International Journal of Applied Engineering Research, ISSN 0973-4562 Vol.7 No.

11 (2012)
© Research India Publications; http://www.ripublication.com/ijaer.htm

TAX EVASION IN INDIA: CAUSES AND REMEDIES

Lalit wadhwa*, Dr. Virender Pal**
*Assistant Professor in Management, Geeta Institute of Management & Technology,
Kanipla, Kurukshetra
Email: lwadhwa09@gmail.com
** Assistant Professor in Management, Geeta Institute of Management & Technology,
Kanipla, Kurukshetra
Email: virenderpal2007@rediffmail.com

Abstract: Table 1: Number of Tax Payers in India & their Slabs

Tax evasion occurs when individuals deliberately fail to Slab Number in Percentage of tax
comply with their tax obligation. The resulting tax revenue lakhs payers
loss may cause serious damage to the proper functioning of 0-5 lakh 288.40 89%
the public sector, threatening its capacity to finance its basic 5-10 lakh 17.88 5.5%
expenses. This study investigated the overview of the opinion 10-20 lakh 13.78 4.3
of tax professionals regarding the tax evasion in India, More than 20 4.06 1.3
delineating the number of factors responsive for tax evasion lakh
and examining the possible remedies to reduce the problem of Source: Report released by Ministry of Finance, April, 2012.
tax evasion.
Key Words: Evasion, Compliance, Discriminatory, The table number 1 clearly shows the inequality in the
Assesses, Bilateral Agreement, Errant earnings of Indian people – Imagine, in a country of 120 crore
people, only 4 lakh people earn above 20 lakh rupees a month
INTRODUCTION and when we go through the discussion how much tax is
In India, most of the persons do not pay their taxes. They try collected it can be understand with the below table:
to avoid this by some illegal means or by taking the benefit of
some loopholes in the Indian tax system. Tax evasion is the Table 2: Income Tax collection
term for the efforts by individuals, corporate, trusts and other Slab In Crore %
entities to evade taxes by illegal means. It is the deliberate, of tax collected
misrepresentation or concealment of the true state of their 0-5 lakh 15010 10.10%
affairs to the tax authorities to reduce their tax liability or to 5-10 lakh 21976 14.80%
avoid the tax liability by declaring less incomes, profits or
10-20 lakh 17858 12.10%
gains than actually what they earned or overstating their
More than 20 lakh 93229 63%
expenses. Thus the amount which would have been used for
Source: Report released by Indian Finance Ministry, April,
economic and social development is used for anti social
2012
activities. All this creates black money and social evils in the
society. Thus tax evasion is not a problem in development of
Although, only 1.3 per cent of all tax-payers earn more than
country but also harmful for the country. The level of Evasion
20 lakhs in India, they account for a whooping 63 per cent of
Tax also depends on the chartered accountants and tax lawyers
all the taxes collected by Indian Government. So 4.6 lakh
who help companies, firms, and individuals evade paying
Indians pay a total of 93,229 crore rupees of tax. That comes
taxes. Tax Evasion is a crime in all major countries and the
to an average of roughly 23 lakh per person. This all shows
guilty parties are subjected to imprisonment and fines.
that huge amount of tax is evaded by the citizens of India.

REVIEW OF LITERATURE:
NUMBER OF TAX PAYERS IN INDIA
Indian Taxation Enquiry Committee (1924) under the
According to the report released by Indian Finance Ministry,
chairman Charles Todhunter examine the burden of taxation
estimated number of taxpayers for financial year 2011-12
on different classes of people, equity of taxation and to
stands at just 3.24 crore people. That means, less than 3 people
suggest alternative sources of taxation under the chairmanship
in 100 pay taxes .Out of these 3.25 crore people, 89 per cent
of. The committee recommended some suggestions to evade
pay taxes in the tax slab of 0 – 5 Lakh rupees, while on the
tax evasion as Loss sustained in one year should be allowed to
other end of spectrum, only 1.3% of all tax payers have
carry forward and set-off in the subsequent year, in case
income about 20 Lakh.
private companies are formed just for tax avoidance by with
holding dividends, then such companies should be treated as
firm., the officer should be authorized to compute liabilities of
unregistered firm as if it had been registered in some particular
cases if he thinks it reasonable. Direct Taxes Enquiry
Committee (1971) was appointed by government of India
 International Journal of Applied Engineering Research, ISSN 0973-4562 Vol.7 No.11 (2012)
© Research India Publications; http://www.ripublication.com/ijaer.htm
under the chairmanship of Justice K.N. Wanchoo to
recommend measures for unearthing black money, checking
tax evasion and reducing tax arrears. The committee estimated
that unreported income during 1968-69 was Rs. 1400 crore
which resulted in tax evasion amounting to Rs. 470 crore. The
committee was of the opinion that high tax rates, controls and
licenses in the economy, donations to political parties,
ineffective enforcement of laws and deterioration in moral
standards were the main causes responsible for tax evasion.
The measures suggested were reduction in tax rates with
maximum marginal rate of 75 percent, regulation of donations
to political parties, imposition of penalty with reference to tax
sought to be evaded instead of income concealed. Direct Tax
Laws Committee (1978) was appointed by the Government
of India on June 25, 1977 under the chairmanship of N.A.
Palkhiwala. Later on C.C. Choksi took over the Chairmanship
as Palkhiwala had to leave. The committee (also known as
Choksi Committee) was directed to recommend measures for
simplifying and rationalizing the direct tax laws and
improvement in administration. Committee observed that
frequent amendments in tax laws led to uncertainty and
confusion among tax payers and tax collectors. The committee
made some suggestion in its final report as a uniform central
law governing registration of trust, regulating their fund
raising activities, maintenance of accounts, application of
income and investment of trust funds should be enacted.
Murti (1982) studied different aspect of income tax
administration in India viz. origin and development of income
tax in India, the structure and organization of income tax
administration, public relations, recruitment and training of
personnel as well as morale of income tax personnel. The
study reflected both strengths and weaknesses of Indian
Income Tax administration based on its historical evolution
since the colonial period. It highlighted that income tax
officials were overburdened with work. The service conditions
in the department were not healthy for accomplishment of
goals. The reforms in administrative machinery were very
slow. In the end, the researcher stressed upon reviewing the
income tax administration as a part of the larger Indian
bureaucracy. Das, Gupta and Mookherjee (1998) studied the
role of incentives and institutional reform in tax enforcement
in India and compared it with other countries like Mexico,
Spain, Singapore, Philippines and Indonesia. The study
revealed that income tax compliance in India deteriorated
during 1965-66 to 1994-95. The authors opined that income
tax revenue in relation to GDP was low not because of tax
rates, exemptions, amnesty schemes and non taxation of
agricultural income but only due to poor enforcement. The
researchers suggested for amending the provisions regarding
appeals, penalties and prosecution which were exploited by
large scale tax evaders. Jha (1999) examined the reasons for
tax evasion, black money and implications of offering
amnesties to tax evaders in India. She opined that most
important reason for tax evasion was that it provided
economic benefits to tax evaders. She further opined that
besides tax evasion, black income was also generated from
illegal activities like smuggling, trafficking in illicit drugs and
gambling etc. She recommended reduction in marginal income
tax rates for individuals, firms and corporations, which could
help in widening the tax base. Sreekantaradhya (2000) tried
to study structure and reform of taxation in India. He analysed
the tax structure prior to 1991 and various tax reforms that
were implemented during the period 1990-91 to 1999-2000.
The study revealed that share of personal income tax in total
tax revenue of the Central Government increased to 15.21 per
cent in 1999-2000 as compared to 9.33 per cent in 1990-91.
The coverage of personal income tax was extremely limited
because of exemption of agricultural sector and predominance
of unorganized sector in the economy. The study also pointed
out that high marginal rates and complicated rules were
responsible for poor compliance. The author suggested some
measures for improvement in tax system such as application of
presumptive taxation on unorganized sector of the economy,
bringing the agricultural income under tax net, adoption of tax
deduction at source, compulsory filing of return on the basis of
certain economic criteria and rationalization of fringe benefit
taxation. Task Force on Direct Taxes (2002) constituted
under the chairmanship of Mr. Vijay Kelkar by Ministry of
Finance, Government of India was asked to suggest measures
to rationalize and simplify direct taxes, improvement in
taxpayers` service and redesign procedures for strengthening
enforcement so as to improve compliance of direct tax laws. It
recommended the income tax department must increase
expenditure on tax payers‟ services, the Permanent Account
Number should be extended to cover all citizens and therefore
serve as a Citizen Identification Number, the department
should set up a structure for Electronic Data Interchange (EDI)
with some of the major departments, the number of tax slabs
should be reduced, Maximum marginal rate of tax should be
moderate outsourcing of routine activities, simplification of
tax procedures and adoption of computer based technology for
achieving the same. Torgler (2006) tried to examine the
citizen's outlook towards tax compliance in India. The study
observed the impact of non-economic factors on three tax
compliance variables namely justification of tax evasion,
corruption and claiming government benefits without
justification. The author applied regression technique on micro
data taken from the 4th wave of World Values Survey (1991-
2001). The results indicated that education, national pride,
religiosity and age had a positive impact on compliance.
Women and self-employed had a higher willingness to comply
tax rules. It was also observed that lower middle class had the
lowest willingness to comply tax rules. Singh and Sharma
(2007) made an attempt to study the perception of tax
professionals with regard to Indian Income Tax System by
collecting primary data from 100 tax consultants operating in
Punjab and Haryana. They tried to investigate the role of tax
consultants played in the revenue collection process by
helping their clients in understanding the complex tax system
and meeting their legal obligations. Factor Analysis of data
showed that seven factors –reduction in tax evasion, extension
of relief to taxpayers, incentives for dependents and honest
taxpayers, broadening the tax base, e-filing of returns,
adequacy of deductions and impact of exempt-exempt tax
system played an important role in determining the
effectiveness of Indian tax system. While concluding the
authors suggested for adjustment of income tax rates
according to price level changes, broadening of tax base, strict
measures against tax evaders, extensive use of TDS,
consideration to number of dependents for tax rate purpose
 International Journal of Applied Engineering Research, ISSN 0973-4562 Vol.7 No.11 (2012)
© Research India Publications; http://www.ripublication.com/ijaer.htm

and establishment of good relationship with taxpayers .Arora
R.S. and Rani Vanita (2010) Studied the causes and
Remedies for Tax evasion & corruption in the Indian Income
tax system . They investigated the opinions of tax
professionals from the different districts of Punjab regarding
tax evasion and corruption in Indian Tax system . They
pointed out the high tax rates ,corruption ,social acceptance of
tax evasion, low probability of detection and low tax morality
are the main causes of tax evasion. Further they opined that
excessive discretionary powers available with income tax
authorities, harassment to tax payers, lack of integrity on the
part of income tax officials, lack of processes are the factors
which lead to corruption. They suggested the rationalization of
tax rates, simplification of tax laws, extensive use of TDS
system and proper processing of information available under
the Annual Information Return for increasing tax compliance.
OBJECTIVES OF THE STUDY:
This study is carried out with the following objectives:
1) To find out the causes of income tax evasion.
2) To find out the impact of tax evasion in India
3) To suggest some ways to improve income tax
compliance.
RESEARCH METHODOLOGY:
To collect the information regarding tax evasion in India a
well designed questionnaire with five point likert scale has
been used. To achieve the specific objectives of the study, the
data is collected from tax professionals such as chartered
accountants, company secretaries and ICWA’s from the state
of Haryana. A sample of 150 respondents has been taken by
selecting 30 respondents from Faridabad, Gurgoan, Murthal,
Panipat and Sonipat respectively. The data is also collected
through secondary sources also such as Internet, websites,
professional magazines, referred journals, news papers and
conference books. In addition books on income tax and reports
published by ICAI, ICSI and ICWA etc.

RESULTS AND DISCUSSION OPINION BY RESPONDENTS FOR INCOME TAX EVASION IN INDIA
Hypothesis

: = Significant difference among the respondents from various locations regards to tax evasion in India.
: ≠ is not true.

Table 3: Opinion by respondents for Income tax evasion in India

Response/Area Faridabad Gurgoan Panipat Murthal Sonipat Total
Strongly agree 24(80) 22(73) 21(70) 20(67) 18(60) 105(70)
Agree 3(10) 2(7) 9(30) 4(13) 8(27) 26(17.34)
Neither agree nor 3 (10) 5(17) 0(0) 6(20) 3(10) 17(11.33)
disagree
Disagree 0(0) 1(3) 0(0) 0(0) 1(3) 2(1.33)
Strongly disagree 0(0) 0(0) 0(0) 0(0) 0(0) 0(0)
Total (N) 30(100) 30(100) 30(100) 30(100) 30(100) 150(100)
Chi-Square 29.400 38.533 4.800 15.200 23.067 -
Df 2 3 1 2 3 -
Asymp. Sig. .000 .000 .028 .001 .000 -
Hypothesis Accepted Accepted Accepted Accepted Accepted -
Null Null Null Null Null
Source: Calculated by author.

Note: The figures in parenthesis are percentage.
The table shows the responses given by the tax professionals
on a five point scale. The table depicts that 87.34 per cent of
respondents have agree or strongly agree with the opinion of
high tax evasion in India. However, 1.33 per cent of total
responses have disagreed with this. Location-wise analysis
indicates that major proportion of the respondents have agreed
or strongly agreed with the statement. The table confirms that
no significant differences exit among respondents from
various locations i.e., Faridabad, Gurgaon, Panipat, Murthal,
And Sonipat of Haryana province. The computed value of Chi
square is shown in Table 3. Location-wise p value
corresponding to chi square is less than 0.05 which proves that
no significant difference in the opinion of the respondent of
various locations regards the tax evasion in India.

CAUSES OF TAX EVASION IN INDIA

Table 4: Causes of tax evasion in India listed by respondents

Causes/Area Faridabad Gurgoan Panipat Murthal Sonipat Total
High Tax Rates 12(44) 16(67) 20(67) 17(71) 18(69) 83(63)
Complex tax 13(48) 18(75) 10(33) 12(50) 10(38) 63(48)
system
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© Research India Publications; http://www.ripublication.com/ijaer.htm

Inefficient tax 14(51) 10(41) 19(63) 9(38) 11(42) 63(48)

authorities
Ineffective 8(30) 17(71) 9(30) 10(42) 13(50) 57(44)
enforcement of
law
Generation of 16(59) 18(75) 16(53) 19(79) 9(34) 78(60)
black money in
public sector
Low tax morality 15(56) 10(42) 10(33) 12(50) 13(50) 60(46)
Multiple taxes 20(74) 16(67) 12(40) 13(54) 16(62) 77(59)
Total (N) 27 24 30 24 26 131
Source: Field survey

The Table 4 depicts the causes for Income tax evasion in India given by the tax professionals. Majority of the respondents
identified that high tax rates (63%), corruption in public sector unit (60), multiple taxes and inefficient tax authorities are the
main reason of tax evasion in India. Beside this complex tax system and low tax morality are the other source of tax evasion.

IMPACT OF INCOME TAX EVASION

Table 5: Impact of Income tax evasion in India listed by respondent

Impact/Area Faridabad Gurgoan Panipat Murthal Sonipat Total
Reduction in Country’s economy growth 19(70) 15(62.5) 12(40) 18(75) 20(77) 84(64)
Increase in inflation 15(56) 16(67) 14(47) 16(67) 18(69) 79(60)
Impact on moral 8(30) 10(42) 17(57) 19(79) 14(54) 68(52)
Increase in corruption 21(78) 20(83) 14(47) 19(79) 23(88) 97(74)
Increase in prices of land and houses 10(37) 12(50) 13(43) 14(58) 12(46) 61(47)
Decrease in country’s reputation 5(18) 17(71) 10(33) 13(54) 8(31) 53(40)
Total (N) 27 24 30 24 26 131
Source: Author’s Calculation.

The Table 5, shows the impact of Income tax evasion in India
given by the tax professionals. 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
country’s 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 country’s reputation
globally.

SUGGESTIONS FOR IMPROVEMENT IN INCOME TAX COMPLIANCE:

TABLE 6: suggestions for improvement in income tax compliance:

Suggestions/Area Faridabad Gurgoan Panipat Murthal Sonipat Total
Reduction in tax rate 15(50) 12(40) 23(77) 20(67) 22(73) 92(61)
Strong surveillance 12(40) 15(50) 18(60) 12(40) 16(53) 73(49)
system
Simplified tax law 10(33) 18(60) 20(67) 16(53) 10(33) 74(49)
Strong corruption 10(33) 12(40) 14(47) 12(40) 17(57) 65(43)
law
Remove tax 15(50) 18(60) 14(47) 10(33) 24(80) 81(54)
loopholes in tax
subsidy and Grants
Annual Information 8(27) 16(53) 10(33) 15(50) 20(67) 69(46)
Return
Severe punishment 8(27) 7(23) 14(47) 15(50) 18(60) 52(35)
to errant tax officials
Bilateral agreement 15(50) 16(53) 9(30) 4(13) 8(27) 52(35)
with foreign Govt.
Total (N) 30 30 30 30 30 150
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© Research India Publications; http://www.ripublication.com/ijaer.htm

Source: Author’s Calculation.

The study reveled that most of the respondents are in opinion [10] Sreekantaradhya, ,B.S,2000, “Structure and Reform
of reduction in tax rates to reduce tax evasion in India. of Taxation in India”, Deep and Deep Publication,
Further, tax evasion can be reduce with the help of removing New Delhi.
loopholes in tax system, by utilising information from annual [11] Torgler, Benno, 2006 “Compliance in India: An
information return. Empirical Analysis”, The ICFAI Journal of Public
Finance, Vol. 4, No. 2, May, pp. 7-18.
[12] Wanchoo K.N, 1971, Final Report of Direct Taxes
CONCLUSION: Enquiry Committee.
This study has surveyed the opinion of income tax
professionals regarding tax evasion in India. As per their
opinion income tax evasion is prevalent in India. They
opinioned that high tax rates, corruption in public sector units,
multiple tax rates and inefficient tax authorities are the main
causes of tax evasion. They suggested that reduction in tax
rates, simplifications of tax laws, remove loopholes in the tax
system and some extent proper processing of information
available the under the annual information return can be best
tool for improving Indian tax compliance. Therefore there is a
need for creating transparent, friendlier and less
discriminatory administrative system. Further there is also a
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 feel proud in discharging their duty to pay
the taxes.

REFERENCES:

[1] Arora R.S. & Rani Vaneeta , 2010,“Tax evasion and

corruption in the Indian Income Tax System : causes
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[3] Chokshi C C, 1978.,” Direct Tax Laws Committee”
[4] Das Gupta, Arindam and Mookherjee, Dilip,
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[8] Report of the Indian Taxation Enquiry Committee,
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