TAX EVASION:

Introduction:
Tax evasion occurs when individuals deliberately fail to comply with their tax obligation. The resulting tax
revenue loss may cause serious damage to the proper functioning of the public sector, threatening its apacity
to finance its basic expenses.
Meaning:
Tax evasion is knowingly and purposely not paying taxes to the government or attempting hide
taxable money. Many celebrities have been charged with tax evasion simply because their accountants didn't
know what they were doing.
An illegal practice where a person, organization or corporation intentionally avoids paying his/her/its
true tax liability. The process whereby a person, through commission of Fraud, unlawfully pays less tax than
the law mandates
Tax evasion is an intentional and fraudulent attempt to escape payment of taxes in whole or in part. If
proved to be intentional and not just an error or difference of opinion, tax evasion can be a chargeable
Federal crime. Evasion is distinguished from attempts to use interpretation of tax laws and/or imaginative
accounting to reduce the amount of payable tax.
Tax evasion in India:
In India, most of the persons do not pay their taxes. They try to avoid this by some illegal means or
by taking the benefit of some loopholes in the Indian tax system. Tax evasion is the term for the efforts by
individuals, corporate, trusts and other entities to evade taxes by illegal means. 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. Thus the amount which would have been used for economic and social
development is used for anti social activities. All this creates black money and social evils in the society.
Thus tax evasion is not a problem in development of country but also harmful for the country. The level of
Evasion Tax also depends on the chartered accountants and tax lawyers who help companies, firms, and
individuals evade paying taxes. Tax Evasion is a crime in all major countries and the guilty parties are
subjected to imprisonment and fines.
Number of tax payers in India:
According to the report released by Indian Finance Ministry, estimated number of taxpayers for
financial year 2011-12 stands at just 3.24 crore people. That means, less than 3 people in 100 pay taxes .Out
of these 3.25 crore people, 89 per cent pay taxes in the tax slab of 0 5 Lakh rupees, while on the other end
of spectrum, only 1.3% of all tax payers have income about 20 Lakh.

Quantum of Tax Evasion In India:

A rough idea about the quantum of tax evasion in India could have been formed on the basis of the following
three major indicators:
(i) The number of individual tax returns with income above Rs 2 lakh has hardly doubled in the course of
last six decades. In 1939 there were 2.7 lakh such returns and currently their number is around 7 lakh only.
Actually the number of persons with income over Rs 2 lakh must have gone up 30 times or 50 times. This
one fact alone shows how widespread tax evasion in the country is.
(ii) The quantum of income taxed in the hands of companies in many developing countries exceeds 15 % of
GDP, while in India it is hardly 5 %.
(iii) Huge quantity of black money that changes hands in property transactions, or sent abroad or spent
lavishly within the country.
Why is tax evasion so large in India?
The most important question is the reason behind so much tax evasion in India. If we look at the
rates of successful developing countries it would have at once discovered why their tax evasion is negligible
and the revenue collected by them is two to three times more than India's. A few countries main rates are
mentioned here.

Hong Kong has the most ideal tax system in the world. Without taxing interest, dividend, capital
gains and international trading income, it has been collecting more IT revenue than the whole of
India, even in absolute terms. For individuals its exemption limit is about Rs 14 lakh, starting rate is
2% and maximum rate is 20%. Companies are taxed at 15%. The city is also almost totally free of
the evils like litigation, bribery and accumulation of tax arrears. Because of massive voluntary
compliance, it does not need an army of law enforcers. It employs one Commissioner (counterpart of
CBDT), two deputy commissioners and five assistant commissioners.

Singapore has exemption limit of Rs 5 lakh, starting rate of 4% and applies its maximum rate of
22% to income above the equivalent of Rs one crore. Rates of mainland China are far from the ideal,
but unlike India it has the good sense to apply the rate of 30% to income above the equivalent of Rs
30 lakh.

Russia taxes entire individual income at the single rate of 13%.

India's Rates:

A comparison with India's rates would have shown that the rate structure is the main culprit
responsible for forcing most of the taxpayers to evade tax on a major part of their income. Just like the other
countries mentioned above, even India had a fairly reasonable rate structure till 1939 (although the top rate
was 59.4%, applicable to income above Rs 5 crore ). Income upto Rs 2 lakh (in rupees of 2003) was exempt
and the starting rate was 4.7%. Thereafter under the misconception that higher rates will lead to higher
revenue, India went on raising the rates.
The rates were increased in two ways. One was to push up the top rate, applicable to high income
earners, which reached nearly 98%. This has, however, been brought down to 31.5%. But the much more
damaging method was to go on shifting the super heavy rates to absurdly low levels of income. History of
one such rate, that is the 30% rate, will show how the government recklessly went on making the burden of
tax intolerable and forcing major part of the income to flow outside the tax system. The rate of 30% was
applicable to income above Rs 60 lakh in 1939, 6 lakh in 1959 (in rupees of 2003) and now it applies just
above the petty amount of Rs 1.5 lakh. By the 1960's rates had become intolerable for higher income groups,
but two-third of the individual taxpayers were still paying tax at 3% and 6% only. Subsequent increases in
rates have forced most of them also to become tax evaders. In 1960 income above Rs one lakh ( in rupees of
2003 ) was taxed at 3% and it is now taxed at 20%. Pushing up the rate nearly 7 times at certain levels of
income is the root cause of massive tax evasion.
Causes for tax evasion:
-High tax rate A study says that about 83% tax evasion in India is due to high rate of taxation.
- Complex tax system about 63% of tax evasion is because of complex tax system in India..
- Multiplicity of tax
-Administration inefficiency
- corruption in public sector units,
Effects of tax evasion:
Tax evasion and thereby establishment of parallel economy has been creating the following serious
impacts on the social and economic system of the country.

Most of the respondent are agreed on the opinion that tax evasion has been causing reduction in
countrys economic growth as an enormous volume of income is diverted to this unaccounted sector
resulting in growing continuation of parallel economy of the country. However, the direct effect of
tax evasion is the loss of revenue, increase in inflation.

Tax evasion has resulted in the diversion of resources for the purchase of real estate and luxury
housing. Moreover, Black money has resulted in transfer of funds from India to foreign countries
through clandestine channels which decrease countrys reputation globally.

Measures:

The following measures are suggested in general for further reduction in tax evasion in India.

The reduction in tax rates,

Simplifications of tax laws,

Removing loopholes in the tax system

Proper processing of information available the under the annual information return

Need for creating transparent, friendlier and less discriminatory administrative system

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

Making people feel proud in discharging their duty to pay the taxes.
Apart from these, there are some other measures suggested to over come the problem relating
to tax evasion in India.

Disentitling tax evaders/defaulters to avail of the facility of payment of taxes in the instalments and
getting credit facilities from banks.

Streamlining procedure for speedy determination of tax disputes. Special courts for this need to be
set up.

Paying special attention towards training for detection of tax frauds, evasion and black money
generation, including deputation of IT officers to other countries for training to tackle cross border
tax evasion.

Providing adequate security to tax officials, conducting search and surveys.

Improving morale of the tax department officials by providing them adequate infrastructure and other
facilities, by recognition of their merit and giving hem the place that they deserve in the overall
government set up.