Socio-Economic Offences:Nature and Dimensions
Transcript of Socio-Economic Offences:Nature and Dimensions
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DESCRIPTION OF MODULE:
Items Description of Module
Subject Name Criminology
Paper Name Socio-Economic Offences: Nature and
Dimensions
Module
Name/Title
Tax Evasion
Module Id Cri/SEO/
Objectives
Learning Outcome:
i. To understand the meaning and concept
of tax evasion.
ii. To know the reasons and modes for tax
evasion.
iii. To know and understand the impact of tax
evasion
iv. To know the institutions dealing with the
tax evasion
v. To find the measures to contain the tax
Role Name Affiliation
Principal Investigator Prof. (Dr.) G.S. Bajpai Registrar, National Law
University Delhi
Paper Coordinator Dr. Kavita Singh Associate Professor,
WBNUJS, Kolkata
Content Writer/Author Dr. Sanjay Kumar Assistant Professor,
WBNUJS, Kolkata
Content Reviewer Prof. (Dr.) N. K.
Chakraborty
Director, KIIT Law School,
Bhubaneswar, Orissa
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TABLE OF CONTENTS
I. Tax Evasion- Introduction to the concept ............................................................................... 5
V. Causes of Tax Evasion ........................................................................................................... 14
VI. Methods of Tax Evasion ....................................................................................................... 17
VI. Suggestions ............................................................................................................................ 22
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TAX EVASION
I. TAX EVASION- INTRODUCTION TO THE CONCEPT
Why Taxes?
Over the Course of human history there are quite few things which would have divided human
opinions taxes have. On one side we have luminaries Adam Smith, the father of modern
economics1 saying "It is not very unreasonable that the rich should contribute to the public
expense, not only in proportion to their revenue, but something more than in that proportion.”
and in the other corner we see titans like Mark Twain quipping in with: the "The only difference
between a tax man and a taxidermist is that the taxidermist leaves the skin." meaning that the
taxpayer leaves nothing and takes everything. As citizens of a developing country like ours, we
are always at the dilemma of whether to pay or not to pay tax.
The history of taxation is as old as tale of great civilizations. The Egyptian Pharaoh's tax
collectors were known as scribes and the taxes were imposed and collected stringently.2 In times
of war the Athenians imposed a tax referred to as eisphora and imposed metoikion, a monthly
poll tax on foreigners, on people who did not have both an Athenian Mother and Father, of one
drachma for men and a half drachma for women.3 Rome imposed customs duties on imports and
exports called portoria and the taxation system of Caesar Augustus is mentioned in the bible and
became the corner stone for the development of inheritance taxes. Chanakya , the great Indian
statesman had also endorsed taxation of citizens.
1 L. Davis, William; Figgins, Bob; Hedengren, David; B. Klein, Daniel (May 2011). "Economics Professors'
Favorite Economic Thinkers, Journals, and Blogs (along with Party and Policy Views)" (PDF). Econ Journal Watch.
8 (2): 133 2 History Of Taxation available at http://www.taxworld.org/History/TaxHistory.htm 3 Ibid
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As citizens of a welfare state we expect the government to provide us with all the facilities, we
expect good roads, subsidized fuels, healthcare at affordable rates, state of the art universities
and above all its the dream of every common Indian to land a government job. Now the
government cannot keep printing currency notes to discharge all the above functions. this is
where the relevance of the taxes come in as the great American jurist Justice Oliver Wendell
Holmes who pointed out “I hate paying taxes. But I love the civilization they give me”. taxes are
the necessary evil by which we gift ourselves health care through Government hospitals (usually
they offer service without any cost), Education (In Municipal and Government schools the fee is
negligible), cooking gas at concessional rate , employ lakhs of employees in various
departments and secure our borders with sufficient arms and ammunitions so that we can live a
happy and peaceful life.
COMPLIANCE WITH TAXATION MEASURES; PLANNING VS AVOIDANCE VS EVASION
Most of the civilised nations, if not all, levy taxes on their citizens to meet their running
expenses. What the government does through legislation is imposition of taxes. Adapting the
popular idiom, government proposes and citizen disposes is the present tax scenario in the
nation. 5.16 crore people which is just 4.1 per cent of the over 125 crore population pays taxes in
India, in contrast, in the U.S., about 45 per cent of the population pays taxes showing the dismal
rate of tax collection and the absence of a tax culture in our country4. In an ideal scenario all the
individuals will be taxed according to their capacity and pay will what is levied on them.
However the law is never a rigid system which has a one size fits all formula.
Tax Planning
Let's admit that government is no Count Dracula who is satisfied only by sucking the poor
citizen dry of all his earnings. The legislation allow deductions and exemptions from payment of
4 'Why should I pay tax? available at www.incometaxindia.gov.in/Charts Tables/Why should I pay tax.htm
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taxes to incentivise certain priority measures of government, eking out maximum benefit out of
such benevolent provisions is tax planning. Subject to certain limits the government allows
exemption from payment of taxes by non levy of taxes on pension plans, life insurance policy,
medical insurance, home loans, education loans, long term capital gains etc. If one is able to
claim full deductions under all the heads of the Income Tax Act the total non-taxable income is
pegged at 10.75 lakhs.5 An intelligent tax planning lets one of the hook of the tax man, at the
same time complying with the letter and spirit of the law. If the assessee goes for tax planning, it
is win-win situation for everyone including the Stateas planning is both compliance and savings .
Tax Avoidance and Tax Evasion
“The difference between tax avoidance and tax evasion is the thickness of a prison wall.”6, said
Denis Healey the former UK Chancellor of the Exchequer. What the ex-tax man meant was that
the evader goes behind bars whilst avoider manages to stay outside. Tax avoidance, though
seems closer to tax evasion, is rather related to tax planning than the former. Tax avoidance, as
the term suggests is brazen non payment of taxes by exploiting loopholes in the taxation
machinery. Though there is no violation of the letter of the law the but the spirit of law is given a
go by. In short, an assessee essentially exploits the loophole that enables him them to pay tax at
on a lesser amount rate than what was initially due. Since this act merely involves finding and
exploiting a gap in the fiscal provision, it is not usually construed to be strictly illegal because it
usually enables the assessee to be legally exempted from the payment of tax.
5 What is the Maximum Income Tax You can Save for FY 2015-16? available at http://apnaplan.com/max-income-
tax-saving-fy2015/# 6 As quoted by Craig Elliffe, The Thickness of a Prison Wall - When Does Tax Avoidance Become a Criminal
Offence? New Zealand Business Law Quarterly, Vol. 17, No. 4, pp. 441-466, December 2011
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The Black's Law Dictionary defines tax evasion as "Illegally paying less in taxes than the law
permits; committing fraud in filing or paying taxes"7. The deliberate fraud committed by a
person who is liable to pay taxes by non payment is tax evasion and the evader runs the risk of
prosecution and penalty. In simple terms, tax evasion means suppressing or minimising the tax
liability by using unlawful means. Unlike tax avoidance which is a legal act, tax evasion is illegal
and involves “exploiting a tax advantage that Parliament never intended”8 In the judgment of
CIT v. Raman & Co.9 , the Supreme Court held:
“Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is
not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises
to him. Effectiveness of the device does not depend not upon considerations of morality, but on
the operation of the Income Tax Act. Legislative injunction in taxing statutes may not, except on
peril of penalty, be violated, but it may lawfully be circumvented.”
In the judgment case of Union of India v. Azadi Bachao Andolan10 , the Apex Court has
reaffirmed the right of the assessee to mitigate the payment of tax as long as it is done by
legitimate and legal means and measures. Similarly, in the case of Vodafone International
Holdings v. Union of India & Another11, the Court agreed with the Westminster principle,
evolved in England, stating that every tax payer has the right to manage their tax liability and
consequently, efficient tax management cannot be penalized.
7 Black's Law Dictionary 6th Edn. 1990 8 Ben Chu, David Cameron offshore investment fund: What is the difference between tax avoidance and tax
evasion? (April 8, 2016) available at http://www.independent.co.uk/news/uk/politics/what-difference-between-tax-
avoidance-evasion-david-cameron-offshore-panama-papers-a6974791.html 9 67 ITR 11, 17(SC) 10 (2004) 10 SCC 1 11 (2012) 6 SCC 613
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In Vodafone International Holdings Case12, the Court held that “whether a transaction is used
principally as a colourable device for the distribution of earnings, profits and gains, is determined
by a review of all the facts and circumstances surrounding the transaction... It is in the above
cases that the principle of lifting the corporate veil or the doctrine of substance over form or the
concept of beneficial ownership or the concept of alter ego arises. Thus it is the facts and
circumstances which decides on whether or not one is found guilty of tax evasion or saves
himself due to gaps in the tax net.
II. Tax Evasion And The Evil Of Black Money
A common saying in the country side which goes like "evil breeds evil", one which is true about
the evil of tax evasion also. The evil of tax evasion breeds greater evil in the form of black
money, economic destabilization measures like this is capable of bringing down entire nations
down, infact the entire economy of the Delhi Sultanate faced severe crisis due to counterfeit
currency that flooded the markets.13 Black money has defined as assets or resources that have
neither been reported to the public authorities at the time of their generation nor disclosed at
any point of time during their possession14. In its 1985 report on Aspects of Black Economy, the
National Institute of Public Finance and Policy (NIPFP). defined ‘black income’ as ‘the
aggregates of incomes which are taxable but not reported to the tax authorities’.15
"Black" Black money and "White" Black Money
12 Ibid 13 Chandra, Satish (2004). Medieval India: From Sultanat to the Mughals-Delhi Sultanat (1206-1526) - Part One.
Har-Anand Publications. ISBN 9788124110645. at p105 14 White Paper on Black Money (the Paper) table by Finance Minister in the Lok Sabha on May 21, 2012 para
2.1.1 15 As cited by White Paper on Black Money (the Paper) table by Finance Minister in the Lok Sabha on May 21,
2012 at para 2.1.2
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Black money can actually be classified as Black money begotten by legitimate ways and black
money amassed by legitimate means. The first type the "black" black money is that the money
may have been generated through illegitimate activities not permissible under the law, like
crime, drug trade, terrorism, and corruption, all of which are punishable under the legal
framework of the state. The "white" black money on the other hand is begotten by through
perfectly legitimate and otherwise permissible activities under the law of the land but s/he has
failed to report the income so generated, comply with the tax requirements, or pay the dues to
the public exchequer, leading to the generation of this wealth16. The first type is illegal income
gained by illegal means while the second type covers legal income that is concealed from public
authorities. The effect of the former is direct and is quite detrimental to the economy as the
promotion of illegal activities funds terrorism, drug trafficking and the dubious underworld
ecosystem, the latter is an indirect threat as its effect is felt due to the adverse effects on the
economy leading to a dysfunction in the whole system of cash flow.
III. The Tax Payer And The Evader, A Classic Crow - Cuckoo Story.
The Cuckoo is wily bird, it lays the eggs in the crows nest leaving the poor crow to go though all
trails and tribulations of incubating the eggs. Once the cuckoo chick is born it feeds out of the
hard work of the crow to the detriment of the little crows, as a free rider its entire growth is a to
the detriment of the crows on chicks. The tax evader is a free rider like this. He doesn’t
contribute as he is expected to contribute but drains out the precious government resources
funded by the honest tax payer. Since taxes are used for the purpose of providing public benefit
welfare measures, tax evasion by persons implies that these persons the evaders avail of the
general benefits of welfare measures of conferred to them by the government, executed by
making use of the compliant taxpayers’ money, without contributing anything towards the
16 Ibid para 1.3.1
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exchequer. The classic cuckoo - crow story is repeated in the great Indian stage with the crooked
evader being the cuckoo who raises his offspring solely on the effort of the crow who is the
honest tax payer. while these persons who are evading tax are not complying with it and
nevertheless receiving public benefits
In developing and under-developed economies taxes are a matter of life and death, in such
economies evasion entails there is not just an economic costs but also a social cost associated in
relation to the evil of with tax evasion.17 In the absence of the tax income filling its coffers the
State is unable to foot the bill of its welfare measures resulting in cuts in allocation of funds for
such projects and the honest tax payer is made to pay for such evaders. The social impact of tax
evasion is much like the dejection felt by a crow chick, the evader grows more and more while
the complaint tax payer loses whatever little he had. It is said that the evil in the world is not due
to a few bad men but due to the complacency of the score of good men. The more the commoner
snuggle under this cozy blanket blissful ignorance higher will be the price he pays.
IV. Aam Aadmi And Tax Evasion; The Parable Of The Boiled Frog.
Of the 125 crore people in India only 4.5% pays taxes, the question that the 95.5 % of common
men raises when they hear about tax evasion and black money is the archetypal "chod do, hame
kya? ", as tax laws are of no concern for them. Kids are taught the tale of the frog who enjoyed
the rising warmth of the slowly heated vessel. The warmth felt good, a bit later, it felt like a
steam bath draining away energy and deepening the frog's relaxation while the water is getting
hotter and hotter. By the time the frog realizes its danger, it is too late to take action and the
dumb frog perished in boiling water. The aam aadmi is like the frog and the shadow economy
created by tax evasion and infested with black money is the slowly boiling water. The common
17 Matthew Timms, “The true costs of tax avoidance”, World Finance, available at
http://www.worldfinance.com/strategy/the-true-costs-of-tax-avoidance
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man though might not feel the pinch of this arcane National Sport of India’18 but he stands to
lose all as its only a matter of time before the field gets too hot to take remedial action.
Impact Of Evasion On State Revenue And Welfare Measures
One of the important function of the tax is the mobilization of resources from rich to poor and
bridging the gap between the rich and the poor. As the tax evasion immediate effect is the loss of
revenue to the State which adversely affect the power to state to spend more on the poor and to
ensure welfare of the people. Though the government might not have delivered us the promised
land flowing with milk and honey we cannot fail to see the governmental initiatives that touch
every phase of our lives. The doctors who touch us the moment we are born are learn their trade
at hugely subsidized prices, the schools run by the government light the lamp of learning in the
minds of lakhs of kids, though the public transport fails to make ends meet they ensure that the
citizen remains unburdened, the doctors, the teachers, the judges, the policemen, the firefighter
and scores of other government servants on whom we rely on in our journey from cradle to grave
are paid by the government. We raise hue and cry when fuel prices increase, we take to streets
when subsidized gas cylinders are capped, we declare bandhs when transport fares are hiked.
What we sometimes opt to forget is that the government needs revenue to provide these
facilities. The expenditure if not recouped by tax revenue will empty the government coffers and
will be the toll the death knell of the government subsidies. It’s the tax payer who gifts himself,
through taxes, all these perks and the day this payment stops we will have to wake to the grim
realty of having killed the golden goose of welfare measures for greed.
Impact Of Evasion Of Public, Peace And Morality
18 Tushar Dhara & Cherian Thomas, ‘ In India, Tax Evasion Is a National Sport’ Bloomberg Business week (July
29, 2011) available at http://www.bloomberg.com/news/articles/2011-07-28/in-india-tax-evasion-is-a-national-sport
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More direct than expected is the impact of the illegally obtained black money in the everyday
life of the common citizen. Black money arising from illegal activities such as crime and
corruption fosters an underground parallel economy that is anti-social. The black money
amassed by racketeering, trafficking in counterfeit and contraband goods, smuggling, production
and trade of narcotics, forgery, illegal mining, illegal felling of forests, illicit liquor trade,
robbery, kidnapping, human trafficking, sexual exploitation and prostitution, cheating and
financial fraud, embezzlement, drug money, bank frauds, and illegal trade in arms are more than
capable of disturbing the public peace, law and order and morality. The smugglers, the dacoits
and the terrorists who are the beneficiaries of this shadow economy will deliver nightmares to
our country. The ‘corrupt’ component of black money stemming from bribery and illicit
gratification by those holding public office results in an system failure where the citizen must
bribe to get his pound of flesh, despite it being a right vested in him to avail the same.
The Impact Of evasion On Economy.
Currency is but a random piece of paper if it loses its purchasing power. Money unaccounted for
is capable of creating large scale infaltionationary pressure on the economy resulting in loss of
purchasing power of currency. The impact of food inflation and inflation of prices of essential
commodities on the common man is a topic over which much ink is spilt and its always the poor
that suffers due to such market disturbances. A case in point is the real estate sector where the
large scale influx of black money has resulted in property prices shooting through the roof and
pricing the common out of the race to buy property. Another effect of black money is the impact
it causes on the GDP of the country. It causes an adverse impact on the GDP as a huge part of the
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income is diverted to another economy not being the home economy resulting in deficient GDP,
thereby depicting a faulty picture of the economy and hiding real state of affairs.19
V. CAUSES OF TAX EVASION
There could be various reasons which could possibly be causing tax evasion resulting in the
creation of black money in India. Some of them are-
1. A High Burden Of Taxation:- High tax rates either actual or perceived, provides a
strong temptation to evade taxes and generate black money. Taking a look at the past, the
present marginal income tax rate capped at around 34.6%20 is not substantial when
compared to the astronomical going upto 97.75%21 marginal income tax rate including
surcharge) in seventies. Despite the steep decrease in the tax rates, its ironic that the
perception that is persisting is one of high tax rates. The high rate of taxes creates greater
incentive for non compliance of the tax laws, as high rate adversely affect the disposable
income in their hands. The people evades taxes is because of the high rates of the taxes
and this a phenomenon which is common in almost all kind of taxes whether being
income tax, sales tax, excise duties, custom duties, corporate taxes, etc. Moreover the
increase in the burden of taxation, as well as the burden of complying with the laws is a
strong reason for getting tempted to be a part in tax evasion
2. Culture and social practices : In a society where tax evasion and under-reporting of
activities and income is perceived to be very common or the norm, such activities may be
considered acceptable and honest tax compliance and paying one’s due share to the
public fund may not be considered a virtue.
19 Sukanta Sarkar, “The Parallel Economy In India: Causes, Impacts And Government Initiatives”, Economic
Journal of Development Issues, Vol. 11 & 12 No. 1-2 (2010) 20 Income tax rate 30%, surcharge 12% and Edu. cess 3%. 21 Income tax rate 85%, surcharge 15%. Chathurvedi and Pithisaria Income tax Law 5th edn. Vol I (1998) p 219-
220
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3. Ineffective enforcement of laws- It is found that more often than not, the enforcement
of laws that regulate taxation- Income Tax Act, Sales Tax, Excise Duty, etc. are not very
efficiently enforced. Due to lukewarm enforcement of such provisions as well as
abundant exploitation of the loopholes and gaps in these creates no deternce and makes
the tax evasion fearless. and thereby creation of parallel economy has become very easy.
4. Unregulated sector or informal economy- Economy can be divided into two sections-
formal and informal. Informal economy is that part of the economy which is largely
unregulated by the enforcement agencies. A large part of the Indian economy comprises
of the informal sector which essentially implies that there is a large area of the Indian
economy which is uncovered by the enforcement agencies mainly because regulating this
sector is extremely difficult and to a certain extent, not even possible. It is primarily in
this section of the economy that most cases of evasion take place. Since it is largely
unregulated, the ease to carry out unscrupulous transactions is in fact quite high. An
example is that of jewelry sector or the real estate sector wherein in most transactions are
done in cash and barely an regulatory mechanism exists to monitor the large volume of
money that flows through these key sectors.
5. Corruption- The corruption leads to tax evasion as the person getting the income by way
of corrupt practice is hardly going to disclose the income and its source to the State. The
disclosure on his part not only invite tax burden but also the punitive action under the
relevant laws and loss of job too. Since most people are aware of the rampant corruption
that exists, according to them evading tax is easier and financially also viable. By paying
a minimal amount in lieu of ensuring that the same is carried out without any hassle.
6. Corrupt Business practices:- With the advent of globalization, liberalization and
privatization the industries started mushrooming in the country along with them came
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the whole scale bribery to the officials by way of secret commission, speed money, on-
money, pugree etc.22 The cases like Wa
7. Lack of stringent penal provisions. – The tax statute hardly makes the stringent penal
provisons in case of evasion. Since the penalty amounts are also low, evading taxes is
easier and financially lucrative owing to the fact that penalty is much lesser than the tax
they would have paid on the earnings had the same not been evaded.
8. Lack of banking infrastructure and overreliance on cash economy:- The majority of
transactions in India are still made though cash making it an easy route to launder money.
The lack of penetration of effective banking facilities has meant that the people find it
more convenient to transact in cash than through banks where it is easier to trace.
9. Deterioration in moral standards- In the earlier days people owed respect for their
king or ruler and were more governed by fear of getting caught and get punished but with
passage of time both fear and respect have faded away and now people are not any more
transparent or honest and have found out various ways in which they can accumulate and
generate unaccounted money or black money. The people were more united and were
more disciplined as they worked in coordination as a unit, they were honest and
transparent and were not tainted with jealousy and worked for a common goal.They were
willing to share the reaps of their hard labour with every member of the society which is
not the present case in our society. In contrast, the people are now self centered and are
only working for their own good and do not think about the society or the country as a
whole.
10. Evasion of one tax leads to evasion of another tax- Where assessed suppress the
production or manipulate the price , it will lead to evasion of excise duty, sale tax,
income tax and other taxes on the goods.
22 K.N Wanchoo Committee Report chapter 2, para 2.20 (d)
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11. Non Compliance of general laws:- Sometimes the people do not intend to evade taxes,
however while making non compliance of non tax laws, they evade the taxes unwillingly.
For example to evade payment of other statutory contributions, to evade compliance with
the provisions of industrial laws such as the Industrial Dispute Act 1947, Minimum
Wages Act 1948, Payment of Bonus Act 1936, Factories Act 1948, and Contract Labour
(Regulation and Abolition) Act 1970, and / or to evade compliance with other laws and
administrative procedures.
VI. METHODS OF TAX EVASION
Now that we know that tax evasion is an extremely common phenomenon and is also deliberate
in nature, let us look at the methods that the assesses employ for evading taxes. Evasion could
take place by way of the following methods-
1. Manipulating transactions- This is the most commonly adopted method of evading tax,
owing to the ease in the transaction. The tax payer usually does not maintain a proper
account of income or the receipts which may be subject to taxation and manipultes the
books of accounts through any of the following methods23-
23 White Paper on Black Money (the Paper) table by Finance Minister in the Lok Sabha on May 21, 2012
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Parallel Books of Accounts
Out of Book Transactions
Manipulation of Books of Account
Manipulation of Sales/Receipts
Under-reporting of Production
Manipulation of Expenses
Other Manipulations of Account
Manipulation by Way of International Transactions
through Associate Enterprises
Manipulation of Capital
Manipulation of Closing Stock
Manipulation of Capital
Manipulation of Capital Enterprises
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2. Transfer pricing- Apart from manipulating accounts, another method of reducing tax
liability is by way of transfer pricing. This pertains to the manner in which the companies
carry out transactions among their affiliates transcending territorial boundaries. The
companies in this case, essentially, by way of efficient trade planning, shift the proceeds
of their business to countries with lower tax rates, thereby reducing their effective tax
liability. This money which is routed overseas is transferred back to India by way of
Foreign Direct Investment, etc.
3. Share price rigging- Initial Public Offerings (referred to as “IPOs”), offer a lot of scope
for embezzlement of funds resulting in reduction of tax liability. Usually, there is a shell
company created for this purpose which entails investment by offshore companies or
individuals in foreign tax jurisdictions in the shares offered by IPO. Thereafter these
artificially escalate this trading price and sell it off later at the cost of ordinary investors.
4. Tax Havens- While this term lacks a precise definition OECD has previously provided it
as something that is “characterized by no or very low taxes, lack of effective exchange of
information, and lack of transparency about substantial activities.” However, due to lack
of regulation and vigilance that is exercised over these and the almost negligible rate of
taxation imposed in these countries they have come to become ‘offshore financial centers'
(OFCs).
5. Non-profit Sector: Taxation laws confers some benefits for promoting charitable
activities. The lack of proper monitoring in this sector has lead to misuse of the funds
funneled through the non profit sector.
6. Routing through vulnerable sector- Certain sectors of the economy offer ample of
opportunity to indulge in evasion of tax, consequently in the generation of black money
in the economy. Real estate sector, wherein under-reporting of transactions owing to high
market price in the real estate sector and the proportionately high tax incidents, has lately
evidenced undervaluation of transactions to avoid the payment of taxes. Further, gold
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bullion and jewellery market transactions also provide the space to carry out transactions
which can effectively avoid payment of taxes. Usually in such transactions, buyer has the
scope of legally bringing in black money which was parked safely till now, into the
economy. While the seller can, by way of cash transactions save on tax by not putting the
transaction on record.
Tax Evasion
Manipulation of Accounts
Out of Book/Parallel reporting of transactions
Manipulation of sales/receipts
Under-reporting transactionsTransfer Pricing
Tax Havens
Share Price Rigging
Routing through vulnerable sectors
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VII. INSTITUTIONS DEALING WITH TAX EVASIONS .
There are many institutions which have been set from time to time under the different laws for
dealing with tax evasion and related issues. The agencies which are directly related with tax
evasion are as under.
1. Central Board Of Excise And Customs
The Central Board of Excise and Customs ( hereinafter referred as CBEC), constituted under the
Central Boards of Revenue Act,1963, is the apex body for the administration of indirect tax laws
enacted by the union government. The Board deals with the work of formulating policy relating
to levy and collection of Customs & Central Excise duties and Service Taxes, preventing
smuggling, and doing work related to administration of matters in the sphere of customs, Central
Excise, Service Tax and narcotics within the ambit and purview of the Board.24
2. Central Board Of Direct Taxes
The Central Board of Direct Taxes (hereinafter referred as CBDT), constituted under the Central
Boards of Revenue Act,1963, is the apex body for administration various direct taxes being
imposed by the union governemnet. The board also lay down the broader policy for the direct
taxes in India. 25
3. Enforcement Directorate:
The Directorate of Enforcement was established in the year 1956, it was initially
established to manage and control the provisions relating to the Foreign Exchange
Regulation Act,1973 but after the Act got repealed and got substituted by the Foreign
Exchange Management Act,1999 (FEMA) which came into effect from 1st June,2000. The
24 White Paper on Black Money (the Paper) table by Finance Minister in the Lok Sabha on May 21, 2012 25 Ibid
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Enforcement Directorate hereinafter referred as ED is entrusted with the duty of
enforcement of the Foreign Exchange Management Act, 1999 herein after referred as
FEMA and some specific provisions of the Prevention of Money Laundering Act herein after
referred as PMLA , it is under the control of the Department of Revenue for the operational
purposes with regard to administration. At present it is empowered to investigate and
prosecute the offences that are related to money laundering as well to confiscate or attach any
property that has been obtained with the proceeds of the crime as Stated under the Prevention
of Money Laundering Act,2002.26
VI. SUGGESTIONS
The tax evasion leads to black money. The immense growth of black money is having an
adverse effect on the economy, on the society and the person residing in the country. It has also
become a threat to the security of the country as the black money is being used to fund the anti
social entities like terrorism. The persons are evolving various means and ways for evading taxes
and adversely effecting the society, social structure, economic growth and development of the
country as a whole. A few measures that can be adopted to root out the evil of tax evasion are
1. Simplification of the tax laws: "The hardest thing to understand in the world is the
income tax, said Albert Einstein. Sheer complexity of the Tax laws makes it a Herculean
task to understand it and maneuver through its murky currents. The outrageous number of
amendments to tax laws brought year after year makes it even more complex. A simple
system which can easily be communicated and understood will definitely change the
perception that people have towards the tax laws and this positive social perception is
paramount in ensuring revenue through taxes.
26 government of india, ministry of finance department of revenue ,ed(enforcement directorate), available at<
http://dor.gov.in/ed_pml> last accessed 12.6.2016
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2. To have moderate rate of taxes- Tax rates may be reduced as it may prima facie seem
plausible considering high tax rates are often understood to be on the of the principal
causes behind evasion of taxes. Low tax rates provides incentive for tax compliance and
create heavy disincentive for non compliance coupled with heavy penalty
3. Deterrent Penalty : Law according to Austen is the command of the sovereign with a
sanction behind it. The sanctions under the current tax laws aren't having enough the
expected deterrence to ensure compliance. Lessons can be leant from criminalization of
cheque bouncing which brought out a radical impact.27 The threat of criminal prosecution
and a possible jail term if coupled with astronomic fines can have a deterrent effect in the
minds of prospective evaders.
4. Improvement Of Banking Infrastructure and Promotion of Plastic Money : The
economy of India is still reliant on cash transaction as opposed to plastic money. The
lion's share of cash transactions that take place are untraceable and results in large scale
evasion in vulnerable industries like jewelry , bullion and real estate. By bringing the
entire nation within the banking umbrella is the first step to move away from a cash
economy. Post offices which have reach to each and every nook and corner of the nation
can be made the nodal agency to ensure that every Indian is connected to the banking
system.
Unlike cash which is untraceable, transactions through cards make it sure that money
changing hands is traceable by government and can be taxed appropriately. The current
system of surcharge on card transactions acts as a disincentive to this much useful mode
of efficient tax governance. Promotion of plastic money by incentivizing it can go a long
way in reducing the size of cash economy and widening the tax net.
27 Centre for Civil Society, Criminalizing Cheque Bounce Cases – An effective remedy available at
ccs.in/sites/default/files/research/research-criminalizing-cheque-bounce-cases.pdf
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5. Promotion of awareness : Awareness of a law leads to compliance with the laws. Tax
and tax laws belong to that part of public mind which is considered murky and unclear. A
genuine lack of awareness about taxation and tax laws prevail in the country. Grass root
level awareness programmes which familiarizes the common citizen with the workings of
the tax machinery can create a better social perception about the taxes that are levied on
them.
Addition of taxation and tax laws as part of the curriculum at the secondary level or any
other appropriate level can being out a generation who knows why and how they are
taxed. Such education will lay foundations in young minds on the importance of taxation,
impact of evasion etc resulting in positive social perception on taxation.
6. Better enforcement of existing laws : we have a large number of laws which aid to
prevent evasion, the sheer number of legislations have not brought the evasion to the
extent that they were expected to. Corruption a major cause of tax evasion is sought to be
tackled through the Prevention of Corruption Act 1988, the Prevention of Money
Laundering Act, 2002 intends to curtail money laundering, The Black Money
(Undisclosed Foreign Income And Assets) And Imposition Of Tax Act, 2015 is aimed
directly at black money. Despite having so many laws, the mischief sough to be remedied
is persistent due to poor enforcement regime. An iron fisted enforcement of existing laws
can ensure that the legislative intention behind current laws is realized.
7. Changing the social perception about taxes : " How is the state mirrored in citizens’
minds? This is the question with which any investigation about the discipline that citizens
exercise over their tax paying behaviour must start. Consciousness about the state leads to
citizens’ civic and tax ‘sentiments’ and to a fundamental attitude with regard to problems
of ‘their’ state." (Schmolders, 1960, p. 38)28. As rightly pointed out, the negative social
28 As quoted by Erich Kirchler, The Economic Psychology of Tax Behaviour 2009, p 29
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perception about taxes must change and a positive idea of a State's needs being
understood by people must settle in the minds of citizens. The initiative of Indian
Railways to mention the subsidy information on railway tickets is a step in this direction.
When the citizen is told or shown how much the government does for him out of the tax
money, he would be more inclined to pay his taxes. Ensuring that the target group
benefits out of government welfare programmes will also aid in creating a feeling of
contentment resulting in better realization of taxes.
In the end the realization that tax evasion is nothing but daylight robbery is what one should
understand. The temporary gain of today is a seed of destruction which would engulf the
economy tomorrow and would leave the but phantom of a once great nation. As Dwight
Eisenhower, pointed out "… we … must avoid the impulse to live only for today, plundering for
our own ease and convenience the precious resources of tomorrow". Finally, the tax policy
should be oriented to make the life of tax payer comfortable and of tax evader difficult,
miserable and hell. This can be done through the strong political will and zero tolerance policy
as to evasion.