Tax Evasion – Innovation Required!

money.jpgWith the budget finally been released, there seem to be a million things to think about – beginning from the requirements of various sectors to the improvement in allocation of funds, infrastructure and so on. For the misanthropes, it calls for newer and more brilliant ways of tax evasion. It seems as if there is a constant battle between the government and the polis in terms of tax payments. After all, it is all about the money!

Tax evasion and tax avoidance may sound the same, but in reality, they are not. Tax avoidance is the legal utilization of the tax regime to one’s own advantage, in order to reduce the amount of tax that is payable by means that are within the law. On the other hand, tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes dishonest tax reporting. There are also tax protesters who uncover different interpretations of the law to show that they are not liable to be taxed. Some practice tax resistance as a conscientious way of not supporting the government in its activities.

Indian economy has had its fair share of tax evasion scams, the biggest being the Rs. 35,000 crore income tax evasion. While in Tamil Nadu, distilleries are doing so by floating bogus firms, the air conditioning giant Kirloskar Copeland in Chandigarh was also found guilty. Most states did not want VAT to be implemented for the simple reason that evasion would become more tedious. On an international level, there was the controversy over Double Taxation Avoidance Treaties in the late 1990s and early 2000. It surfaced during Yashwant Sinha’s reign as the Finance Minister; several companies were alleged to have misused the D.T.A.T which India has with Mauritius, to evade taxes. The mystery behind the famous Swiss banks is that Switzerland is one of the few countries where failure to report or underestimation of income or assets on a tax return is not considered a crime. It does not comply with any requests for judicial cooperation from other governments such as India.

Empathizing with the taxpayers, their argument for tax evasion and exemption is that the taxes are too high and benefits too little. Especially for a developing country like India, high tax rates induce people to work less or hide their money. Apart from the usual fake accounts and firms, tax evaders now have started using technology to their benefit as iPods and pendrives seem to be their latest information hideaways. Small in size but high on memory storage, these devices are easily discarded. Some raids in Haryana, Ludhiana and Delhi have unearthed evasion ranging from Rs.55 lakhs to Rs. 40 crores. Even in the movie The Shawshank Redemption, the protagonist shows the head prison guard an ingenious way of evading inheritance tax by giving the inheritance to his wife as a one-time tax free gift.

One can’t even imagine the multiple ways of evading taxes. The government is faced with understatement of the value of immovable properties in transfer deeds, huge circulation of black money, the widespread practice of benami and unsuitable arrangements for valuation of gifts, income, wealth, etc. However, the government is no less and has come up with some effective ways, much to the dislike of evaders. As per the Direct Tax Reform in Budget 2008, the number of high value transactions has been increased to enhance scrutiny. For budget 2008-09, the tax exemptions availed as per Section 12A of Income Tax Act, 1961, under which companies avail tax benefits for charitable activities, is likely to be removed. This is due to gross misuse, which has led to revenue loss in the corporate sector of approximately Rs. 50,000 crores. The FM is also considering to raise the standard deduction limit to Rs. 1,20,000 from the present Rs. 1,00,000 as per Section 80C of the Income Tax Act,1961, which will allow taxpayers to save upto Rs.2,000 in taxes everywhere.

The government may also bring all unaided non-government schools and colleges, unaided non-government hospitals and amusement parks under the service tax net by amending the Finance Act 1994. From April 2010, there is a possibility of an increase in the service tax ambit and tax rate, as precursor to the dual Goods and Service Tax (GST). Government may subject tax evaders to narco-analysis and polygraph tests to curb evasion. To counter understatement, the Central Government is now empowered to acquire immovable properties and for benam, the real owner is debarred from enforcing his claim to property till he does not declare his income from that property, or the property itself, for purposes of income-tax and wealth-tax.

The FM has, it seems, thought of taking some steps to chalk a way out of this problem, but it is yet to be seen if he wins or the evaders do. Let us see if what he said in 2005 holds true now as well, “Every tax payer in every tax bracket is a winner.”


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