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“Tax Evasion” for Income Tax Purpose

It is also important to understand the meaning of tax evasion in the correct perspective. Whenever a person either under-reports or does not report any income with the intention of reducing his tax liability, it can be said to be a case of tax evasion. He may be filing his return in which all the financial activities are not disclosed or he may choose not to file his return at all. All such income which has been concealed and consequently has not borne the due tax liability, is tax evaded income. It may be in the form of cash or it may have been invested in immovable property or movable assets like jewellery, bullion, etc.

Such money may even be found invested in shares, bonds, mutual funds, etc. or it may have been spent in maintain ing an opulent lifestyle. It may be invested in business in the form of stock in trade or bogus sundry creditors, etc. The most popular and convenient form of investment of such money is in real estate. Farm houses, land, buildings, etc. are found to absorb large amounts of such funds.

It is also not unusual for the tax evaders to park their black money in bank accounts. Such accounts could be in Indian banks or in Swiss banks or other tax havens. The accounts could be in the name of the investor or in benami names. Prior to the enforcement of the KYC (Know Your Customer) norms, people are known to have opened bank accounts in the names of their employees, servants or even their pet dogs.

On the other hand, if financial activities and transactions are all disclosed but either provisions of law are interpreted in such a manner or facilities in the statute are used in such a way that tax liability is considerably reduced, then it is called tax avoidance. Tax avoidance is the legal utilization of the tax regime to one’s advantage to reduce the amount of tax that is payable. By contrast, tax evasion is the term used for not paying taxes that are due. For example, in the case of a hotel, if depreciation is claimed in respect of a water treatment plant which has not been installed at all, it would be a case of tax evasion. However, if the hotel labels its building as “plant” for claiming higher rate of depreciation on it, it would be a case of tax avoidance.

There is a provision in the IncomeTax Act by virtue of which a person is entitled to exemption from tax on profits derived from a manufacturing or production unit set up in India’s North-Eastern states and the states of Sikkim, Himachal Pradesh and Uttaranchal. It was noticed that a lot of assessees claimed that they had established their undertakings in these states. However, enquiries in certain places like Baddi in Himachal Pradesh revealed that these assessees had acquired small premises just to show that they had set up a manufacturing unit but, in fact, either no manufacturing activity or minimal manufacturing was carried out from these premises. The actual manufacturing was being carried out at some other place. But the assessee claimed the tax benefit for the entire production. This is a clear-cut case of tax evasion. On the other hand, if an assessee who already has an industrial unit in some other place, say like Faridabad, creates a new entity and starts manufacturing from Baddi through this entity to take benefit of the provision, it could be a case of tax avoidance. Splitting up of profits by creating new entities like trusts, HUFs, etc. could be termed as tax avoidance.

Someone else has explained the difference between tax avoidance and tax evasion as “the jail walls”. In other words, tax evasion may lead the offender to jail but this is not so for tax avoidance.

Tax evaded income or black income is often spent lavishly for supporting luxurious lifestyles. It is splurged on marriages and other social functions. During elections, it comes out of the coffers and is illegally spent for campaigning. It is conveniently spent for payment of bribes,  for “on money” payments, under the table payments for securing admissions, etc. In this way, it is pumped back into the system and becomes an integral part of the economy. Black money, in fact, is not idle money; it is very much in the productive channel. That is why it is also termed as “parallel economy”. Paradoxically, during the 2008 economic recession, India was believed to not have been as impacted as the West because of the country’s black economy. Although the black economy is not counted for statistical purposes, it is very much a part and parcel of the economic system of the country.

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