An investigation into tax evasion 

This article was authored by Utsav Pachouri pursuing Diploma in Advanced Corporate Taxation and Tax Litigation and edited by Koushik Chittella.

This article has been published by Sneha Mahawar.

Did you ever think about how some people manage to pay less or no amount in taxes while other people pay more? People think about this when they see the gap between the rich and poor people in India, along with the state of public services and buildings. Tax evasion is when people do not pay the taxes they should have. This has been a problem in India for a long time. It has become more common and complex because of advancements in finance technology and global politics. 

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Tax evasion is not just about people’s choices or what they think is right. It’s also about how powerful people and influential folks use their money, connections, and influence to bend the tax rules to their advantage and avoid paying what they should have. Let us dive into the topic and understand how wealthy and influential people manage to get rid of taxes. 

Tax evasion is an illegal method to avoid paying taxes, whether by a company or an individual. It is a serious offence and attracts hefty penalties. It can be hiding income or falsely showing wrong income by various unrealistic deductions while filing their income tax. 

Tax evasion is a big problem in India because it means the government loses the money that was to be paid as tax. About 19-21% of India’s total money earned (called GDP) is lost because of tax evasion.

In India, various methods and strategies are employed to evade taxes, including:

  1. Concealing income from businesses, professions, capital gains, or foreign assets
  2. Making claims for deductions or exemptions related to expenses, investments, donations, or losses that are not legitimately incurred or eligible
  3. Illegally smuggling goods across borders or between states to avoid paying customs duty, sales tax, or value-added tax
  4. Presenting inaccurate statements, accounting books, or tax returns to misrepresent an individual’s or a company’s income and assets
  5. Utilising documents like PAN cards (Permanent Account Number) invoices, receipts, or certificates to evade taxes and seek refunds
  6. Engaging in bribery of tax officials or intermediaries to reduce tax liability, bypass scrutiny measures, or obtain assessments
  7. Undisclosed amount in offshore accounts

There are various reasons why tax evasion is common in India, like:

  • High taxes
  • Having to pay number of different taxes can be tough. It makes them defy the tax rules.
  • The complex and intricate tax system creates confusion and uncertainty among taxpayers, leading to compliance costs.

When tax compliance and enforcement are low, it gives the impression that evading taxes is not risky and can bring benefits. This leads to the normalisation of tax evasion as a common behaviour. When the government does not show clearly how it uses public money and is not responsible for it, that causes people to lose trust and belief in the government. As a result, taxpayers become less willing to fulfil their tax obligations.

Wealthy people and large companies avoid paying their fair share of taxes by using their power and money. They do things like set up fake companies, hide their money in secret places, and take advantage of agreements between countries to pay less tax. This places an extra burden on the other class of people, who end up indirectly shouldering a greater share of the tax burden than they ought to. Here are some tricks wealthy and important people use to avoid paying taxes:

  1. Utilising shell companies: They create fake companies that don’t really do any business. These fake companies help them hide their money and move it between different countries without paying taxes. 

A recent Oxfam report revealed that India’s top 100 companies had more than 700 subsidiaries located in tax havens.

  1. Resorting to tax havens: Tax havens refer to countries or jurisdictions that offer no taxes, along with laws that safeguard secrecy and lenient regulations for investors. Wealthy individuals and corporations take advantage of these tax havens to stash away their money beyond the reach of taxing authorities or enjoy taxation rates. 

According to estimates by Global Financial Integrity, India experiences a loss of $10 billion due to financial outflows directed towards tax haven destinations.

  1. Double taxation avoidance agreements (DTAAs): Are agreements made between countries to prevent the issue of taxation on income earned in both countries? Nevertheless, affluent individuals and corporations often exploit the loopholes and inconsistencies in tax regulations across nations through the use of DTAAs. 

A recent report by Tax Justice Network revealed that India loses $5 billion per year due to treaty abuse by multinational corporations.

  1. Using political connections: Wealthy individuals and corporations use their political connections to influence tax policies, laws, regulations, or administration in their favour. They also use their political power to ask for special financial benefits like tax discounts, exceptions, support, or rewards that lower the amount of tax they have to pay.

People and businesses contribute to the government in the form of taxes. The government then uses this money for the development of the country and its citizens. It helps to support hospitals, schools, and roads and also keeps the country safe.

While some people who do not pay their taxes correctly get away without any consequences, others pay their taxes honestly and show their true income. This situation can make people lose faith in the government and the law. It’s also not fair for businesses because businesses that evade taxes can do better than their competitors, which can harm businesses and the environment. Because of this, India might not look good for foreign investments or foreign trade.

Let us discuss the instances of high-profile tax evasion cases in India that exemplify how certain individuals and companies employ illicit means to avoid paying taxes rightfully owed to the government. The action by the government can be slow and not enough because the people accused of wrongdoing find ways to use tricks to delay or avoid facing punishment.

  1. Vijay Mallya: From the King of Good Times Gone Bad

Vijay Mallya used to lead a company that made beer and ran airlines. He became famous for his best way of living and throwing big parties. However, in 2016, it was noticed that he flew to a foreign country after allegations of defaulting loans exceeding ₹9,000 crore from banks as well as evading taxes on his income and assets.

  1. Nirav Modi: Unveiling the Diamond Tycoons Elaborate Scam

Nirav Modi was an entrepreneur who is known for his diamond and jewellery business. He was in the business of selling jewellery to celebrities and royal family members. However, in 2018, he absconded after accusations of defrauding a bank with a sum exceeding Rs 13,000 crore using forged letters while evading tax obligations on his income and assets. Apparently, it was done using fake invoices and tricky money transfers to pull off a plan, avoiding taxes.

  1. Reliance Industries: The Oil Giant That Manipulated Costs and Prices

Reliance Industries, led by Mukesh Ambani, is an Indian company that stands out because it’s owned by the people in India. Reliance Industries operates in a lot of different sectors, like oil, gas, telecommunication, shops, and media. Allegations have been made against the company for inflating gas production costs in a sea area by more than $2.4 billion while also evading taxes on its income and profits. The Income Tax Department has sent out notices seeking more than Rs 25,000 crore in taxes and penalties from the company.

Individuals who evade taxes are a challenge to society and the government. These individuals should be tracked, and the government must pay attention to these kinds of people. To stop this from happening, the government should consider implementing the following measures:

  • In order to develop better and stronger tax laws, new rules and regulations are important. The legislature must make tax laws that prohibit people from evading tax. New legislation must fall into place that will close the loopholes in the current tax laws.
  • Enhancing and improving tax administration and enforcement is also highly significant.
  • Increasing collaboration between nations and international organisations plays an important role in understanding this issue. Sharing tax information helps make our systems better.
  • Increasing awareness about issues related to taxes should be a priority for the government. Raising awareness among individuals about the benefits of tax-paying helps in better development of society.
  • We should focus on helping tax agencies work better using technologies like data analysis and more advanced tools. By using these technologies, we can better identify those who do not pay their taxes and punish them with a hefty penalty and a criminal charge.

Avoiding taxes in India affects many things, like the economy, society, the environment, and how the government works. It results in the government making less money, which makes things harder for taxpayers, which makes it harder to deliver services and develop projects. The law must be stronger, and taxes must be collected. The aim is to ensure that everyone, whether they are individuals or a company, must pay the right amount of tax to the government, which helps the country grow. But this problem has effects beyond money. By not following the rules, it makes the economy worse. It also decreases competition in the market and increases corruption, which affects the reputation of the country. If the government tries to prevent this problem, they need to take important steps.

  1. Corruption Perception Index 2020
  2. India lost $10 billion in illicit financial flows due to trade misinvoicing: Report
  3. India’s top 100 companies have more than 4000  in tax havens: Oxfam
  4. Mayashree Acharya, “Understanding Tax Evasion and Penalties in India”
  5. Tax Evasion In India

  1. Tax Evasion in India: Causes, Effects, Government Measures
  2. What is Tax Evasion? How to Report Tax Evasion in India?
  3. 69% of funding for political parties in India came from unknown sources: Report

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