It is often said that the one who knows the defects in law cannot be punished as he will find a way to escape the punishment in law. Similarly, in taxation the one who knows the loopholes of how to fake income and interest can reduce his liability and substantially will result in the revenue loss of government. So, the need of the changing times is that there should be ways and means by which the evasion and avoidance is brought under control
Income Tax Avoidance
These are the 3 broad ways of income tax avoidance:
These three ways are further divided into for avoidance of heavy taxes
Purchase of defunct company, which has made heavy losses, so as to use up that loss against the future profits.
Accumulating income by means of trust so as to avoid sur tax.
Arranging for the tax avoider’s income to come to him as capital:
Letting property on lease at a large premium with a much-reduced rent, and
Selling securities just before dividend is paid and repurchase them after.
Arrangements between a friendly employer and employees, which suit them both to the disadvantage of revenue.
Transferring income from a high sur tax payer to someone who pays little or no surtax. However, this method is now not prevalent in India.
Arranging expenditure in such a way as to qualify for deduction for tax purposes from the business for instance by allowances, charitable donations, subscriptions and other expenses.
Income splitting by various methods of intra family arrangements, trust and other controlled corporations.
Transferring income to a corporation towards such a state where tax is at minimal rate or even no tax.
Showing of agriculture income to get exemption.
Purchasing government bonds which provide discount and interest in tax free.
Income Tax Evasion
Some of the provisions of tax evasion are as follows these are provisions why people evade taxes:
Omitting to report any taxable income which needs to be shown in income tax return.
Purposely changing, manipulating and altering books of accounts or making alternations continuously.
Maintaining various sets of accounts books.
Opening various accounts under fraud names, or those accounts on which sign on cheque is not needed by the account holder of false name.
Keeping transactions out of account books.
Filing of incomplete or improper return.
Inflating expenses means purchasing of bills and showing expenses without actually not making those expenses.
Purchasing property in minimum white money and rest in black money.
Reforms to prevent tax evasion and avoidance
1.Not Filing Income Tax Returns:
If a taxpayer is obligated to file income tax returns before the due date as required under 139, subsection (1) of Income Tax Act and be unsuccessful to do so, the assessing officer can charge a fine of INR 5,000 or more.
2.Failure to Pay Tax as Self-Assessment:
As per Section 140 A (1) of the Income Tax Act, if a taxpayer is unsuccessful to pay completely or partially—self-assessment tax or interest and fee or both, the taxpayer is acknowledged as a nonpayer. The assessing officer can as per Section 221(1) announce the taxpayer as a nonpayer and impose a fine that does not surpass the tax in arrears. However, if the taxpayer is intelligent to deliver satisfactory proof for nonpayment, the assessing officer can immune the taxpayer from paying the penalty.
3.Failure to Comply with Demand Notice:
If a taxpayer obtains a demand notice inquiring for tax payment, the taxpayer has to pay the essential amount in 30 days to the name and department stated in the notice. Failure to do so will lead to the outcome in additional severe provisions and the taxpayer will be treated as a defaulter.
5. Failure to Get Accounts Audited:
If a taxpayer obtains a demand notice inquiring for tax payment, the taxpayer has to pay the essential amount in 30 days to the name and department stated in the notice. Failure to do so will lead to the outcome in additional severe provisions and the taxpayer will be treated as a defaulter. Section 92(E) involves the taxpayer to provide a statement from the taxpayer. Failure to do so will sustain a punishment of INR 1lakh or more. If any document is not equipped or attached, a punishment of 2% of the transaction’s value (international or domestic) is imposed, this is under Section 92(D)3.
6. Concealment of Income:
Income concealment to not pay tax is a disease that needs eradication before its effect throws the economy into a downward spiral. Under section 271(C) of Income Tax Act, there is a 100% to 300% punishment of the tax escaped if someone is caught covering tax. The tax evasion punishment varies under certain circumstances.
If the taxpayer admits to the covered tax, he or she will have to pay 10% of the previous year’s unrevealed income along with interest.
If the taxpayer does not reveal the unrevealed amount but does so in the return of income furnished in the previous year, 20% penalty of the unrevealed amount along with an interest is to be collected. If the previous year’s amount is undisclosed, the minimum penalty that can be collected is 30% and the maximum is 90%.
7. Failure to comply with Income Tax Notice:
When the Income Tax department issues a tax notice, the receiver taxpayer has to submit. Failure to fulfill empowers the assessing officer to send a notice under Section 142(1) or 143(2) requesting the taxpayer to:
File the return of income.
Furnish in writing all details of assets and liabilities.