

Penalties for Tax Evasion

There are different types of penalties that the income tax authority of the country can impose on a person who is found guilty of avoiding or evading taxes. Some of those penalties can be:

In case of not paying the due tax the assessing officer can impose a specific penalty amount; however, the amount cannot exceed the amount owed in taxes.

• Collecting 100% or even 300% of the tax, if income is not disclosed.
• If someone conceals details of their fringe benefits or income that are taxable, the penalty may range from 100% to even 300% of the due amount.
• If a person doesn’t file tax statements within the allotted time, then a penalty of Rs. 200 per day can be charged for every day that the report is not filed.
• If a person or an organization cannot maintain their accounts correctly, as mentioned in section 44AA, somebody can apply a penalty of Rs. 25000.
• If an organization cannot deduct tax where it should while making payments, then a penalty can be levied.

Conclusion

Thus, as a responsible citizen of India, it is vital to know all about tax evasion meaning and follow all the guidelines and rules provided by the Income Tax Department of India.