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What is Tax Evasion? The Complete Guide

21/10/2022 |

The tax* structure in India evolved majorly for the infrastructural development and handling of public expenses. Therefore, every individual and business entity must focus on paying the tax regularly. However, many taxpayers find methods to refrain from paying taxes for various reasons. These methods are considered illegal and referred to as tax evasion. Tax evasion elements can invite serious penalties. So, let us define tax evasion and understand the different methods and the related penalties to avoid such financial inconsistencies.
 

What Is Tax Evasion?
 

Tax evasion is a process wherein an individual or a business entity falsifies the tax liability and refrains from paying the applicable tax by using different methodologies such as providing incorrect information in the Income Tax Return (ITR), creating fake documents to avail of tax benefits, etc., Willful attempts to evade tax is a punishable offence.
 

Tax evasion is different from tax avoidance. Tax avoidance in India refers to avoiding paying taxes using the loopholes present in the tax provisions. On the other hand, tax evasion refers to avoiding paying or reducing the payable tax using fraudulent activities. Different tax methods lead to evading paying the liability.
 

Having discussed the tax evasion meaning, let us understand the different methods used by people to indulge in such tax evasion activities. 
 

Methods Of Tax Evasion


Individuals or business entities indulge in different methodologies to evade tax. Here are a few common methods.
 

  • Refraining from paying the tax liability - Individuals having adequate knowledge about the different tax provisions and their liability; decide on not paying it on time. They might do it willingly or non-willingly before the due date.

  • Reporting erroneous income in the Income Tax Return (ITR) - Individuals and business entities report incorrect information related to their income in the ITR. For example, individuals ignore showing an income to reduce the tax liability or show an investment they have not made to avail of the tax deduction benefits.

  • Fake documents - Individuals try creating fake documents to understate their income, and businesses falsify their financial statements to cut down on their tax liability. For example, Equity Linked Savings Scheme investments will qualify for a tax deduction under Section 80C. People try to use this benefit without making such investments, but they have fake documents to prove that they have invested in it.

  • Smuggling - A tax payment is associated with the transfer of goods between the state boundaries. People try to make this transfer without the knowledge of the relevant authorities or smuggle it to reduce the tax burden.

  • Bribing the officials - People try to bribe the officials managing the tax calculation on their business, profession or any other source of income. It is an unlawful practice that leads to tax evasion.

  • Saving funds outside the Indian boundaries - Individuals might also open offshore accounts and save funds in them, refraining from accounting for the tax liability in India.
     
Penalties for Tax Evasion
 

We have seen some of the common methods of tax evasion. Here is a detail about tax evasion-related penalties.
 

  • For not filing the ITR - If a taxpayer fails to file the ITR within the due date, he is liable to pay a penalty of ₹5000 according to Section 139 of the Income Tax Act, 1961.

  • For reporting erroneous income - If the taxpayer tries to hide his actual earnings to reduce the tax liability, the applicable penalty can range between 100% and 300% of the payable tax. 

  • For failing to get the accounts audited - According to Section 44AB, if a business entity fails to get the accounts audited, it may be liable to pay a penalty charge of ₹1.5 Lakh or 0.5% of the sales turnover, whichever is more. And, under Section 92(E), if the business entity has failed to provide the report presented by the accountant, it has to pay a penalty charge of ₹1 Lakh or more.

  • For non-compliance with the TDS regulations - If an employer or individual deducts or collects tax at the source should have the Tax Deduction And Collection Account Number (TAN). A penalty of ₹10,000 will be applicable in case of failing to have the TAN details. If a company fails to file the TDS (Tax Deducted At Source) or TCS (Tax Collected At Source), they have to pay a penalty of ₹200 per day and in the range between ₹10,000 and ₹1,00,000 if they have not filed it within the due dates.
     

Tax evasion is an unlawful practice. Nevertheless, people indulge in it to reduce their tax liability and save funds for the future. However, various legal and highly beneficial methods exist to save funds for the future to secure their families while saving on taxes.
 

For example, life insurance plans help you ascertain a financial benefit to your loved family members in the event of your unexpected demise. Comprehensive life insurance plans provide life cover, savings, and investment benefits. In addition, the savings made in such life insurance plans in the form of premiums will qualify for a tax* deduction benefit under Section 80C, and the payouts will qualify for a tax* exemption benefit under Section 10(10D) of the Income Tax Act, 1961.
 

Furthermore, insurers have introduced various flexible features to help the policyholders customise their life insurance plans. For instance, our Tata AIA life insurance plans help you purchase life insurance with guaranteed1 returns, add-on riders# that provide a regular income to manage a medical emergency for the insured during the policy duration, offer different payout options, etc
 

Conclusion
 

Paying the tax payable within the due date and filing the ITR is mandatory. Failing to do so or indulging in fraudulent activities to reduce tax liability or avoid paying tax is called tax evasion. Tax evasion is unlawful and can lead to severe penalties. Therefore, understanding the tax evasion definition, the different related tax provisions and filing the ITR timely is important. Furthermore, you can invest in various financial instruments to save money for the future while saving on taxes! 


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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

What is the fine for Tax Evasion?

The penalty for tax evasion depends on the method used by the individuals to avoid or reduce paying the payable tax. 

What are some examples of Tax Evasion?

Some of the common tax evasion examples are 
 

  • Reporting lower income
  • Creating fake documents to reduce tax liability
  • Willingly not paying the taxes within the due date.
  • Smuggling
  • Misreporting financial statements

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
  • #Riders are not mandatory and are available for a nominal extra cost. For more details on the benefits, premiums and exclusions under the riders please refer to the Rider Brochure or contact our Insurance Advisor or visit our nearest branch office.
  • 1Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry