Tax Evasion: Methods and Causes

The concept of Tax Evasion

When a person reduces his total income by making false claims or by withholding the information regarding his real income, so that his tax liability is reduced, is known as Tax Evasion. It is not only illegal but it is also immoral, anti-social and anti-national practice. Therefore under the direct tax laws provisions have been made for the imposition of heavy penalty and institution of prosecution proceeding against tax evaders. The tax evader reduces his taxable income by one or more of the following steps:

  1. Unrecorded sales.
  2. Claiming bogus expenses, bad debts, and losses.
  3. Charging personal expenses as business expenses, Ex: Car expenses, telephone expenses, travel expenses, medical expenses incurred for self or family may be shown in the account books as business expenses.
  4. Submission of bogus receipts for charitable donations for deduction u/s 80G.
  5. Non-disclosure of capital gains on the sale of shares or any other assets.
  6. Non-disclosure of income from ‘Benami transaction’.

In brief to evade tax evader suppresses or omits receipts, inflates expenses and claims bogus deductions.

tax evasion

Methods of Tax Evasion

  1. Smuggling: Smuggling is a method of tax evasion, following which people export or import foreign goods through routes that are unauthorized. People resort to smuggling for they want to avoid paying total customs duties that are chargeable and also when they want to import items that are contraband.
  2. Customs Duty Evasion: Customs duty evasion is another method of tax evasion under which the importer evade paying customs duty by false declarations of the description of the product and quantity. The importers in order to evade paying customs duty also resort to under-invoicing.
  3. Value Added Tax Evasion: Another method of tax evasion is value-added tax evasion under which the producers who collect from the consumers the value-added tax evades paying taxes by showing less sales amount.
  4. Illegal Income Tax Evasion: Many people earn money by means that are illegal such as theft, gambling, and drug trafficking and so they do not pay tax on this amount and thus this is another 3method of tax evasion that is called illegal income tax evasion.
  5. Understatement of Receipts: Receipts received from credit sale add to the total income of the businessman. This addition to the income due to credit sale increases his tax liability, Hence, he takes such steps as to underestimate his receipts so that he could reduce his tax liability.
  6. Over-Estimation of Business Expenses: A person, who evades the payment of tax, over-estimated his business expenses by showing more salaries to employees as compared to the actual amount paid. This deflates his taxable income and he succeeds in reducing his tax liability.

Tax Evasion results in the loss of revenue for the government and so ideally, no one should be indulging in it and the Indian Government must also take steps in order to stop evasion of tax by the people.

Causes of Tax Evasion

  1. High Rates of Taxation.
  2. The complexity of Tax Laws.
  3. The inadequacy of Powers.
  4. Shortage of Experienced Personnel
  5. The absence of Deterrent Punishment.
  6. Lack of Publicity.
  7. Moral and Psychological Factors.
  8. Donation to Political Parties.
  9. Corrupt Business Practices.