Individuals have the liberty to self assess their income and pay taxes accordingly. However that does not mean that if someone conceals a particular source of income with the intention to evade taxes, he will escape easily.
Tax evasion is an unlawful act that consists of failure in filing income tax return or misrepresenting the amount of tax payable.
Tax evasion is not same as tax avoidance, which is a legal act dealing with the utility of income tax laws to reduce the amount of tax payable.
Acts resulting in tax evasion:
The common types of tax evasion are concealing cash income, reporting lower amount of income, concealing money in accounts held in foreign banks and claiming unjust tax deductions, claiming unauthorized deductions for expenditures on a return or claiming charitable deductions falsely.
Other types include filing a fake return, concealing ownership of property, under reporting the value of property and overestimating the value of an asset donated for the purpose of charity. Companies often evade taxes by paying employees in cash and not filing their returns.
How is tax evasion detected?
Tax returns are picked up for scrutiny when the income tax authorities feel that there is tax evasion. If the department concludes that an individual has willfully concealed his income to reduce his tax liability, he will be penalized.
Tax evasion is an offence, so the best preventative measure to avoid it is to obey the rules. If you are liable to pay taxes from the previous years, pay it as quickly as possible. Even if you have not filed the return, it is best to file before the authorities discovers the omission.
Effects of scrutiny:
Scrutiny refers to evaluating the return for its authenticity. The assessing officer goes through the returns and other documents like bank statement, Form 16, etc. to check if there is any difference in tax liability assessed by the assessee and the actual tax to be paid. When a return is picked up for scrutiny, a notice is sent within one year from the month in which returns have been filed. The notice contains a date on which the tax payer needs to appear before the department. If it is found that an assessee has evaded tax, penalty is levied.
New rules relating to tax evasion:
Tax evasion is likely to become a prosecutable offence attracting imprisonment for offenders. The Supreme Court has recently appointed special investigation team to check the accumulation of black money. The team has suggested before the government to make tax evasion a criminal offence.
The Central Board of Direct Taxes is examining the existing provisions of the Income Tax Act to bring tax evasion within the purview of predicate offences and such examination is supposed to be completed very soon.
To prevent accumulation of black money, the government has considered many cases of tax evasion. Till date, tax evaders used to escape imprisonment by paying the amount of tax evaded along with a penalty under the provisions of the Income Tax Act. If the person failed to pay the tax and penalty for such evasion, then the authorities were empowered to seize his property for realization of the due amount.
The team, headed by J. M B Shah and J. Arijit Pasayat, has suggested making tax evasion a crime in India following the examples of the other nations like US, Canada and Australia. The team also added that presently ‘tax evasion’ is not a predicate offence under the prosecutable offences as enlisted before the PMLA.
Recommendations of the special team:
The team stated that it was difficult for the government to take measures under Foreign Exchange Management Act, which protects the property held by an NRI abroad for evasion of tax in relation to the money deposited abroad. For many reasons, till date it is not easy to proceed against property held by tax evaders abroad.
The team stated that it has become necessary to provide for seizure and confiscation of property of NRIs held abroad and to amend the provisions of FEMA and the government should also act expeditiously to effect the said amendment as proposed by the team.
In its report submitted to the Apex Court, the team also proposed a limit for holding cash by people since holding cash is one of the easy modes in which black money is held in India.
It has been recommended that transactions made through cheques, bank transfers, etc. should be traced. The team also recommended that a limit should be imposed on the maximum cash that an individual should be allowed to possess at a point of time. SIT has recommended that the government should examine this issue and make a proper legal framework to implement such recommendations.
One important step which can be taken is to make declaring PAN number mandatory in case of very sale where payment is in cash or through cheque if the value exceeds Rs. 1 lakh. The purchaser should also be under the obligation to collect the PAN number of the seller.
This would undoubtedly check the generation of unaccounted money in the country. The purchaser should be bound to disclose his identity by PAN number Aadhaar card or any other recognized document relating to identity.
Furnishing of PAN in the aforesaid manner would facilitate the traceability of the source of money spent by individuals which are not reflected in the return. The SIT also recommended that the government should make a team to trace the mismatch between the export/import data of the country with that of other countries.
This would ensure that the government has a clear estimation of the amount of black money which is being sent outside the boundaries of the country through imports and exports by means of trade based money laundering.
Scenario in other countries:
Tax evasion is not a criminal offence as compared to that in the U.S., Australia or China. However in India there are many provisions relating to prosecution under Chapter 22 of the Income Tax Act, 1961. Acts like failure to file return of income, making false statements, signing false verifications, forging of accounts and documents, failure to deposit TDs, etc. attract imprisonment of three to six months under section 276C of the Income Tax Act, 1961.
However in the near future tax evasion might land individuals not only in trouble but would also affect people who help people to evade taxes and this offence would be punishable with imprisonment for a period of three to six months along with a fine. Where the offence is committed by a firm or partners where the officers including directors are responsible or has been done with their knowledge, the authorities would proceed against the company along with its officials.