-Aryan Sinha
Abstract
Tax evasion and tax avoidance is a big problem in our country. There are many people in our country who are eligible &liable to pay tax, but they are not paying tax. As a result, government’s developments activities are jeopardized. So, we should know about the mechanisms of tax evasion, tax avoidance and its preventives measures. Tax evasion and tax avoidance are practices that have rotten out the revenue that ought to be generated by the government, and hence affect the economy of the country as a whole, in view of this, this research paper seeks to examine the reasons why people evade and avoid taxes, the methods used by people to achieve these.
Keywords: Tax Evasion, Tax Avoidance, Economic Development.
Introduction to Tax:
Taxes are the most important & major source of revenue of the modern governments. It is a compulsory levy, to be paid by the citizens who are liable to pay it which is imposed by the government. Let’s discern some important definition of Tax-
1. P.E. Taylor: “Taxes are compulsory payment to government without expectation of direct return in benefit to the tax payer”[1] .
2. Seligman: A tax is a compulsory contribution from the person to the government to defray the expenses in the common interest of all without reference to special benefits.
The above definitions makes it clear that taxes are compulsory contribution by the taxpayer to the government.
Characteristics of Tax:
“Characteristics of tax are as follows:
1. Tax is a compulsory contribution.
2. The assesses will be required to pay tax if is due from him.
3. Taxes are levied from government.
4. Common benefits to all.
5. No direct benefit.
6. Certain taxes levied for specific objectives.
7. Good tax system should be in harmony with national objectives.”[2]
Objectives of Taxation:
“Taxation is an integral source of revenue for the government. In order to accelerate economic development as well as to ensure the defense, administration, social welfare and other development activities government needs huge amount of resources. So the main objectives of tax are mentioned below:-
1. Raising revenue.
2. Removal of inequalities in income & wealth.
3. Implementing economic stability.
4. Control regional imbalances.
5. Capital accumulation.
6. Employment opportunities.
7. Preventing harmful conventions.
8. Diversification of resources.
9. Exports.
10. Healthy standard of living.”[3]
Introduction to Tax Evasion:
Tax evasion may be defined either as the concealment of taxable object and the failure to pay tax in time either by the assessee or his representative. So it is illegal. In case of tax evasion, tax liability is reduced or tax is not paid at all. Tax evasion is an attempt to escape tax liability whether wholly or partially by breaking the tax law and it is a criminal act since it is achieved by making false declarations such as under reporting income or over reporting relieves and allowances. Tax evasion usually entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability, and includes, dishonest tax reporting such as declaring less income, profits or gains than actually earned; or overstating deductions.
Methods of Tax Evasion:
“Generally, any person adopts the following methods to evade tax:
1. Delay in paying dues.
2. Declaration of false Income Tax Returns (ITR).
3. Forged financial statements.
4. Using forged documents to claim exemption.
5. Not declaring annual income.
6. Bribing Taxation Officials
7. Storing wealth outside the country.”[4]
Causes of Tax Evasion:
“The followings are the main causes of tax evasion by the tax payers:
1. The weak structure of the countries’ tax system.
2. Lack of implementation of the tax legislation.
3. Inflation.
4. High tax rates.
5. Informal economy.
6. Permanent regularization regimes like moratoriums, whitewashing, etc.
7. Promotional regimes like tax incentives, exemptions and tax expenses.
8. Lack of peoples’ tax integrity.
9. Inefficiency of the functioning of the Tax Administrations.
10. Proliferation of special tax regimes for attracting investments like tax rulings.
11. Digital economy, with the significant technological development.
12. Maximum people of our country, who are liable to pay tax, are not conscious about to pay tax.
13. Due to critical tax rules in our Tax legislations, alike some other countries a tax payer can take advantages of these rules to his own benefit.
14. Loyal tax payers do not get any benefit directly. So, others people are not encouraged to pay tax.
15. Non-enforcement of measures relating to appropriate punishment.
16. High tax rate discourages taxpayers to pay tax.”[5]
Introduction To Tax Avoidance
Tax avoidance is the minimization of tax liability by the tax-payer or his agent by efficient tax planning. It is possible by fully abiding with the tax laws and meeting tax liabilities. Thus tax avoidance takes the advantages of the loopholes in the existing taxation laws. The avoider is a smart taxpayer who finds loopholes in the taxation laws (and related laws) to reduce tax liability.Usually the avoidance of tax is done by the people who opt to keep their money with themselves and not it to the governments.
Common Methods of Tax Avoidance:
“Tax avoidance can be adopted by any of the following way:
• Reduce the tax bill is by making a contribution to Individual Retirement Account (IRA). In IRA either you deposit your money as a contribution or pay for your taxable income. A well informed person would obviously choose investment over expenditure.
• Deduct the direct or indirect expenses which are incurred in making investments.
• The tax rate on short term capital gain is always higher than long term capital gain held assets. If you are making up mind to sell the assets, make sure you sell the old ones first.
• If your property value can be reduced by any of the reasons with the help of local valuers, you can reduce the tax arising on real estate taxes.
• If possible, install the energy-efficient components in your home as well as offices. These installations help you gain on the tax credits. Tax credits can be used to reduce your tax invoice. Energy-efficient components save on your energy bill in the long term duration.
• If you can get home finance easily, then you should take a home loan to reduce your tax liability by allowing the interest paid part as your expense.”
Effects of Tax Avoidance:
“By analyzing the loopholes of taxation, the tax payers can reduce their tax liability. This concept is known as tax avoidance.There can be multiple effects of tax avoidance. The following effects are:
• Reduction in public revenue collection which jeopardizes the growth of a country.
• There is a serious impact on the black money which is piled up due to tax avoidance, and can lead to inflation.
• Loyal Taxpayers start having a sense of inequality as compared to those who are avoiding tax and not facing any repercussions.
• Delay in government projects due to restrictions in the amount of spending”[7]
Definition of Economic Development:
Economic development is a term that generally refers to the sustained, concerted effort of “policymakers” [8]and “community”[9] to promote the “standard of living”[10] and “economic expansion”[11] in an adequate area.
Indicators of Economic Development:
• “Real GDP per capita.
• GDP at purchasing power parity (PPP).
• Levels of absolute poverty.
• Starvation levels.
• Safe Water
• Employment rate.
• Initial years of education.
• Number of doctors available for the country.
• Average life expectancy.
• Applicability of international trade.
• Infrastructure Development
• Share of agriculture in economy.”
Repercussions of Tax Avoidance & Tax Evasion in Economic Development:
Tax revenue/income is used to build the infrastructure, to invest in social security programs, in various poverty elevation program(s). But due to tax evasion and tax avoidance above the development activities are jeopardized. Both hamper the social welfare. It obliges the government to borrow loan that affects the economic development.Economic growth is linked with budget. It is evident that higher government`s income support to do large budget and large budget helps to accelerate economic development of a country. But due to tax avoidance and tax evasion a lot amount of revenue is not collected. As a result the government has to shortcut the budget.In capitalist and mixed economy, private sector is supposed to play an important role in investment and development. But sometimes direct investment by the governments is a necessity. Due to tax evasion and tax avoidance the government cannot supply the expected fund for investment.The government has to take various plans for economic development. But lack of fund the plan cannot be implemented. If the people would not avoid tax, the government could implement the plans. Due to this the government cannot ensure the employment opportunity. Because the government needs financial assistance to create employment opportunity. It also disrupt the structural development such as roads, bridges, transportation, industrial development etc.Social security schemes cannot be provided fully by the government due to lack of fund. Tax evasion and tax avoidance is the main obstacle to create sufficient fund.If the taxation laws are not sufficient to check the tax evasion and avoidance, it may lead to the development of a culture of evasion. So a vicious cycle of tax evasion may take place.Tax evaded incomes are used for conspicuous consumption in the form of buying luxurious goods. As a result honest tax payers find various methods of tax evasion and tax avoidance. So the stability of the society will be affected. Such illegal money is also transferred abroad weakening the economy of the country.Due to tax evasion and tax avoidance, a huge amount of tax revenue is lost. As a result the government cannot provide basic needs for mass people.Infrastructure Development expenses fall due to tax evasion and tax avoidance. It affects the distribution function of wealth of the government and adversely affects the economic development of a country.From the above discussion it is evident that tax evasion and tax avoidance affect the economic development of a country severely. Because a large part of the government income is collected by tax revenue.
Case Laws
“R.K Garg vs. Union of India” [13]In this case government highlighted the disclosures of having possession of black money, was challenged. In this case the contention was raised that this measure is taken only to avoid the crime related to tax evasion which are becoming the white collar crimes and this is not to encourage such kind of activities because this will help only to get back all the money which has been taken over and hide by the people.This was just an initiative to disclose all that money which has been taken wrongfully by the criminals through tax evasion. This was later considered as an important measure because it ultimately helps in stopping such kind of things as the Indian govt. does not have complete set of effective rules that is why it is to be considered a good method.
“Mc Dowell& Company Limited Vs. The Commercial Tax Officer” [14]and “Azadi Bachao Andolan Vs. Deputy Commissioner Of Income Tax”[15] :In both of these cases, the territoriality on tax laws of India was highlighted and these both were in contrary to each other because the ratios given in there were totally different.The Supreme Court held that India doesn’t have any jurisdiction over the matters of tax evasion in these cases because the question of territoriality is there and since the tax evasion has taken place outside the territory of India then the tax authorities of India cannot exercise their jurisdiction in the present case.
Similarly, in Birla & Star controversy cases, the subject of tax planning was highlighted and supreme court gave its verdict that organizing of such commercial affairs in order to avoid taxes and distribution of taxes in such order is not at all prohibited. Because they ultimately help in removing such crimes.
Conclusion:
The effect of tax evasion and tax avoidance in our economy cannot be overemphasized. The revenue of government has been affected the current taxation system being used gives room for loopholes, the corrupt tax officials, the lack of adequate information and many more have worsened the situation. In addition, a reduction in tax rate is even not an optimum solution to the problem, simply because some people would still attempt to evade or avoid taxes no matter the rates of taxes. The fact is that the change of mentality of tax payers is the main solution of tax evasion and tax avoidance
References:
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10. Michael J Boyle, “Standard of Living”, Feb 11 2021, Investopedia https://www.investopedia.com/terms/s/standard-of-living.asp (Visited on 06:17 PM, Jan 25).
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12. “Indicators of Economic Development”, Economics Help https://www.economicshelp.org/blog/glossary/indicators-of-economic-development/ (Visited on 07:11 PM, Jan 26).
13. R.K Garg Vs. Union of India 1981 133 ITR 239 (India).
14. Mc Dowell & Company Ltd. Vs. The Commercial Tax Officer 154 ITR 148 (India).
15. Azadi Bachao Andolan Vs. Deputy Commissioner of Income Tax 263 ITR 706 (India).
About the Author:-
This Article has been written by Aryan Sinha, 4th Year law (BBA+LLB(H) student at Galgotias University, Greater Noida.
