Introduction

Taxes play a crucial role in a country's economy, contributing to social welfare and development. While most taxpayers fulfil their obligations diligently, some individuals and entities attempt to evade taxes, which is illegal and punishable under the Income-tax Act, of 1961. In this blog, we will explore the concept of tax evasion, its consequences, and the penalties involved, aiming to help taxpayers understand the importance of compliance and the risks associated with tax evasion.

We will differentiate between tax avoidance and tax evasion, emphasising that the former is legal tax planning, while the latter involves unlawful means to evade tax payments. Real-life examples will highlight various forms of tax evasion that individuals and entities may engage in, knowingly or unknowingly. Additionally, we will discuss common methods of tax evasion and the corresponding penalties under the Income-tax Act, of 1961. From the late filing of income tax returns to concealing income, each transgression bears significant consequences.

This guide aims to equip readers with knowledge on tax compliance, empowering them to contribute positively to the nation's economic growth and prosperity while thwarting tax evasion practices. Together, let us build a society founded on transparency, accountability, and responsible financial citizenship, leaving no room for tax evasion to undermine our collective progress.

Understanding Tax Evasion and Its Consequences

• Tax Avoidance

Tax avoidance is when people or companies use loopholes in the tax rules to lower their taxes or prevent paying them altogether. It's not against the law since it's not clearly defined in tax regulations. An example is when some companies send their money to overseas branches to avoid paying taxes in their own country.

• Tax Evasion

Tax evasion is illegal, and it is clearly stated in Chapter XXII of the Income Tax Act, 1961, which specifies its penalties. Some examples of tax evasion include individuals, firms, or companies deliberately not paying their taxes, providing false information about their income, and purposefully trying to avoid paying taxes.

Read more: Guide to Tax-Free Investments in India

Common Methods of Tax Evasion and Associated Penalties

• Late Filing of Income Tax Return

If you don't file your income tax return on time as required by the Income Tax Act, you may have to pay a penalty of up to Rs 5,000. All taxpayers must file their income tax return during the designated period for each financial year. If you miss the deadline and don't file your return, you will be charged a late fee. The penalty used to be ₹10,000 until the financial year 2019-20, but now it is ₹5,000 from the financial year 2020-21 onwards. In some cases, the assessing officer may decide a penalty amount different from ₹5,000.

• Concealing Income to Evade Tax

If taxpayers try to hide their actual earnings to avoid paying taxes, they can face penalties ranging from 100% to 300% of the evaded tax. This penalty depends on the reason behind the evasion:

• 10% penalty if you admit to the hidden income and declare it, but there might be interest charges too.
• 50% penalty for a bona fide mistake in under-reporting income, which means a genuine error not done to evade taxes.
• 300% penalty for intentionally hiding income to evade taxes, known as a mala fide mistake. Additionally, tax officials may conduct raids to find undisclosed income, and penalties are calculated based on Section 271AAB in such cases.
  

Read more: Common Income Tax Deductions

• Failure to Get Accounts Audited

If an organisation fails to get its accounts audited under Section 44AB or does not submit an audit report, He/She will be penalised with ₹1.5 lakhs or 0.5% of its sales turnover, whichever is higher. Also, if the taxpayer doesn't provide a report from a chartered accountant as required by Section 92E, they will be fined at least ₹1 lakh or more.

To avoid these penalties, taxpayers must document all their domestic and international transactions and obtain a report from an Indian chartered accountant before the deadline. Non-compliance with this may result in a penalty of 2% of the transaction's value, whether it's domestic or international, under Section 92(D)3.

It's important to note that the assessing officer has the authority to waive the penalty in certain cases where the default was due to circumstances beyond the taxpayer's control, such as hardships caused by natural disasters or other unavoidable situations.

• Non-Compliance with TDS Regulations

For businesses or employers deducting tax at source, having a Tax Deduction Account Number (TAN) is essential. Failure to obtain a TAN can lead to a penalty of ₹10,000. There are two types of fraud that can occur here:

• Not deducting tax at source: The penalty is equal to the amount of tax not deducted.
• Not filing a TDS return on time: The penalty can range from ₹10,000 to ₹1,00,000, and interest will accrue until the payment is made. To avoid this penalty, taxpayers must file their TDS returns before the prescribed due date.

• Wilful Attempt to Evade Tax

A taxpayer deliberately trying to evade taxes involving an amount exceeding Rs 25 lakh may face imprisonment for six months up to seven years, along with a fine.

• Providing Incorrect PAN Number or Not Furnishing PAN Card Number

For businesses or employers deducting tax at source, having a Tax Deduction Account Number (TAN) is essential. Not having a TAN can result in a penalty of ₹10,000. There are two types of fraud that can occur here:

• Not deducting tax at source: The penalty is equal to the amount of tax not deducted.
• Not filing a TDS return on time: The penalty can range from ₹10,000 to ₹1,00,000, and interest will accrue until the payment is made. To avoid this penalty, taxpayers must file their TDS returns before the prescribed due date.
  

Conclusion

Tax evasion is a serious offence and can have significant consequences for taxpayers. It is crucial for individuals and entities to adhere to income tax rules and fulfil their tax obligations promptly. By doing so, taxpayers not only contribute to the nation's progress but also safeguard themselves from the harsh penalties and legal repercussions associated with tax evasion. Seeking advice from financial experts and tax professionals can further assist taxpayers in staying compliant and maintaining financial integrity. 

We at TaxNodes can help ensure a smooth and hassle-free experience while filing income tax returns.

byAstik Dubey

Astik is a law student diving deep into indirect Tax and business law. With a flair for business writing and a special interest in crypto taxation, he turns complexity into captivating articles. Join his enlightening blog, where law and business intersect.

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