DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE

ECONOMICS AND LEGAL ANALYSIS OF TAX EVASION IN INDIA

SUBJECT

ECONOMICS -II

NAME OF THE FACULTY

Abhishek Sinha

Name of the Candidate Koduri Lakshmi Praharshitha

Roll No. 2017038
Semester III

1
 ACKNOWLEDGEMENT

I would sincerely like to put forward my heartfelt appreciation to our respected Economics
professor, Abhishek Sinha for giving me this golden opportunity to take up this project regarding
“ECONOMICS AND LEGAL ANALYSIS TAX EVASION IN INDIA”. I have tried my best
to collect information about the project in various possible ways to depict clear picture about the
given project topic.

2
 ABSTRACT

TITLE OF THE PROJECT:

ECONOMICS AND LEGAL ANALYSIS OF 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.

High tax rates, corruption in public sector units, multiple tax rates and inefficient tax authorities
are the main causes of tax evasion. It 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.

3
 ECONOMICS SYNOPSI$

TITLE OF PROJECT:
ECONOMICS AND LEGAL ANALYSIS OF TAX EVASION IN INDIA

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 capacity to finance its basic expenses. This study investigated the overview
of the opinion of tax professionals regarding the tax evasion in India, delineating the number of
factors responsive for tax evasion and examining the possible remedies to reduce the problem of
tax evasion. This study is carried out with the objectives like the causes of income tax evasion,
The impact of tax evasion in India, etc.
AIM:

My aim is to analyse all the consistent factors associated with the Economic offence of Tax
evasion in India and to find out the impact of these consistent factors; whether they are having a
positive impact or negative impact.
OBJECTIVE:

I am going to cover the economic and legal aspects of the ECONOMIC OFFENCE OF TAX
EVSION IN INDIA

SIGNIFICANCE:

Government financial operations are well-nigh impossible without taxation. Apart from this,
taxation can be a powerful means in order to achieve the golas of social progress and the
objectives of economic development. It serves as a device to encourage the growth certain
activities by way of giving exemptions, discourage use of certain products by way of imposing
heavier charges like those sin taxes which are imposed upon tobacco products, or strengthen
anaemic enterprises, also by way of tax exemptions. Local industries may be protected through

4
taxation by imposing high customs duties to foreign goods. Moreover, taxation can also be used
to reduce inequities or inequalities in wealth and income by progressively higher taxes as in the
case of estate and income tax. In this scenario it is highly required to deal with the problem of tax
evasion in India.

SCOPE OF THE PROJECT:

This study investigated the overview of the opinion of tax professionals regarding the tax evasion
in India, delineating the number of factors responsive for tax evasion and examining the possible
remedies to reduce the problem of tax evasion. This study is carried out by dealind with like the
causes of income tax evasion, The impact of tax evasion in India, etc.
Geographical extension : India
Time period : 1950s - 2015

LITERATURE REVIEW:

“Tax Professionals Perception of the Income Tax System of India an Empirical Evidence”
Prof. Singh, Jaspal Sharma , 2007 .

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.
Although, only 1.3 per cent of all tax-payers earn more than 20 Lakh in India, they account for a
whopping 63 per cent of all the taxes collected by Indian Government. So 4.6 Lakh Indians pay a
total of 93,229 crore rupees of tax. That comes to an average of roughly 23 Lakh per person.
This all shows that huge amount of tax is evaded by the citizens of India.

“Tax evasion and corruption in the Indian Income Tax System : causes and Remedies” ,
Arora R.S. & Rani Vaneeta , 2010.

Generation of black money, stashing it abroad in tax havens and recovering such illicit wealth
secreted in these accounts was one of the dominant issues in the run up to the 2014 General

5
elections. In fact on assuming office one of the first decisions of Narendra Modi led NDA
Government was to constitute a Special Investigating Team [SIT] as mandated by the Hon‟ble
Supreme Court to look into these matters.

While the SIT was operating on a narrow compass the fact remained – much was left to be done
by the Government. It is in this background that Budget 2015 has pronounced certain measures
to deal with the “generation of black money and its concealment effectively and forcefully.” This
statement of intent has been backed by providing highest priority to investigations into cases of
undisclosed foreign assets. This is over and above that investigation conducted by SIT.

According to the Finance Minister “major breakthrough” has been made with the Swiss
Authorities and certain critical and actionable information obtained from such authorities

RESEARRCH PROBLEM:

1. what are the means through which taxevasion occurs in India

2. what is the economic impact of tax evasion in India .

3. what are the measures adopted b the government to control tax evasion in I.ndia

RESEARCH METHODOLOGY:

My study deals with the doctrinal method of research. The data has been collected from various
scoundary sources of data including various books, websites and journals .

CONCLUSION :

High tax rates, corruption in public sector units, multiple tax rates and inefficient tax authorities
are the main causes of tax evasion. It 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.

6
CONTENTS

1. INTRODUCTION……………………………………………………………………8
2. DIFFERENCE BETWEEN TAX EVASION AND TAX AVOIDANCE………8
3. NUMBER OF TAX PAYERS IN INDIA………………………………………….9
4. METHODS OF TAX EVASION……………………………………………………11
5. MEANS THROUGH WHICH TAX PAYMENT IS MANIPULATED…………16
6. GENERATION OF BLACK MONEY……………………………………………..18
7. IMPACT OF TAX EVASION………………………………………………………19
8. MEASURES UNDERTAKEN BY THE GOVERNMENT TO
9. PREVENT TAX EVASION…………………………………………………………21
10. SUGGESTIONS FOR THE IMPROVEMENT OF INCOME
TAX COMPLIANCE IN INDIA…………………………………………………….26
11. CONCLUSION…………………………………………………………………….......27
12. REFERENCES………………………………………………………………………...29

7
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 capacity to finance its basic expenses. This study investigated the overview
of the opinion of tax professionals regarding the tax evasion in India, delineating the number of
factors responsive for tax evasion and examining the possible remedies to reduce the problem of
tax evasion. This study is carried out with the objectives like the causes of income tax evasion,
The impact of tax evasion in India, etc.

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.1

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.2

1
Singh, Jaspal& Sharma, Poonam , 2007 ,”Tax Professionals Perception of the Income Tax System of India an
Empirical Evidence”, The ICFAI Journal of Public Finance, Volume 5, No. 1, pp. 45-56.

2
V. Kalpana ,2015 -Tax Evasion - A Major Threat to Economic Development and Growth – Causes and Remedies,
(IJSER) www.ijser.in,Volume 5, No. 1, pp. 45- 56.

8
DIFFERENCE BETWEEN TAX AVOIDANCE AND TAX EVASION

Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage, to
attempt to reduce the amount of tax that is payable by means that are within the law whilst
making a full disclosure of the material information to the tax authorities. Examples of tax
avoidance involve using tax deductions, changing one's business structure through incorporation
or establishing an offshore company in a tax haven.
By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other
entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers
deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to
reduce their tax liability, and includes, in particular, dishonest tax reporting (such as under
declaring income, profits or gains; or overstating deductions).

Tax avoidance may be considered as either the amoral dodging of one's duties to society, part of
a strategy of not supporting violent government activities or just the right of every citizen to find
all the legal ways to avoid paying too much tax. Tax evasion, on the other hand, is a crime in
almost all countries and subjects the guilty party to fines or even imprisonment. Switzerland is
one notable exception: tax fraud (forging documents, for example) is considered a crime, tax
evasion (like under declaring assets) is not.

Tax resistance is the refusal to pay the tax for conscientious reasons (because they do not want to
support the government or some of its activities), sometimes breaking the law to do so. Some
donate their unpaid taxes to charity, while others (at least in the US) take creative "deductions"
such as not paying a percentage of tax equal to the defense budget. In either case, they typically
do not take the position that the tax laws are themselves illegal or do not apply to them (as tax
protesters do) and they are more concerned with not paying for what they oppose than they are
motivated by the desire to keep more of their money (as tax evaders typically are). Some have
suggested the term tax avoision for people who adopt the techniques of tax avoidance in the
service of tax resistance, thereby doing tax resistance legally.

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

9
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.

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

Slab Number in Lakh Percentage of tax payer

0-5 Lakh 288.40 89%
5-10 Lakh 17.88 5.5%
10-20 Lakh 13.78 4.3%
More than 20 Lakh 4.06 1.3%

Source: Report released by Ministry of Finance, April, 2012. The table number 1 clearly shows
the inequality in the earnings of Indian people – Imagine, in a country of 120 crore people, only
4 Lakh people earn above 20 Lakh rupees a month and when we go through the discussion how
much tax is collected it can be understand with the below table:

Table 2: Income Tax Collection

Slab In crore % of tax collected

0-5 Lakh 15010 10.10%
5-10 Lakh 21976 14.80%
10-20 Lakh 17858 12.10 %
More than 20 Lakh 93229 63 %

Source: Report released by Indian Finance Ministry, April, 2012

Although, only 1.3 per cent of all tax-payers earn more than 20 Lakh in India, they account for a
whopping 63 per cent of all the taxes collected by Indian Government. So 4.6 Lakh Indians pay a

10
total of 93,229 crore rupees of tax. That comes to an average of roughly 23 Lakh per person.
This all shows that huge amount of tax is evaded by the citizens of India.3

Tax evasion – its forms and effects Tax administration is closely linked with three concepts of
tax avoidance, tax evasion and corruption, they are sometimes used interchangeably. However,
there are essential differences among the three, mainly reflecting the degree of malpractice
involved. Tax avoidance is not illegal in the sense that it usually results from the creativity and
planning of tax accountants and lawyers within the gambit of existing tax laws in aiding
taxpayers to minimise their tax. Tax avoidance is obviously facilitated by complex tax statutes in
which opportunities exist to interpret the tax in the taxpayer’s favour when it is not so intended
by the drafters of the law. Therefore, tax avoidance as a matter is mostly addressed in the context
of the tax policy reform.

Tax evasion, on the other hand, is illegal though, if detected, it normally leads to civil rather than
criminal penalties. It generates an underground economy in the form of income that is not
reported or accounted for in tax returns. As a result, a subterranean economy begins to function
in parallel to the organised economy with generally deleterious effects on equity among taxable
persons, on the efficiency of resource allocation, and on the stability of revenue collection and
the macro-economy.

Corruption goes one step further. It has been defined as the “abuse of power for private gain”. Its
ramifications are grave since it burrows into the very foundations of the society and the
institutional frame work of the government.

Unlike tax avoidance and tax evasion, corruption involves collusion and, often, criminal
connotations. The role of tax administration in curbing corruption is through its investigative
wings but it has to be supported by the prime control wings- such as intelligence, enforcement
and internal security of government.

3
V. Kalpana ,2015 -Tax Evasion - A Major Threat to Economic Development and Growth – Causes and Remedies,
(IJSER) www.ijser.in,Volume 5, No. 1, pp. 45- 56.

11
METHODS OF TAX AVOIDANCE.

1. Declaring less incomes, profits or gains Tax payers declare less income than the actual income
earned by them in any financial year under various heads of income (ie.,under reporting of
incomes) is given below:

a. Income from salaries Salaried tax payers evades tax by using any of the following
methods, like claiming higher rent receipts than the actual rent paid to avail the HRA
exemption, breaking the salary component in to cash and cheque’s, claiming exemption
for school fee, donations and other abnormal indirect expenses like conveyance
allowances, claiming for exemptions of certain perquisites like LTC, claiming HRA
exemption though residing in own house etc
b. Income from House property While computing total income from house property tax
payer may evade taxes by claiming unrealised rent, vacancy allowance and also interest
on borrowed capital by generating documents.
c. Corporate tax evasion and/professional income Corporations and professional persons
evade taxes generally by non recording/under reporting of receipts and claiming over
stated deductions. Companies usually adopt over depreciation of assets, claiming
exemption for amount spent on scientific research activities, advertising expenses, bad
debts, issue of salaries and wages in the names of their family members, excess bonus
fees and commission paid to employees. Professionals like doctor’s, chartered
accountants, lawyers, Engineers etc, evade taxes by not recording their receipts like
consultation fees, gifts given by patients and clients and over stating their personal
expenses as professional expenses, claiming for depreciation of office equipments which
are hired or leased.
d. Capital gain Capital gain shall be one of the most important area of tax evasion because
of the taxpayers adopt under valuation of properties sold and purchased for registration
and evading the stamp duty by real estates and others, claiming for brokerage, stamp
paper and other selling expenses more than the actual expenditure, purchasing another
property even though they are the owners of more than one property, declaring

12
 industries as sick units and also transfer of industries to rural areas because of different
rates of tax for long term capital gains and short term capital gains.
e. Income from other sources Since, it is a residuary head of income and tax payers follow
self assessment method of tax payment, don’t disclose information on winning from
lotteries, puzzles, gambling, betting, card games, Interest on deposits, royalty’s, interest
on securities through bond washing transactions, director fee and other additional
revenues received by them in any financial year.
f. Evasion under incentives as per the IT Act Indian income tax Act, 1961 provided various
incentives to encourage general public for social savings under section 88 of the Act. The
same provisions are misused by tax payers in the form of Rebate in respect of tuition
fee’s of children, expenditure on medical treatment of self and handicapped dependents,
donations to various institutions, interest on educational loans, deduction for rent paid
etc.

2. Over stated expenses Employees evade taxes by claiming expenses more than their actual
amount spent like children school fee, hostel expenses, conveyance allowances, rent expenses,
selling expenses in case of selling of properties, expenses on purchase of securities, collection
charges of interest and dividends, medical expenses of physically handicapped dependents etc.
Companies also over state expenses relating to welfare expenses of employees, transportation
expenses (petrol, diesel, maintenance charges), advertising expenses, salaries and wages,
commission fees paid to the employees and scientific research expenses and thereby evading the
taxes by avoiding the actual amount of income earned by the tax payers.

3. Manipulation of accounts Taxpayer either as an individual or business firm manipulates the

books of accounts either by non-recording of certain incomes or overstating certain deductions
and exemptions. There are four methods of tax evasion practiced by companies across the
country. First it is common to show inflated expenditures, secondly companies routinely reduce
collection figures thirdly companies often reduce stock valuation and fourthly the trend is to
make capital expenditure especially in real estates and show it in accounts as repairs which are
not taxed.

13
Many real estate companies have in the past been caught under-reporting their income and
evading tax. Raids carried out by the department last year unearthed Rs. 800 crore of undisclosed
income.Companies that admitted under-reporting of income included Mumbai-based HDIL
group along with two Mumbai-based developers Bombay Rayon and Electro groups; Delhi-
based Modi and Mehta groups; Jaipur based Agarwal group and Pune based Panchshil group.
According to the income tax department, all these companies provided inflated expenses for
purchase of materials, suppressed amount of professional income and indulged in cash
transactions.

While Mumbai-based Electro group admitted undisclosed income of Rs. 114.50 crore, HDIL
(Housing Development and Infrastructure Ltd) made a disclosure to the stock exchanges about
defaulting to the tune of Rs. 350 crore. The other five companies admitted undisclosed income
ranging from Rs. 22.80 crore to Rs. 85 crore. In September 2010, the income tax department had
raided premises of some other real estate companies and found gross irregularities on their part.
Prominent among those found guilty is the Delhi-based Amrapali group, which according to
sources in the department has admitted undisclosed income of Rs. 73 crore.4

4. Accepted Corruption Corruption is the abuse of the power for private gain. Tax officials
indulge in corruption and help the taxpayers by using their discretionary powers and
interpretation of tax provisions in favour of the tax payers by accepting the bribe by minimising
the tax liability through avoiding the penalty, interest on outstanding liability. Taxpayers accept
the evil of corruption for their personal benefit and believed that the work can be completed
/done by bribing the officials faster than the legal method.

5. Procurement of Materials without bill Materials as a factor of production can be procured

either from registered or unregistered dealers according to their convenient. When the materials
are procured from unregistered dealers through cash transaction without bill /invoice to avoid the
VAT and other charges payable towards the procurement of materials there by the buyer also

4
V. Kalpana ,2015 -Tax Evasion - A Major Threat to Economic Development and Growth – Causes and Remedies,
(IJSER) www.ijser.in,Volume 5, No. 1, pp. 45- 56.

14
benefited and sell the finished products at a lower rate as well as records the same sales value in
the books of accounts which results in evasion of corporate tax.

6. Loopholes in Indian tax system The Indian tax system so complicated that a common person
will never be able to understand it. One common and ordinary man works so hard after a month
of sweating out when he gets his salary in hand, he comes to know that already a part of his hard
earned income has been taken away by the government in the form of TDS and he is not able to
claim the refund back due to the complicated structure of the tax system and many tax provisions
can be interpreted by tax officials and chartered accountants according to their interest to gain
personal benefits.

7. Progressivity of tax rates Tax liability of an individual is calculated based on slab system at
the rates proposed by the annual budgets of the central government. Income of the taxpayer is
exempted from tax if the net income is up to certain limit (Rs.1,60,000 for men) and tax shall be
levied if the income is between certain limits (Rs.1,60,000 to Rs. 3,00,000 at 10 percent and
Rs.3,00,000 to Rs. 5,00,00 at 20 percent and Above Rs. 500,000 at 30 percent) and more tax if
the income exceeds the maximum limit. Therefore the taxpayers always make efforts to reduce
their income at a slab which carries lower tax rate.

8. Dishonesty and Individual behaviour Tax evasion starts where the national interest ends. Tax
payers evade taxes because of the behavior of the tax payer towards the corrupt system and with
an apprehension that the tax money will be misused. Level of tax evasion depends on the honesty
of the tax payers in declaring their actual income earned by them from all sources and also
Chartered Accountant and lawyers who help the company, firms and individuals to evade taxes.

9. Lack of knowledge Many tax payers have the opinion that the filing the tax returns is a tedious
process and many provisions of the Act can not be understand by the common person which
requires the assistance from the Chartered accountant either for the calculation of taxable income
and various provisions applicable for each of the assessment year make the tax payers to evade
the taxes.

15
10. Compliance Cost Cost incurred by the taxpayer to submit the tax returns influences the
behavior of the tax payer for the payment of taxes to the government. Since the Indian tax system
adopted the self assessment scheme many tax payers take the assistance of the experts which cost
the tax payers may affect the interest of the tax payers towards the payment of taxes.

11. Lack of responsibility and integrity of tax officials The tax officials do not have the
responsibility of minimum amount of collection of taxes by adopting various methods of
assessments of tax collection by organising the adalat’s, workshops and public meetings to guide
the general public relating to tax matters and their role is limited only to exercise powers vested
by the Income tax Act.

12. Discretionary Powers of tax officials The income tax Act gives the discretionary powers to
tax officials to determine whether a certain expenses are reasonable or unreasonable,
whetherbusiness is separately assessable for tax holiday method of depreciation, amount of
penalty and interest by interpreting the provisions according to the situation to get personal
benefit.

13. Smuggling Smuggling is a method tax evasion, which people export or import foreign goods
through routes that are unauthorized. People resort to smuggling because they want to avoid
paying total customs duties that are chargeable and also when they want to import items that are
contraband.

14. Evasion of duties Customs duty evasion is another method of tax evasion under which the
importers evade paying customs duty by false declarations of the description of product and
quantity. The importers in order to evade paying customs duty also resort to under invoicing.

THE MEANS THROUGH WHICH TAX PAYMENT IS MANIPULATED

 Out of Book Transactions:

This is one of the simplest and most widely adopted methods of tax evasion and generation
of black money. Transactions that may result in taxation of receipts or income are not entered

16
 in the books of account by the taxpayer. The taxpayer either does not maintain books of
account or maintains two sets or records partial receipts only. This mode is generally
prevalent among the small grocery shops, unskilled or semiskilled service providers, etc.

 Parallel Books of Accounts:

This is a practice usually adopted by those who are obliged under the law or due to business
needs to maintain books of account. In order to evade reporting activities or the income
generated from them, they may resort to maintaining two sets of books of account – one for
their own consumption with the objective of managing their business and the other one for
the regulatory and tax authorities such as the Income Tax Department, Sales Tax
Department, and Excise and Customs Department.

 Manipulation of Books of Account:

When books of accounts are required to be maintained by taxpayers under different laws, like
the Companies Act 1956, the Banking Regulation Act, and the Income Tax Act, it may
become difficult for these taxpayers to indulge in out of books transactions or to maintain
parallel books of accounts. Such parties may resort to manipulation of the books of accounts
to evade taxes.5

 Manipulation of Sales/Receipts:

A taxpayer is required to pay taxes on profit or income which is the difference between sale
proceeds or receipts and expenditure. Thus manipulation of sales or receipts is the easiest
method of tax evasion. Other innovative means may include diversion of sales to associated
enterprises, which may become more important if such enterprises are located in different tax
jurisdictions and thereby may also give rise to issues related to international taxation and
transfer pricing.

 Under-reporting of Production:

5
NishantRavindraGhuge and Dr. VivekVasantraoKatdare, 2016 “A Comparative Study of Tax Structure of India
with respect to other countries”,International Conference on Global Trends in Engineering, Technology and
Management (ICGTETM-2016)

17
Manipulation of production figure is another means of artificially reducing tax liability. It
may be resorted to for the purpose of evading central excise, sales tax, or income tax.

 Manipulation of Expenses:

Since the income on which taxes are payable is arrived at after deducting the expenses of the
business from the receipts, manipulation of expenses is a commonly adopted method of tax
evasion. The expenses may be manipulated under different heads and result in under-
reporting of income.

 Other Manipulations of Accounts:

Besides inflation of purchase / raw material cost, expenses like labour charges, entertainment
expenses, and commission can be inflated or falsely booked to reduce profits. In these cases,
bogus bills may be prepared to show inflated expenses in the books.

 Manipulation by Way of International Transactions through Associate Enterprises:

Inter corporate transactions between these associate enterprises belonging to the same group
or owned and controlled by the same set of parties may be arranged and manipulated in a
way that leads to evasion of taxes. This can often be achieved by arrangements that shift
taxable income to the low tax jurisdictions or tax havens, and may lead to accumulation of
black money earned from within India to another country.

 Manipulation of Capital:

The statement of affairs or balance sheet of the taxpayer contains details of assets, liabilities,
and capital. The capital of the taxpayer is the accumulated wealth which is invested in the
form of assets or as working capital of the business. Manipulation of capital can be one of the
ways of laundering and introduction of black money in books of accounts.

 Manipulation of Closing Stock:

Suppression of closing stock both in terms of quality and value is one of the most common
methods of understating profit. More sophisticated versions of such practice may include
omission of goods in transit paid for and debited to purchases, or omission of goods sent to
the customer for approval. A more common approach is undervaluation of inventory (stock

18
 of unsold goods), which means that while the expenses are being accounted for in the books,
the value being added is not accounted for, thereby artificially reducing the profits.

 Manipulation of Capital Expenses:

Over-invoicing plant and equipment or any capital asset is an approach adopted to claim
higher depreciation and thereby reduce the profit of the business. As already stated, increase
in capital can also be a means of enabling the businessman to borrow more funds from banks
or raise capital from the market.

GENERATION OF BLACK MONEY

There can be two different modus operandi involved in the generation of black money. The first
is the crude approach of not declaring or reporting the whole of the income or the activities
leading to it. This is the likely approach in all cases of criminal, illegal, and impermissible
activities. The sophistications in such an approach mostly get introduced subsequently for the
purpose of laundering the money so generated with the objective of making it accountable and
converting it into legitimate reported wealth that can be openly possessed and used.

The same approach of not declaring or reporting activities and the income generated there from
may also be followed in cases of failure to comply with regulatory obligations or tax evasion on
income from legitimate activities.

Generation of Black money in Some Vulnerable Sections of the Economy

While the source of generation of black money may lie in any sphere of economic activity, there
are certain sectors of the economy or activities, which are more vulnerable to this menace. These
include:

 Land and Real Estate Transactions

 Bullion and Jewellery Transactions

 Financial Market Transactions

 Public Procurement

 Non-profit Sector

19
  Informal Sector and Cash Economy

 Trade-based Money Laundering (TBML)

 Tax Havens

 Offshore Financial Centers

ECONOMIC IMPACT OF TAX EVASION

The tax evasion can seriously affect the entire economic system of India. Some important
impacts are discussed here:

1. Less Tax for the Government: Many times, the Indian Government has failed to collect the
estimated amount of tax from the people of our country and for this, credit has to go to the black
money driven underground economy. Recently, a report was submitted to the Finance Ministry
of India that divides the spread of black money in different sectors like real estate, mining,
telecom etc.

2. Uncontrollable Inflation: When black money is out in the market, the amount of money in
the system is higher than the Government expects. This causes the prices of commodities to
increase to a level beyond normal. This is a direct result of people having more money offering
more money on specific items. Even if the Government tries to control the credit flow in the
market by taking necessary measures, the amount of black money present upsets the move,
resulting in some sort of pressure on the economy.

3. Leads to Mass Poverty: The distribution of wealth and income in our country has been
severely affected by the growth of underground economy. The common people get affected
indirectly in so many ways. The tax evaders are keeping the money away from the deserved. .

4. Lack of Technology: Due to the existence of black money, India is facing the problem of
shortage of capital. This has the direct impact on the up gradation of technology in all sectors.
The major reason behind such backwardness is the parallel economy.

5. Impact on Growth by moving investments on Gold, Stones and Jewellery: People who
are looking to turn black money into white money are largely investing in precious metals like
Gold and other jewelry. There are people who believe that almost 70% of the total gold

20
investment in our country is black money. One reason for people to invest in gold is that it is
hard to trace. People in black market may buy gold bars, coins, jewelries etc. because one can
buy gold easily and can be converted back to money anytime. This flow of underground money
has caused Indian economy to stall on its growth.

6. Corruption: While corruption creates black money in the economy, it can also be a result of
the growing underground market. People with black money are able to bribe the administrators
and politicians to get what they want. By doing this, they are able to get what they want and
others are pushed down the stack.

7. Inflated Real Estate: When people with deep pockets are ready to pay more for a piece of
land, the price of surrounding land also tends to increase; thus artificially inflating the prices of
an entire area. Generally, people involved in black money market are always ready to pay more
for a piece of land as this helps in converting their colored money to legal money.

8. Transfer of Indian Funds Abroad to Safe Heavens: The black money generated in India is
kept in foreign tax havens. For this, money has to be transferred from India to other countries
through secret channels. Under-invoicing of exports and over-invoicing of imports are two of the
main methods used by black money holders for transferring money overseas.

9. Encourages Anti-Social Activity: It is no doubt that black money is a curse to any country.
Black money is always promoting anti-social activities in the society. Bribery, mentioned earlier,
is only one example. The anti-social effects of black money include activities like terrorism, a
huge threat already to our country.

MEASURES UNDERTAKEN BY THE GOVERNMENT TO AAVOID TAX EVASION

Several steps as below have been taken by India government to avoid tax evasion. In India, tax
evasion is regarded as a crime. Prosecution and Penalties are imposed under different acts by
government. Income tax reward scheme has been introduced by Income Tax Department which
gives rewards to informers about tax evasion. Recently, India has entered into pact with US to
avoid tax evasion by Americans through Indian financial organizations. Special Bearer Bond
Scheme (Immunities and Exemptions Act, 1981) enable person in possession of black money to
invest in special bonds. Voluntary Compliance Scheme (Amnesty Scheme) was another one.
Government increased the tax slab, reduced deduction rate, and increased legal tax avoidance

21
measures. Most recently, Tax Administration Reform Commission was set up by Government to
make structural reform to tax matters to simplify and streamline tax procedures. Earlier India had
set up several committees like Taxation Enquiry Committee, Indian Tax Reforms Committee,
and Direct Taxes Enquiry Committees etc. Transfer Pricing Audit was introduced by Finance
Bill to audit undisclosed transactions to curb tax evasion

Generation of black money, stashing it abroad in tax havens and recovering such illicit wealth
secreted in these accounts was one of the dominant issues in the run up to the 2014 General
elections. In fact on assuming office one of the first decisions of Narendra Modi led NDA
Government was to constitute a Special Investigating Team [SIT] as mandated by the Hon‟ble
Supreme Court to look into these matters. 6

While the SIT was operating on a narrow compass the fact remained – much was left to be done
by the Government. It is in this background that Budget 2015 has pronounced certain measures
to deal with the “generation of black money and its concealment effectively and forcefully.” This
statement of intent has been backed by providing highest priority to investigations into cases of
undisclosed foreign assets. This is over and above that investigation conducted by SIT.

According to the Finance Minister “major breakthrough” has been made with the Swiss
Authorities and certain critical and actionable information obtained from such authorities

Measures to fight tax evasion :

1. Reduction in tax rates Prevalence of high tax rates is the first and for most reason for tax
evasion, because this is what makes the evasion so profitable and attractive in spite of the
attendant risks. If public conscience is to be aroused against tax evasion and if tax evaders are to
be ostracised by the society at large, the public needs to be convinced that tax evasion is
antisocial. This objective is difficult to achieve so long as the marginal rates of taxation are
confiscatory. The high rats of taxation create a psychological barrier to greater effort and

6
NishantRavindraGhuge and Dr. VivekVasantraoKatdare, 2016 “A Comparative Study of Tax Structure of India
with respect to other countries”,International Conference on Global Trends in Engineering, Technology and
Management (ICGTETM-2016)

22
undermine the capacity and the will to save and invest. The present high level of taxation leaves
the Government with little scope for maneuverability for raising additional resources in times of
emergency. The maximum marginal rate of income tax, including surcharge, should be brought
down in order to create an impact, the reduction in the rates of taxation should be at one stroke

2. Minimisation of controls and licenses A committee of experts should be appointed to enquire

into the utility of all existing controls, licensing and permit systems, and suggest elimination of
such of these as are no longer considered necessary. This committee may also suggest changes in
law and procedures so as to ensure that the controls which are absolutely essential for the health
of the economy are administered more effectively and with the least harassment to the public.

3. Regulation of donations to political parties There is a need to keep political institutions free of
corruption. Removal of the ban on donations by companies to political parties is, therefore, not
favoured. Nevertheless, it is an accepted fact of life that in a democratic setup, political parties
have to spend considerable sums of money and that large sums are required for elections. As in
West Germany and Japan, in our country also, the Government should finance political parties.
Reasonable grants-in-aid should be given by the Government to national political parties and
suitable criteria should be evolved for recognising such parties and determining the extent of
grant-in-aid to each of them. For according recognition to a political party for this purpose, it
should be necessary, inter alia that it is registered under the Societies Registration Act, 1860 and
its yearly accounts are audited and published within a prescribed time. Irrespective of the
decision of government on the question of financing political parties, the parties may be required
to get their accounts audited and published annually.

Donation by taxpayers, other than companies, to recognised political parties should be allowed
as a deduction from the gross total income subject to certain restrictions. The maximum amount
eligible for deduction on account of donations to political parties should be 10 per cent of the
gross total income, subject to ceiling of rupees ten thousand. The deduction to be allowed should
be 30 per cent of the qualifying amount of the donation.

4. Creating Confidence among Small taxpayers The practice of being to meticulous in small
cases, where no worthwhile revenue is involved, has done much to damage of the department in

23
the public eye. The initiative for undoing the danger lies with the department. The instructions
issued by the Central Board of Direct Taxes on the new procedure for making assessments in
small income cases make a bold departure from the past and are likely to achieve more
significant results than the earlier small income scheme.

5. Allowance of Certain Business Expenses Entertainment expenditure which is incurred

primarily for the furtherance of the tax payers business and is directly related to its active
conduct should be allowed to be deducted up to the ceilings prescribed under section 37 (2A) of
the Income-tax Act, 1961.

6. Changes in Penal Provisions Penalty serves its purpose only so long as it is with in the
reasonable limit. Once it crosses that limit, it is more likely to increase the rigidity of the
taxpayer's recalcitrance than to reform him. A penalty based on income instead of tax hits the
smaller taxpayer more harshly. The quantum of penalty imposable for concealment of income
should be with reference to the tax sought to be evaded, instead of the income concealed.

7. Vigorous Prosecution Policy The department should completely reorient itself to a more
vigorous prosecution policy in order to instill fear and whole some respect for the tax laws in the
minds of the taxpayers. Further, where there is reasonable chance of securing a conviction, the
tax dodger should invariably be prosecuted.

8. Intelligence and Investigation To cope with the increasing refinement and sophistication of
the techniques of tax evasion, there is a need for complete re-orientation in the department's
approach to its methods of intelligence as investigation. The machinery for intelligence and
investigation at the command of the department should also be thoroughly overhauled and
streamlined to tackle adequately the menace of tax evasion.

9. Taxation of agricultural income Agricultural income, which is at present outside the central
tax net, offers plenty of scope for camouflaging black money. There is urgent need for
agricultural income being subjected to a uniform tax more or less on par with the tax on other
incomes so as to eliminate the scope for evasion of direct taxes imposed by the Union
Government.

24
10. Compulsory maintenance and audit of accounts A statutory provision may be made
requiring maintenance of accounts by all persons in profession, and by businessmen where the
income from business is in excess of exempted limit or turnover or gross receipts are in excess of
Rs. 50 lakh in any one of immediately three preceding years. A provision may be introduced in
the law making presentation of audited accounts mandatory in all cases of business or profession
where the sales /turnover /receipts exceeds the exemption limit.

11. Permanent Account Number The absence of a uniform system of indexing all taxpayers in
the country on a permanent basis has to some extent been responsible for the difficulties
experiences by the department in tackling tax evasion. It will be necessary to have an additional
code, a 'Records Locator Code', to help locate the records of a taxpayer when the case is
transferred from one circle to another after the permanent account number has been allotted. To
avoid confusion with the permanent numeric code, this records locator code may be short
alphabetic code. It will not be a part of the permanent code and will not in any way vitiate its
permanent character.7

12. Power of Survey A new provision may be introduced as an adjunct to section 133A of the
Income-tax Act, 1961 to enable the Income-tax Officer to visit any premises of an assessee for
the purposes of counting cash, verifying stocks, and inspecting such accounts or documents, as
he may require and which may be available there. He may also obtain any additional information
and record statement of any person who is found at the premises, in respect of matters which
would be relevant for making a proper assessment

Information made available by Central board of Direct taxes reveals that there had been a steady
and continuous efforts to unearth the income tax evasion through searches. The assets seized
during 2008-2009 were to the tune of Rs. 3059.89 crore. Tabulated information giving the details
of number of searches, assets seized and unaccountable income disclosed for the years 1999-
2000 to 2008-2009 is presented below. The statistics of prosecutions that are initiated against the
tax evasions reveal that conviction awarded was low for such prosecutions. During the year 2000

7
Rossi Marcelo J., “The Ethics Of Tax Evasion: A Survey Of Law And Business Students”,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=875892

25
01 of the 678 cases in which prosecutions were decided under Direct taxes enactments, 254 cases
were compounded, 22 cases were acquitted and only 17 cases resulted in convictions.

13. Increasing Survey Operations Adequate number of survey circles should be set up to ensure
comprehensive and continuing survey on rotational basis. Further, an officer of the rank of
Assistant Commissioner should be placed in over all control of survey operation in each
Commissioner's charge and he should also hold charge of the Special Investigation Branch.
Besides, in the bigger cities like Delhi, Bombay, Calcutta, Bangalore and Madras, a survey
Range should be created in other cities too.

14. Collection, Collation and Dissemination of Information The Central Board of Direct Taxes
should lay down each year a programme and specify targets for collection, collation and
dissemination of information. It should also ensure that the programme is strictly adhered to and
efforts are made to reach the targets fixed. The sources to be tapped every year should be decided
at the national level by the Board at the beginning of each year, to be followed and implemented
strictly at all levels. Different types of information may be collected in different years so as to
keep an element of surprise.

15. Co-ordination between Banks, other offices and the Income tax department

The legal provisions under which the system of permanent account numbers is introduced
should also include that tax payers should quote their permanent account number in applications
for bank draft, mail transfers, telegraphic transfers, etc., if the amount involved in such
transactions exceeds twenty thousand rupees.

16. Changes in the form of income-tax return The form of return of income should be made
more elaborate than what it is at present by incorporating a schedule of exempted income, net
worth, personal expenditure and other outgoings. To start with, the requirement to furnish this
additional information should be applicable only when the total income exceeds Rs. 5 lakh.

17. Reintroduction of expenditure tax Introduction of an expenditure statement as a part of the

form of return of income should be quite effective in checking evasion through consumption
expenditure, without disturbing the existing tax structure.

26
18. Checking under-valuation of immovable Properties It would be expedient for the
government to assume powers to acquire immovable properties in cases of understatement of
cost of construction as well. However, the government should consider such extension only after
it has had some experience of acquisition of immovable properties in cases of understatement of
sale consideration.

19. Tax treaties for exchange of information relating to tax evasion Section 90 of the Income-tax
Act, 1961 may be suitably amended to enable the government to enter into agreements with
foreign countries not only for the abidance of double taxation of income but also for prevention
of fiscal evasion, further, our existing agreements should be revised so as to provide for
exchange of routine information and market intelligence as also specific information in
individual cases to facilitate investigation of tax evasion and recovery of taxes.

20. Arousing social conscience against tax evasion Tax evasion cannot be checked by stringent
legal measures alone. It can be dealt with effectively only if such measures are backed by strong
public opinion against black money and tax evasion. In helping to build up such public opinion,
the government can play a vital role. The foremost measure in this regard is denial of the
privileges which are still available to tax evaders.

SUGGESTIONS FOR IMPROVEMENT IN INCOME TAX COMPLIANCE:

1. Government of India is required to open more investment options in Income tax law to
increase capital formation in the Country.
2. There is high need to consolidate and simplify the tax laws.
3. Income tax Department should run tax payers awareness programme so that a common person
may understand the tax law and procedures.
4. Provision for minimum taxes should also be incorporated for persons other than company
except for individuals like for Societies, Firms, and LLPs etc.
5. It should reduce tax rates on edibles so that inflation rate may be brought down on food items.
6. Government should enlarge the tax regime to capture effectively the middle and lower
business class.
7. The area of wealth tax needs to be enlarged to cover more people in its regime.

27
8. The poor people should be tried to be freed from indirect tax regime while more indirect taxes
should be imposed on rich class to reduce income inequality gap.
9. Today there is no separate tax provision for limited liability partnership firm. It is treated like
other partnership firm. Due to its peculiar feature and being an entity entirely different from
partnership firm, separate provisions are needed to tax this entity .
10. Today there are two separate boards for direct tax and indirect tax. Central board of direct
taxes looks after direct tax and Central board of Excise and customs looks after indirect tax.
There is lack of coordination between these two departments and thus it is highly needed that
these two departments are consolidated into one.

CONCLUSION:

High tax rates, corruption in public sector units, multiple tax rates and inefficient tax authorities
are the main causes of tax evasion. It 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.8

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.

8
Rossi Marcelo J., “The Ethics Of Tax Evasion: A Survey Of Law And Business Students”,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=875892

28
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.

29
REFERENCES :

 Singh, Jaspal& Sharma, Poonam , 2007 ,”Tax Professionals Perception of the Income
Tax System of India an Empirical Evidence”, The ICFAI Journal of Public Finance,
Volume 5, No. 1, pp. 45-56.
 Arora R.S. & Rani Vaneeta , 2010,”Tax evasion and corruption in the Indian Income Tax
System : causes and Remedies” , Indian journal of Finance, Vol. 4,pp.30-36
 V. Kalpana ,2015 -Tax Evasion - A Major Threat to Economic Development and Growth
– Causes and Remedies, (IJSER) www.ijser.in,Volume 5, No. 1, pp. 45- 56.
 NishantRavindraGhuge and Dr. VivekVasantraoKatdare, 2016 “A Comparative Study of
Tax Structure of India with respect to other countries”,International Conference on
Global Trends in Engineering, Technology and Management (ICGTETM-2016)
 McGee Robert W. , “Tax Evasion in Armenia: An Empirical Study”,
http://edoc.bibliothek.uni-
halle.de/servlets/MCRFileNodeServlet/HALCoRe_derivate_00003041/Tax%20Evasion
%20in%20Armenia.pdf
 Nickerson Inge, “When Is Tax Evasion Ethically Justifiable? A Survey Of German
Opinion”, http://sbaer.uca.edu/research/allied/2005vegas/legal/12.pdf
 Rossi Marcelo J., “The Ethics Of Tax Evasion: A Survey Of Law And Business
Students”, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=875892

30