The implications of tax evasion

In May 2009, searches and seizures by the Income Tax Department in the National Capital Region, Uttar Pradesh, Maharashtra and Himachal Pradesh unearthed jewellery and cash hauls worth hundreds of crores (billions) of rupees.

In the country's capital alone more than Rs 860 crore (Rs 8.60 billion) is owed: by real estate firms to infrastructure leasing and building companies to paan masala outfits and retail businesses.

In Bangalore, major global IT players have been hauled up for evading service tax.

Industry experts estimate the loss of a billion dollars of revenue from the evasion of tax.

What is tax evasion?

Simply put, tax evasion occurs when any trust, individual, or firm, seeks to avoid paying taxes by illegal and unfair means, by, for example, deliberately hiding income from the tax authorities to reduce the tax liability.

People have been known to submit dishonest reports, including declaring less gains, profits, or income than what was actually earned. Other means of evading tax are smuggling, and avoiding paying out customs duty, value added tax, and income tax.

Smuggling involves the export or import foreign goods through unauthorised routes, to avoid paying customs duties, or to bring in contraband.

Importers evade paying customs duty by submitting false declarations of the description of the product and the quantity imported.

Producers or retailers that collect VAT from consumers evade paying taxes by showing lowered sales amounts.

The double-taxation system that includes VAT and service tax has resulted in a lack of clarity with respect to tax-related issues.

What is the direct result of evading tax?

Tax evasion results in the loss of revenue for the government. It generates more and more black money -- money that is acquired through illegal means -- that people try and offload as quickly as possible by purchasing real estate, jewellery, gold, automobiles, paintings, expensive clothes and accessories, and so on. This distressed purchasing artificially inflates prices and therefore the market.

The greater the income in the black money circuit, the greater the freedom of external economic transactions, and the greater the leakage into foreign financial institutions and markets.

Not only is tax evasion detrimental to the progress of the economy, but also harmful to the individual.

Paying taxes, and on time, means better healthcare and education. The risk-reward for tax evasion is highly unfavourable. It's better to pay your taxes on time and sleep well.

If you are a salaried employee, then TDS (Tax Deducted at Source), helps you to pay your taxes.

If for any reason it is found that taxes have not be accurately paid the individual or tax payer can come under scrutiny.

What is a scrutiny?

The Income Tax Act has a provision where if a tax officer feels you have hidden any income in your tax returns files and detects a conflict in the particulars recorded in your return, the issue can be escalated for a scrutiny.

Typically what happens is a scrutiny notice is served within a one year time frame from the end of the month during which you have filed your returns.

Suppose you have filed your returns in the month of May 31, 2009, you may get a notice anytime on or before May 31, 2010. The notice contains relevant details of the tax payer, his PAN, et cetera and also provides a date on which the he needs to appear before the IT officer.

The tax payer also has the provision of sending a representative in whose name a valid power of attorney has been issued. This usually is the chartered accountant of the taxpayer.

As part of the scrutiny process the tax officer will request all the bank account statements, seek details of all family members who reside with the tax payer, do a match analysis of income and expenditure, check on credit card expenditure, perks and other gift monies received, as well as interest free loans lent to relatives.

In the case of tax evaders, usually an audit is conducted on their businesses as for salaried employees it is mandatory for the employers to deduct tax at the source.

How does TDS work?

According to the Income Tax Department, tax will be deducted at source whenever the taxable income exceeds the specified limits at the rates prescribed under Schedules to Income Tax Act.

Basically, your employer deducts the tax part of your receipt and pays the deducted amount to the government on your behalf.

TDS applies not only to salaries (Section 192), but also interest on securities (Section 193), dividends (section 194), interest other than 'interest on securities' (Section 194A); winnings from lotteries/crossword puzzles/card games (Section 194B), winnings from horse races (Section 194BB), payments to contractors/sub-contractors (Section 194C), insurance commission (Section 194D), payment out of deposits under National Savings Scheme (194EE) or on account of repurchase of units referred to in Section 80CCB (Section 194EE/Section 194F), commission/ brokerage (section 194H), commission on sale of lottery tickets (Section 194G), rent (Section 194I), professional/technical fees (Section 194J), et cetera.

Whether you're an individual or a company, planning how much tax you will pay ensures that your income sources and investments are protected.

This makes you, and the society to which you belong, secure and worthwhile to live in. It is an obvious win-win for you, and for the government.