SUBJECT: TAXATION LAWS I

Project topic:

TAX EVASION in india

Submitted By

Satya prakash (Don)

Roll no. 1377

4TH Year, 7th Semester, B.A.LL.B(Hons.)

Submitted to

Mr. G.P PANDEY

Faculty of TAXATION LAWS

ICFAI University, Dehradun

TABLE OF CONTENTS
TAX EVASION IN INDIA Page 1
 I. Introduction
II. Tax Evasion in India
III. The measures to curb tax evasion
IV. Reforms regarding the tax avoidance and tax evasion in India
V. Law commission and other official government report on tax evasion
VI. Conclusion
VII. Bibliography

INTRODUCTION

TAX EVASION IN INDIA Page 2

“In a society where people are living together as a group or community sharing some common interest have
come together and formed a system which has regulated their activities and protected the common interest of
the society.” Collecting the contribution from the member to run the regulatory system, which in turn spend
such money on the welfare activities of such society or for the overall public good is in practice in one or
the other from since time immemorial. In ancient days the subject used to pay tax to the monarch and
monarch in turn used to take the responsibility of the protection of life and property of his subject. This has
developed as a system of public finance and collection of contribution from the public for the common
public good is the base line of the tax system all over the world.

With regards to the double tax avoidance agreement DTAAs), the inclusive of appropriate limitation of
benefits (LoB) causes between India and other countries needs to be considered. However, if General Anti
Avoidance Rules (GAAR) has an overriding power over LoB clauses, then appropriate application of
GAAR in tax avoidance practices assumes a crucial role. The role and functioning of the dispute resolution
panel would also be vital in this regards.

In the Era of globalisation and liberalisation, competition among multinational corporations has increased
tremendously as result; there may be a natural tendency for such companies to try to reduce their tax costs
by any affordable means. The challenge lies in framing appropriate legal provision to tackle such practices
in an unambiguous manner. The General Anti Avoidance Rules (GAAR) is crucial in this regards and a
policy option for India is to learn from other countries experiences (those which have adopted and are
practicing GAAR)1

Proposes introduce General Anti-Avoidance Rule (GAAR), which would erase the thin line between tax
avoidance and tax evasion. India is not isolated in enacting GAAR in its taxing legislation. It is an
established trend among countries to legislate on GAAR to deny tax benefits for any arrangement structured
with the sole objective of tax avoidance. In India, the law is settled that tax avoidance is legal and evasion is
not. A taxpayer may create a device to arrange his commercial affairs to minimise his tax liability and its
acceptance is based on operation of law2.A company may choose to avoid taxes by establishing their
company or subsidiaries in an offshore jurisdiction. Tax avoidance reduces government revenue and brings
the tax system into disrepute, so governments need to prevent tax avoidance or keep it within limits. In the
judiciary, different judges have taken different attitudes. As a generalisation, for example, judges in the
United Kingdom before the 1970s regarded tax avoidance with neutrality; but nowadays they may regard
aggressive tax avoidance with increasing hostility.3

Tax Evasion:
1
http://www.cbgaindia.org/files/recent_publications/Tax%20Dodging.pdf last visited on August 25,2018
2
http://articles.economictimes.indiatimes.com/2009-08-19/news/27662841_1_tax-evasion-tax-liability-general-anti-avoidance-
rule last visited on august 15 ,2018
3
http://en.wikipedia.org/wiki/Tax_avoidance last visited on August 18,2018
TAX EVASION IN INDIA Page 3
‘Tax evasion’ are terms so frequently referred to in economic and business relationships today that they
constitute part of our conversational language and people in general use these terms even without knowing
their exact meaning and difference. Whereas tax avoidance implies a situation in which the taxpayer reduces
his tax liability by taking advantage of the loop-holes and ambiguities in the legal provisions, in the case of
tax evasion, facts are deliberately misinterpreted and the tax liability is understated. Thus, while tax
avoidance is perfectly legal and is, at times, referred to as ‘tax planning’, tax evasion is illegal and,
therefore, carries with it the risk of penalties and prosecutions under the tax laws. As such, the black
economy comprises the sum total of all the various methods of tax evasion but does not include tax
avoidance. Accordingly, whereas the consequences of the two phenomena are different for the taxpayers,
both reduce the revenue of the Exchequer and consequently need to be checked to the greatest extent
possible.4

If a serviceman earns Rs.10.0 Lakhs per year, he has very limited scope to avoid tax payment. He can at best
save some money in tax saving schemes and reduce tax liability by at most 20 to 30 thousand rupees. He
will have to pay Income tax to the tune of rupees one to two lakhs as income tax per year. They cannot avoid
tax payment but they can if they like, earn bribe up to any extent to compensate they lose in tax payment.
But a manufacturing company earning profit of more than one corer per year can avoid tax payment
completely by using various tools of tax avoidance suggested by tax officials, tax consultants and Chartered
Accountants.

Failure to Pay Tax as per Self-Assessment

As per section 140 A (1) if the tax payer fails to pay either wholly or partly self-assessment tax or interest
then the tax payer will be treated as a default person. If the assesse is declared as a default person then as per
section 221(1) a penalty amount will be imposed by the assessing officer. The criterion for penalty is that it
cannot exceed the arrear amount. Therefore the penalty imposed on not making payment of self-assessment
tax is solely at the discretion of the assessing officer. If the tax payer is able to provide justified reasons for
the delay in paying the tax then the assessing officer can even exempt the assesse from paying penalty.

Failure to Pay Tax as per Demand Notice

If a demand notice is sent to the tax payer asking for payment of tax then the tax payer has to pay that
amount in 30 days to the department and the person mentioned in the notice. Failure to make the payment
will incur further penal  provisions as well as the taxpayer will be treated as a default assesses for defaulting
in the payment of tax.
4
Supra note 1.

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Concealing Income to Evade Tax

There have been several cases wherein the taxpayer has tried to conceal the original earnings or income. The
penalty for concealment of income will be 100% to 300% of the tax evaded as per section 271(C).

If income tax authorities feel the necessity to raid a premise to discover the undisclosed income of the tax
payer in such case the penalty levied will be under section 271 AAB. The penalty varies under different
scenarios:

o If the tax payer admits the undisclosed income then only 10% of the previous year’s
undisclosed amount along with interest will be required to be paid. OF course all the
undisclosed income will invariably have to be declared.

o If the tax payer does not disclose the undisclosed amount but does so in the return of income
furnished in the previous year- in such case the penalty would be 20% of the undisclosed
amount along with interest.

o If the amount is undisclosed for the previous year then minimum 30% and maximum 90%
penalty can be levied.

Penalty for Not Filing Income Tax Return

If the return of income is not furnished as required under section 139, sub section (1) then the assessing
officer can penalize the tax payer with a penalty of Rs 5000/-.

Penalty for NOT Getting Accounts Audited

If the taxpayer fails to get the account audited or furnish a report of audit required under section 44AB then
the penalty incurred will be one half percent of total sales, turnover of the gross receipts or Rs 1,50,000.

If the tax payer fails to present a report from an accountant as required under section 92E then the penalty
incurred will be Rs 1,00,000 or more. It is imperative that the tax payer documents every domestic or
international transaction and gets a report from a chartered accountant in India on or before the requested
date to avoid the penalty.

If any documents are not furnished or attached under section 92(D) 3 then a penalty of 2% of the value of
the transaction (international or domestic) will be imposed.

TAX EVASION IN INDIA Page 5

THE MEASURES TO CURB THE TAX EVASION:

There are three kinds of measures to curb the tax evasion in India which are as fallows-

 Legislative Anti- Avoidance Measures

 Judicial Anti- Avoidance Measure

 Administrative Anti- Avoidance Measures

In India, the proposed Direct Tax Code, 2010 (DTC, 2010) seeks to address miscellaneous issues, concerned
tax evasion and tax avoidance; by bringing in General Anti-Avoidance Rules (GAAR), in addition to various
transaction-specific Special Anti-Avoidance provision. The concept of GAAR is not new to India since
India already has a Judicial Anti-Avoidance Rule, similar to some other jurisdictions 5.The concept of Anti-
avoidance rule can better be understood by classifying the method(s) of its implementation into three
categories namely: (i) measured based upon principles of law interpreted by the judiciary; (ii) General Anti-
Avoidance Rule and lastly (iii) Specific Anti-Avoidance Rule. Discussing each classification herein under:

THE VARIOUS ONSHORE AND OFFSHORE METHOD OF TAX EVASION-

Onshore is in no way synonymous with transparency; and by contrast some supposedly offshore places are
considering opening up. There are numerous ways to evade/ avoid tax and it is difficult to throw light on all
such practices nevertheless some conventional practices of tax evasion / avoidance can be classified as
fallows:

 Money laundering

 Hawala

 Tax Havens

 Transfer pricing

 Trade mispricing

These process are used to evade /avoid both direct as well as indirect taxes. Whereas money laundering
hawala and trade mispricing are more prone to evasion tax heaven and transfer pricing are typically used as

5
Vodafone international v. UOI, (2012) 1 UJ 128. [hereinafter Vodafone]

TAX EVASION IN INDIA Page 6

tax avoidance practices nevertheless the processes are often interrelated and difficult to distinguish in
practices.

REFORMS REGARDING TAX EVASION IN INDIA-

In a globalising environment, tax reforms can serve a multitude of needs. They can help enhance revenue
productivity, reduce economic distortions, and help create a stable and predictable market environment.
Given the growing mobility of capital and skilled labour which raises new tax issues continual reforms also
serve, simply, to keep the country up-to-date with changing conditions. Furthermore, tax reforms can help
address equity concerns. However, unlike in the past, equ\ity in tax policy should not involve reducing the
incomes of the rich, but raising those of the poor. Hence, there needs to be a paradigm shift, away from a
socialistic focus on vertical equity (i.e. the unequal treatment of unequal’s) and towards horizontal equity (or
the equal tax treatment of equals). Until very recently, this preoccupation with vertical equity in the Indian
tax system created enormous incentives for tax avoidance. While this is starting to change, many reforms
remain unfinished. In response to its changing developmental strategy, India’s tax system, too, has been
undergoing profound changes. Within the framework of a closed and heavily planned economy, the tax
system was based on multiple objectives.

While this system may have been sustainable within a closed economy in today’s globalising world, it is
more critical than ever to put in place an efficient tax system. A competitive tax environment means that a
country’s tax policy must be calibrated on three levels: architecture, engineering, and management.
Paradoxically, an open economy presents bigger challenges in setting tax rates - since there are fewer
‘degrees of freedom’ available to policymakers. In such an environment, not only do tax rates impact foreign
investment, but they can also shift the incidence of taxation in unexpected ways. (For instance, studies find
that, in a small open economy, a tax on capital can effectively become a tax on labour.) Hence, being a large
and complex economy, India needs to learn from worldwide best practices, but apply them judiciously to
meet its specific needs. In an increasingly-open economy such as India’s, there is a need to focus on the
efficiency aspect of the tax system more than ever before. This means minimising three different costs: the
cost of collecting taxes; the compliance costs to taxpayers; and the distortion costs to the economy at large.
(One such distortion, in India’s case, is an excessive reliance on tax revenues from the (largely State-con-
trolled) petroleum sector - which has a cascading impact on other areas of the economy.) Given that
distortions tend to increase with higher marginal tax rates, a simpler system with lower tax rates is desirable.

Finally, three additional points must be kept in mind while tracking the progress of tax reforms in India.
First, legal reforms are just as important as tax reforms in driving changes in this area. Second, as the
experience of VAT demonstrates, it is critical to have coordinated reforms, across States, especially in the
area of indirect taxation. Third, it will require great political will to ensure that the existing, discretionary

TAX EVASION IN INDIA Page 7

policy and administrative framework is not further perpetuated. Having seen the influence of the tax mix and
tax policy on capital formation, it is necessary to ensure that these policies promote growth with equity. The
various recommendations of the Chelliah Committee, which were implemented in India during the 1990s,
were targeted at removing loopholes in the direct tax system and providing horizontal equity. However,
there are still difficulties with the present income tax system and the current tax policies do not adequately
address issues relating to vertical equity There is a dilemma as to whether to consider personal income or
expenditure on personal consumption as the base of direct taxation. Taking expenditure as the tax base poses
a lesser problem since it taxes what people take out of the economic production system rather than what they
put into it. Moreover, a progressive expenditure tax falls more heavily on the rich who are using capital
resources to finance their consumption expenditure and, at the same time, it provides greater opportunity
than progressive income tax to finance the development of private enterprises out of private savings. As the
economy moves from the take off stage to the stage of high mass consumption, it is better to levy tax on
personal consumption expenditure, since it promotes vertical equity. 6

CONCLUSION

Modification of tax laws of 'tax haven' countries is an important issue. There are a number of 'tax
havens', which may be used to avoid paying taxes by a number of companies, which emerges as an
external factor beyond the scope of Income Tax Authorities. Unless global pressure is created on 'tax
haven' countries to amend their tax laws to impose certain taxes on offshore transactions and
broaden tax bases on such transactions, it is difficult to tackle tax avoidance practices. There is a need
for clear legal guidelines distinguishing tax evasion, tax avoidance and tax planning, and those
indicating what type of strategies under what circumstances would be taxable or subject to penalty.
On the other hand, there is also a concern that tax laws should not harass honest taxpayers. In the era of
globalization and liberalization, competition among multinational corporations has increased
tremendously. As a result, there may be a natural tendency for such companies to try to reduce their
'tax costs' by any affordable means. The challenge lies in framing appropriate legal provisions to
tackle such practices in an unambiguous manner. The General Anti Avoidance Rule (GAAR) is crucial in
this regard, and a policy option for India is to learn from other countries' experiences (those which
have adopted and are practicing GAAR). Countries like Australia, Canada, Germany, France, South Africa
and China have GAAR provisions; India also needs to introduce such provisions to tackle tax avoidance
practices. However, for proper implementation of GAAR, there is a need to study closely the
experiences of other countries. In-depth discussions are required for distinguishing between
'acceptable' tax avoidance/tax planning practices on the one hand and abusive tax avoidance practices
on the other. With regard to the Double Tax Avoidance Agreements (DTAAs), the inclusion of

6
http://www.chinahomeindia.com/upload/201112/20111201084222719.pdf last visited on November 30,2013
TAX EVASION IN INDIA Page 8
appropriate Limitation of Benefit (LoB) clauses between India and other countries needs to be
considered. However, if General Anti Avoidance Rule (GAAR) has an overriding power over LoB
clauses, then appropriate application of GAAR in tax avoidance practices assumes a crucial role.
The role and functioning of the Dispute Resolution Panel (DRP) would also be vital in this regard.

BIBLIOGRAPHY:
PRIMARY SOURCES-

Statue-

1) The Income Tax Act, 1961.

SECONDRY SOURCES-

Books-

1 jain.Anil Kumar (1987). Tax Avoidance and Tax Evasion: The Indian Case” Modern Asian Studies, 21,
pp 233-255. Doi: 10.1017/S0026749X00013792

2. Acharya, Shankar and Associates, Aspects of the Black Economy in India, National Institute of Public
Finance and Policy, New Delhi, 1985.

3. Gandhi, V.P., Some Aspects of India’s Tax Structure- An Economic Analysis, Vora & Co. Publishers,
Bombay, 1970.

WEBSITES-

1. http://www.cbgaindia.org/files/recent_publications/Tax%20Dodging.pdf
2.http://articles.economictimes.indiatimes.com/2009-08-19/news/27662841_1_tax-evasion-tax-liability-
general-anti-avoidance-rule
3.http://en.wikipedia.org/wiki/Tax_avoidance
4.http://albinet.com/articles/offshore-company/taxes

5.http://biztaxlaw.about.com/od/businesstaxes/f/taxavoidevade.htm

6.http://epaper.timesofindia.com/Repository/ml.asp?Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA
==&Mode=HTML&Locale=english-skin-custom.
7.http://www.hm treasury.gov.uk/press_130_11.htm.

TAX EVASION IN INDIA Page 9

8.http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2013/130574/LDM_BRI(2013)130574_RE
V1_EN.pdf
9.http://www.mondaq.com/india/x/202402/Export+controls+Trade+Investment+Sanctions/Recent+Develop
ments+In+India+Aim+To+Encourage+Foreign+Investment

TAX EVASION IN INDIA Page 10