According to the Income Tax laws prevailing in the country, paying tax* on income and other business activities are mandatory. However, some people indulge in activities to evade paying the tax appropriately. It will affect the country's financial status if many people indulge in such activities.
 

Therefore, the concerned authorities keep tracking the tax payments and force severe penalties on those who try to evade paying taxes based on the tax laws. Here is a detail about tax evasion and the related penalties for your understanding.
 

What is Tax Evasion?

Tax evasion is any activity in which people try to understate, falsify their income, or hide their income sources to reduce their tax liability. It can also be related to concealing or misreporting income, showing deductions without proof, filing inappropriate ITR, etc. Such activities are considered a crime as it is illegal.
 

There is a slight difference between tax evasion and tax avoidance. While tax avoidance means avoiding paying tax by complying with tax laws or using the tax loopholes to their advantage, tax evasion refers to reducing tax liability or avoiding paying tax obligations through fraudulent and unlawful practices.
 

How Do People Engage in Tax Evasion?

People indulge in different ways to evade paying taxes.
 

• Reporting incorrect information in ITR - Filing ITR (Income Tax Returns) is a moral obligation and mandatory according to Indian laws. People try to evade paying taxes by reporting false information regarding their income, investments, or any other applicable deductions.
  
  
• Ignore showing an income - Some people hide cash transactions to avoid showing an income. For instance, a house owner renting the house will mention that he will accept the rent as a cash payment instead of a cheque or bank transfer.
  
  
• Maintaining bank accounts outside India - Indian government will not have access to viewing International bank accounts in various countries. Therefore, people try to maintain bank accounts internationally and save money.
  
  
• Falsifying financial statements - Business corporations try to falsify the financial statements such as the balance sheets, profit and loss statements, etc., to show a lesser annual income.
  
  
• Bribing tax officials - Some people offer a certain sum of money to bribe a tax official to change the tax liability for their benefit.
  
  
• Smuggling - Certain business establishments require paying the import-export taxes, state taxes, customs duties, etc. Therefore, people engage in smuggling activities to avoid paying such taxes.
  
  
• Not paying the tax liability - Despite calculating the payable tax, some people avoid paying the tax amount to the government.
  
  

Penalties for Tax Evasion

The type of fraud and the extent of the tax amount involved in the avoidance of tax will determine the tax penalty.
 

• Refraining from providing PAN card details or providing incorrect details - You have to provide your PAN card details to your employer. The employer will use the information for reporting the TDS (Tax Deducted At Source). It is also required when you file ITR.
  
  
  • If you hide your PAN card number, the employer can deduct 20% TDS on your salary instead of the applicable rate as per tax slabs.
    
  • If you provide incorrect PAN card details, you will be charged a penalty of ₹10000 by the concerned authorities.
    
  • If you unknowingly provide incorrect PAN card details while submitting the form and discover the inaccuracies later, you have to notify the Income Tax Department. Failing to do so can result in paying ₹50000 as a penalty.
     
• Misreporting income - If you hide or understate your income, the penalty can range between 100% and 300% of the tax liability that you haven't paid according to Section 271(C) of the Income Tax Act 1961. The percentage will be based on the following factors:
  
  
  • 10% of the understated or hidden income if you own up to the undisclosed income and declare it will be the penalty with interest charges.
    
  • 50% of the income that is understated or hidden if the reason for under-reporting is a bonafide mistake will be the penalty. It is levied if the reason for the mistake is genuine and not to evade tax payments.
    
  • 300% of the understated or hidden amount is the penalty if the reason to evade tax is completely intentional.
  
  
• Failing to file the ITR - Every taxpayer should file their ITR within the due date for the financial year according to Section 139 of the Income Tax Act, 1961. And, if you fail to do so, you will have to pay late fee charges. From 2020-21, the fee charged is ₹5000 and is subject to revisions by the assessing officer.
  
  
• Not Paying The Self-Assessed Tax - Failing to pay tax as per the self-assessment is a tax fraud under Section 140A(1) of the Income Tax Act, 1961. You might be liable to pay the entire tax liability as a penalty.
  
  
• Non-compliance with TDS regulations - You should have a Tax Deduction Account Number (TAN) as an employer.
  
  
  • If you do not have a TAN, you will end up paying ₹10000 as a penalty.
  • If you don't collect the tax at the source, the penalty will equal the tax you haven't deducted.
  • As an employer, you should also file the TDS returns. Failing to do so, you will have to pay a tax amount every day until the complete payment is made. The penalty in such cases can range between ₹10000 and ₹1,00,000.
    
    
• Failing to get audited - Auditing accounts is an important financial practice in any organisation. Therefore, if you own an organisation and fail to get the financed audited, you will be liable for a penalty based on the following conditions:
  
  
  • Under Section 44AB, you will have to pay a penalty of ₹1.5 Lakh or 0.5% of the sales turnover if you don't get the accounts audited and submit the audit report.
  • Under Section 92(E), if you don't provide a report as mandated by an accountant, you will have to pay a tax liability of ₹1 Lakh.
  • Under Section 92(D)3, you have to pay a penalty of 2% of the transaction value if the corresponding documents, as required by the Act, are not provided.
    
    
• Failing to comply with the demand notice - The Income Tax Department will issue a Demand Notice in case of any inconsistencies. If you fail to respond to such a Notice, you will be liable to pay the penalty.

Tax evasion can lead to paying heavier penalties depending on the scenario. Therefore, understand the tax provisions or take the help of an agent to help you file the ITR. Also, when you purchase a financial instrument such as family life insurance, know the relevant and allowable tax deduction provisions.
 

Conclusion

Tax evasion is a fraudulent practice where you try to reduce your tax liability by hiding or understating income or misreporting investments for increased deductions and exemptions. Tax planning and tax evasion with illegal financial practices is a crime that can lead to paying extreme penalties. Therefore, it is important to understand the tax provisions, take expert assistance, and report the necessary information correctly to avoid penalties.
 

L&C/Advt/2022/Dec/3069