CHALLENGES OF TAX ADMINISTRATION IN

INDIA: TAX EVASION & TAX AVOIDANC

SUBMITTED BY: RISHABH GUPTA & SUMEDHA CHAKRABORTTY

COLLEGE NAME: ICFAI LAW SCHOOL
COURSE: BBA. LLB AND BA.LLB
 CHALLENGES OF TAX ADMINISTRATION IN
INDIA: TAX EVASION & TAX AVOIDANCE
ABSTRACT
The dream of every assesse in a country is to find a way in which he can avoid tax. They
would use any means or by taking the benefit of some loopholes in the Indian tax system. Tax
Evasion and Tax Avoidance are two techniques which are used and applied by many people
for the purpose of reducing their tax liability. Tax avoidance is completely a legal procedure
while Tax Evasion is considered to be crime in the whole world. Tax Avoidance is a practice
of using all the legal means to pay the least amount of tax possible. The tax evasion occurs
when individuals deliberately fail to comply with their tax obligation. It is the deliberate,
misrepresentation or concealment of the true state of their affairs to the tax authorities to
reduce their tax liability or to avoid the tax liability by declaring less incomes, profits or gains
than actually what they earned or overstating their expenses. The resulting tax revenue loss
may cause serious damage to the proper functioning of the public sector, threatening its
capacity to finance its basic expenses.

INTRODUCTION
The dream of every assesse in a country is to find a way in which he can avoid tax. They
would use any means or by taking the benefit of some loopholes in the Indian tax system. Tax
is an obligation which each and every person is bound to pay it to its Government in return
for the facilities which are provided by the Government, for example, electricity tax for
electricity, water tax for supply of clean water.1 The term tax is defined as2 “A pecuniary
burden laid upon individuals or property owners to support the Government, a payment
exacted by legislative authority. It is not a voluntary payment or donation, but an enforced
contribution, exacted pursuant to legislative authority and is any contribution imposed by
Government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom,
excise, subsidy, aid, supply, or other name.”

Tax Evasion and Tax Avoidance are two techniques which are used and applied by many
people for the purpose of reducing their tax liability. Tax avoidance is completely a legal
procedure while Tax Evasion is considered to be crime in the whole world. Tax Avoidance is
a practice of using all the legal means to pay the least amount of tax possible. The tax evasion
occurs when individuals deliberately fail to comply with their tax obligation. It is the
deliberate, misrepresentation or concealment of the true state of their affairs to the tax
authorities to reduce their tax liability or to avoid the tax liability by declaring less incomes,
profits or gains than actually what they earned or overstating their expenses.
The resulting tax revenue loss may cause serious damage to the proper functioning of the
public sector, threatening its capacity to finance its basic expenses.3

1
Neeraj Singh and Ayush Verma, Tax Avoidance in India: Conflict and Chaos between the Legislative, Executive
and Judiciary, Vol. 1, KIIT Student Law Review 95 (2014).
2
Black’s Law Dictionary, (9th Ed.) 2009.
3
G. Tarun and K.S. Shoba Jasmin, A Study on Tax Evasion in India, Vol. 119, International Journal of Pure and
Applied Mathematics, Issue 17, Pg. 219-225, 2018.
TAX EVASION VERSUS TAX AVOIDANCE
Tax evasion can be termed as a crime in which a business entity or individual intentionally
hides or underpays their certain amount of income to save a huge amount of taxes. It is
undertaken by using the unfair means. As it is performed through an illegal way of paying
taxes and therefore the defaulter may be liable for punishment. It is the unfair ways of not
paying taxes. Some of the ways of tax evasion are hiding your true income by understating
the same, overstating expenses in your return, using offshore accounts to hide interest
income, and keeping transactions unrecorded.

Tax Avoidance in a legal manner is the way of reducing the assessee taxes through the
medium which is provided by the local government. This is undertaken by taking advantage
of the loopholes in the local laws. This is not performed through wrongful intention but only
after studying and by complying through the provision of law. It is the ethical ways of saving
taxes to be paid. Some of the ways of tax avoidance are by using legal ways of avoiding tax
like investing in certain schemes as provided by local laws, opening Public Provident Fund
account and investing in same regularly to reduce taxes, creating other legal entities and
splitting revenue between them to be eligible for tax slab benefits.4 Tax Avoidance is using
loopholes in tax law but again at the end of the day, that should not be advisable although its
100% legal as that defeats the very main purpose and the intent to bringing in the law by
the government. Hence, we witness almost every year that government tries to bring
amendments in its annual budget to avoid and reduce all the loopholes to misunderstanding
and misuse of the law which is done legally. Further to catch the tax evaders, government
keeps a vigil eye on almost all the filings, transactions that are conducted by the assessee and
tries to reconcile the same received from different sources for e.g. Banks report all the
interest income and taxes deducted by them to the government, local authority reports all the
real estate property transactions conducted during the financial year, also government keeps
on building up relationships with other countries by signing a treaty where both the countries
agree to share the details and all the income of their local residence earned in that country
which helps in reducing tax evasion. Both tax evasion and tax avoidance are meant to reduce
the liability of assessee tax ultimately but what makes the difference as stated earlier
that the former is justified in the eyes of the law as it does not make any offence or breaks
any local law. However, it appears to be biased as the honest taxpayers assessee are not fools
as they can also decide for postponing the unnecessary tax. If we talk about the latter, it is
100% unjustified as it is a fraudulent activity, because it involves those acts which are
forbidden by the local law and hence, they are punishable.5

CONSEQUENCES OF TAX EVASION AND AVOIDANCE

The causes of tax evasion and tax avoidance are due to high tax rates, complex tax system,
inefficient tax authorities, ineffective enforcement of law, multiple taxes, and corruption.6In
India, corporate companies try and avoid or evade paying taxes to keep some black money to
be utilized for exchanges with government bodies and hirelings. Experts avoid paying taxes
to save the money for the future as tax rates are very high. Politicians and other law makers
for the most part dodge charges since their salary is mainly out of fixes and illicit methods.

4
Agnar Sandmo, International Encyclopedia of the Social & Behavioral Sciences, 2nd Ed. 2015, available at
https://www.sciencedirect.com/referencework/9780080970875 last accessed on 10-10-2019.
5
Gravelle, Jane G, Tax Havens: International Tax Avoidance and Evasion, Vol. 62, National Tax Journal, Issue 4,
Pg. 727–753, 2009.
6
M.Chandrappa, Tax evasion and Black money in India: Causes and Remedies, Vol.6, International Journal of
Management Research & Review, Issue 10, Pg. 1376-1381, Oct 2016.
Tax avoidance is the result of individual citizen behaviour and social standards on the supply
side, and inadequacies in tax administration on the interest or demand side. To start with, tax
structure needs to see as fair and equal over different gatherings of citizens. Likewise, if
marginal rates are very high, people are going to find ways to evade taxes.

All these have resulted in various consequences of evasion and avoidance of tax. The
consequences are as follows:
The tax evasion misshapes economic efficiency. In sectors, that are less subject to the
director’s investigation, there will be more investment. That may be one motivation behind
why certain administration sector-activities for example, construction companies have
developed so sensationally as organization move crosswise over national boundaries in a
globalized world economy. Similarly, the unorganized sector might try and avoid taxes much
more easily than the organized sector. Small taxpayers have stayed extremely hard to assess
and keep up a steady presence in regulatory corners. The functional capacity, efficiency and
effectiveness of a sector suffer because of tax evasion as inequity and inefficiency can lead to
lower government revenue. Capacity endures because of lower accessibility of assets. The
outcome could likely be an increase in tax rates, or the burden of distortive charges, in this
manner starting an endless loop of inequity and disparities.7 Tax evasion being under
revealing of pay suggests underestimation of GDP and all its proportionate large scale
economic ramifications. Since the denominator is under-evaluated, the proportion of
assessment to GDP, the financial deficiency to GDP, and open obligation to GDP are all over
evaluated. The perceived higher GDP proportion prompts false solace, yet overstated
deflationary action might be made to rein back an overstated financial shortfall or public debt
ratio. Tax evasion has had a reducing effect on the economy’s growth. There will be
reduction in revenue and increase in inflation is the direct effects of tax evasion. There has
been transferring of funds or black money between India and other foreign countries through
secret channels, affecting the country’s reputation all around the world. There would be
disequilibrium in the country as the rich get richer and the poor becomes poorer. Due
to tax evasion by the rich society of the economy, government is forced to increase tax rates
to increase the outcome of revenue every year. It will lead to poor standards of living for the
below the poverty line as government doesn’t have enough revenue to take welfare
measures.8

REMEDIES TO OVERCOME TAX EVASION AND

AVOIDANCE
The problems of tax avoidance and tax evasion must be curbed. Some of the possible
remedies to overcome tax evasion and tax avoidance are as follows:

Reduce the rates of taxes- Predominance of high tax rates are the first and foremost purpose
of tax evasion, because this is the thing that makes evasion so profitable or beneficial
furthermore, notwithstanding the risks. The high rates of tax collection leave the government
with little extension for mobility for bringing extra assets in the midst of the crisis. The
maximum marginal rate of tax ought to be bought down to make an effect; the decrease in the
rate of tax collection should be at one stroke.

7
Arora RS, Rani V. Tax evasion and corruption in the Indian Income Tax System: causes and Remedies, Vol. 4,
Indian Journal of Finance, Pg. 30-36, 2010
8
Meghna Manoj & Meera Gopal, Consequences and Evidence of Tax Evasion and Avoidance, Vol. 8,
International Journal of Business and Management Invention, Issue 01, Pg. 72-76, Jan 2019.
Minimizing controls and licenses- A committee of professionals must be appointed to
investigate the utilisation of all permit systems and existing controls and suggest which all are
to be eliminated, whichever is not necessary. This committee must also be given the power to
alter laws in such a way that these laws are healthy for the economy and which can be
administered efficiently and effectively without any ill effects on the public.

Regulate the donations to political parties- It is very essential to keep political parties away
from corruption. If selected with suitable criteria and evaluating the amount to be given to
each one, it would bring about a huge change in this situation. Irrespective of whether the
government funds the parties or not, their accounts must be checked on a regular basis
showing all transactions important.

Create confidence among small taxpayers- The act of being too careful in small cases, when
there is no advantageous revenue involved, has done a lot of harm to this division in general.
The guidelines issued by the Central Board Of Direct Taxes on the new system for making
evaluations in small income cases makes a bold departure from the past and are probably
going to achieve more huge outcomes than the earlier small income schemes.

Amend penal provisions- The penal provisions in the Indian tax laws are not stringent enough
to have a deterrent effect. Penalty is needed just as much as it is within the sensible limit.
Once it crosses that limit, it is bound to increment the inflexibility of the citizen’s
stubbornness than to reform him. A penalty that’s dependent income rather than tax hits the
small taxpayers more harshly.9

Wide Tax Base- Irrespective of the form of activity on which tax is imposed, a broad-based
tax imposed at a lower rate is likely to achieve a higher score on an index of tax effectiveness
than a selective tax imposed at a higher rate. The system should try to cover every aspect of
the economy with lower tax rates. A broader tax base will be able to result in good revenue to
governments even with lower tax rates.

Reduce of black money- In an economy when the possession or circulation of black money is
reduced, then the amount of tax evasion and tax avoidance can be reduced.10

Modify the Small-Scale Exemption Scheme- In India small-scale industries are given many
tax exemptions, from income taxes to commodity taxes. The turnover limit for qualifying for
small-scale exemption is fairly high. The result is mushrooming of small-scale units in the
economy mainly for the purposes of tax avoidance and tax evasion by diverting income and
production of other sources as income and production of small-scale units. These small-scale
units apply crude technology, consume more electricity in their production of goods and
services, and are technically less efficient, yet they compete with efficient tax-paying units on
account of their saving by non-payment of taxes. The nation loses not only revenue but also
valuable scarce resources such as electricity and fuel by their nonefficient functioning. The
idea behind the exemption was that they need some protection only during their period of
infancy.

Taxing Agricultural Income- The economic well-being of a person, who derives his income
from agricultural sources does not differ from that of a person, who derives his income from
9
IBID
10
Pradip Kumar Das, An Insight into Black Money and Tax Evasion – Indian Context, Vol. 3, Journal of
International Business Research and Marketing, Issue 4, 2018.
other sources. Firstly, lack of tax on agricultural income leads to evasion of taxes in other
sectors. In India, incomes from other taxable sources are being disguised as agricultural
income. For disguised agricultural income, one does not need to find even a fake employer.
Only thing they need to have is some agricultural land. Diversion of income from other
sectors to the agricultural sector thus is very easy. On the other hand, if the government
imposes a tax on agricultural income, tax collection from other sectors will increase.
Secondly, the traditional system of agricultural taxation is outdated, inadequate
and irrelevant, and a system of progressive taxation of agricultural income is urgently called
for. Thirdly, the government has invested large amounts in agriculture, and therefore those
who are able to make profits in the agricultural sector must pay to the government in the form
of taxes on grounds of equity and distributive justice. It is also argued that a progressive
income tax will induce farmers to increase production by modernizing their farming to meet
the tax liability.11

CONCLUSION
Effectively implementation of the Income Tax Law can curb tax evasion. Income Tax plays
the vital role in the development of Indian economy. High tax rates, corruption in public
sector units, multiple tax rates and inefficient tax authorities are the main causes of tax
evasion. It suggested that reduction in tax rates, simplifications of tax laws, remove loopholes
in the tax system and some extent proper processing of information available the under the
annual information return can be best tool for improving Indian tax compliance. Therefore,
there is a need for creating transparent, friendlier, and less discriminatory administrative
system. Further there is also a need to educate the people about Indian Tax law and create
such an environment in which they pay their due taxes, do not evade the tax and feel proud in
discharging their duty to pay. Tax evasion is primary cause of low government revenue.
The tax structure and collection tiers are to be changed if there needs to be change in a
country’s economy. Tax relaxation is required for reducing the amount of tax evasion and
stricter punishments are to be enforced for the crimes of tax evasion to reduce the gap. People
do consider paying taxes, even if the person is economically sound. It may be due to the fact
that their tax money doesn’t reach the government for social welfare measures.

11
Pramod K. Rai, The Challenges of Tax Collection in Developing Economies (with Special Reference to India),
(2004). LLM These sand Essays, available at https://digitalcommons.law.uga.edu/stu_llm/41 last accessed on
10-10-2019.