The Basics of Tax Evasion: Laws and Penalties Explained.

With a growing population currently housing 1.48 billion people, as of April 2023, it is no surprise that India’s tax collection is at an all-time high. In fact, direct tax collection in FY23 smashed records, exceeding budget estimates by 17%.

However, tax evasion is the flip side of this coin. GST evasion alone nearly doubled to ₹1.3 Lakh Crores in 2023. Moral ramifications aside, it is important to remember that income tax evasion is a serious offence, strictly punishable under the Income Tax Act 1961.

Read on to know more about the different aspects of tax evasion, the related penalties, and more.

Understanding Tax Evasion

In India, anyone earning an income is obligated to pay income tax. Similarly, those buying, manufacturing, and selling goods, and providing services are liable to pay indirect taxes such as service tax, sales tax, GST, and more.

When a taxpayer evades paying taxes, actively or by omission, they commit tax evasion.

Common Tax Evasion Misconducts and Associated Penalties

There are several techniques employed by taxpayers to escape or reduce their tax liability. These include but are not limited to:

1. Wilfully Trying to Escape Tax Obligation

If a taxpayer is found wilfully attempting tax evasion, they will be charged under Section 276(C), with a jail sentence of a minimum of 6 months. However, this is applicable only if the fraud is attempted for an amount of ₹25 Lakhs or more.

2. Filing Wrong TDS Returns

Companies which deduct TDS need to have a relevant Tax Deduction and Collection Account Number (TAN). If the TDS is not collected, the penalty will be equal to the actual tax due.

If the company does not have a TAN, the penalty is ₹10,000. If the TDS return is not filed on time, the penalty may range from ₹10,000 to ₹1 Lakh.

3. Mismanagement of Accounts

Businesses are responsible for auditing their accounts regularly and maintaining records for cash flows. If a company is not able to show audit records, a penalty of ₹1.5 Lakhs or 0.5% of sales turnover (the lesser of the two) may be charged under Section 44AB.

4. Underreporting Income to Evade Tax

If a taxpayer is trying to conceal or understate their income, the penalty will be anywhere between 100% to 300% of the evaded tax as per Section 271(C).

5. Submitting Wrong PAN Information

If a taxpayer is caught trying to falsify PAN information while filing ITR, the penalty charged is ₹10,000. If PAN details are omitted and not submitted, higher TDS will be deducted.

For example, if you do not submit your PAN details to the bank, they will hike the TDS rate on your FD interest payout.

Difference Between Tax Evasion, Tax Avoidance, and Tax Exemption Planning

Tax evasion is not to be confused with tax avoidance or tax exemption planning. The latter two are legal techniques used by investors and taxpayers to reduce their tax load.

Here is a look at two key differences:

Parameter	Tax Evasion	Tax Avoidance	Tax Exemption
Ethics	It involves committing fraud to reduce the tax liability, and is illegal and immoral	While within the legal purview, it is ethical due to its exploitment of the loopholes in the law	It is moral, legal, and ethical as it refers to deductions, credits, rebates, and exemptions the law provides to reduce taxes
Legal Consequences	Subject to criminal prosecution, if caught	Not subject to criminal prosecution	Not subject to criminal prosecution

Here is an example to understand these three concepts better:

Say you calculate your tax liability for the year and realise that you have to pay high-income tax. To avoid this, if you invest in a tax-saving ELSS mutual fund, it is tax exemption planning. If you transfer your income to a lower tax jurisdiction, it is tax avoidance.

However, if you secretly transfer your money abroad to the Swiss Bank to avoid paying tax, it is tax evasion. A few ways to reduce your overall tax obligation include setting up a capital gains account, active double tax avoidance, and claiming HRA and LTA, if applicable.

Check out various investment options such as NPS, 5-year tax-saving FDs and ELSS schemes on Bajaj Markets. On the platform, you can also compare historical returns, calculate your tax obligation, and invest online in just a few clicks.

Can you go to jail for tax evasion?

Yes, imprisonment is a part of many of the misconducts related to tax evasion. You can go to jail for up to 7 years if found guilty.

Is holding money outside of India considered tax evasion?

Wilful non-disclosure of foreign shares and assets can result in penalties of up to ₹10 Lakhs under the Black Money Act. You are required to declare this while filing ITR.

How are black money and tax evasion related?

Black money is money that does not enter the banking system. It is dealt in cash and is typically evaded and untaxed income. This leads to the government losing revenue, which is the same effect tax evasion evokes.

What is the cause of income tax evasion in India?

Some reasons driving tax evasion are inflation, high tax rates, and the informal economy.

Is tax evasion a crime in India?

Yes, tax evasion is a criminal offence. It involves not clearing your tax liabilities willingly. The Indian government has penalties for tax evasion. These include fines from 100% to 300% of the unpaid taxes, prosecution, and imprisonment.

What is the difference between tax avoidance and tax evasion?

Tax avoidance is reducing your tax legally via exemptions, deductions, and tax-savings investments. Whereas, tax evasion is the illegal practice of not paying your taxes. This includes underreporting income, overstating deductions, or submitting fake tax documentation.

What is the disadvantage of tax evasion?

Tax evasion is a serious criminal offence that can result in severe penalties. It can include fines, prosecution, and imprisonment. It also hinders the development of the country.