Tax evasion is one of the most common things that happen today. But, it is for public welfare and benefits that timely and consistent tax payments ensure. But what happens when people evade taxes? Do they pay penalties? How are taxes actually evaded? Let’s find all the answers here. Tax evasion penalties are way more severe than penalties that you would have to pay if you are late, or you skip a few dates. So, let’s get to know the most about them here.
But firstly, let’s understand tax evasions.
What are Tax Evasions?
Tax evasion is defined as any activity that aims to conceal, understate, or falsely report income in order to reduce your tax liability. Tax fraud is defined as failing to pay the required tax or paying less than the required amount. Tax evasion is illegal in India and is punishable by harsh penalties.
How is Tax Evaded?
People can use a variety of methods to avoid paying taxes. The following are some of the most commonly used strategies:
Many people and businesses resort to smuggling to avoid paying state taxes, import-export taxes, and customs duties. Smuggling is a punishable offense under Indian law, and tax evasion can result in harsher penalties.
- Incorrect Filing
Submitting incorrect information, such as understating your income, overstating deductions, or engaging in any other type of false reporting, is a common method of income tax evasion. This, however, is illegal.
- Fake Financial Statements
Incorrect financial documents, such as balance sheets and account books, can create the impression of a low annual income. Some businesses also refuse to keep sales receipts in order to understate their income and reduce their tax liability for the year.
- Getting Out through Bribes
Another method of tax evasion is to offer a bribe to an income tax official in order to change the amount of tax due. Bribes are used by people to reduce or eliminate any record of tax owed in their name.
- Storing out of the Country
The Indian income tax department does not have jurisdiction over international bank accounts. As a result, some people may keep a bank account outside of the country to store money.
- Hiding Income
Many people use cash transactions to conceal the source of their earnings. If you don’t have any income on paper, you don’t have to pay any taxes either. Invoices for sales are frequently not produced by businesses. Similarly, landlords may only accept cash payments for rent rather than bank transfers or checks.
- Utilizing Fake Docs
Another tax evasion tactic is to have fake documents. With this, they can prove that they are eligible for a tax deduction, such as a disability certificate to claim tax deductions under Section 80U.
Tax evasion usually only happens on direct taxes, it is not quite possible to evade indirect taxes. If you did not know both – the difference between direct and indirect tax is here.
Direct taxes are non-transferable taxes that are paid to the government by the taxpayer. Whereas, indirect taxes are the taxes that are transferable taxes where the liability to pay can be shifted to others.
Penalties for Tax Evasion
The penalty for tax evasion can vary depending on the type of fraud committed and the amount of tax owed. Here are some examples of situations and the penalties imposed in each case:
- Surpassing the Due Date
All taxpayers are required to file their income tax returns during the tax filing period for each fiscal year, according to subsection (1) of Section 139 of the Income Tax Act of 1961. If anyone fails to file their income tax return for any reason, they must pay a 5,000 penalty.
- When Financial Books are not Maintained
Normally, the maximum penalty that can be imposed is 25,000.00. If the assessee has engaged in international transactions, the penalty will be 2% of the value of such international transactions or specified domestic transactions.
- When Income is Hidden
A 10% penalty is payable if the income determined includes undisclosed income. However, if such income was included in the return and tax was paid before the end of the relevant previous year, no such penalty will be imposed.
- Not Following TDS
A tax deduction account number (TAN) is essential for businesses or employers who deduct and collect tax at the source. Failure to obtain a TAN can result in a 10,000 fine.
- Not Complying with the Demand Notice
If there are inconsistencies in the income tax return, the income tax (IT) department may issue a demand notice. If this occurs, the IT department sends a demand notice outlining the amount of tax that is still owed. The taxpayer has 30 days from the date of receipt of the document to reply to this notice. Failure to respond and pay the required tax may result in a penalty.
- When there is no Auditing
If a business fails to have itself audited as required by Section 44AB, it must pay a penalty of 1.5 lakhs or 0.5% of its sales turnover, whichever is greater. Furthermore, if the taxpayer fails to provide a report from an accountant as required by Section 92E, they must pay a penalty of at least one lakh rupees.
There are more scenarios where a person could be fined for not complying with the income tax rules and regulations. Hope you’ve got them all covered.
Tax evasion is a pretty serious crime in the country. This is why it is extremely important to keep things under your control when it comes to Income tax and Income tax payments.