Although they are sometimes equated, tax avoidance and evasion are distinct in many respects. Tax evasion is the use of illegal methods to evade paying taxes, whereas tax avoidance uses legal methods to lessen the tax due. Although it is not criminal, tax evasion is frequently regarded as unethical. On the other hand, tax avoidance is illegal and is subject to legal penalties.

A complicated tax system with several tax laws and policies exists in India. In recent years, the nation has worked to strengthen its tax code and boost tax compliance. The Indian tax system still faces significant difficulties from tax evasion and avoidance, though.

Overview of the Indian Tax structure:
India has a hybrid direct and indirect tax structure. Direct taxes, such as income tax, wealth tax, and corporate tax, are levied directly to the government. Contrarily, indirect taxes such as sales tax, service tax, and excise duty are levied inadvertently via the purchase of goods and services.

India has a progressive tax system, which means that people who earn more money pay a bigger percentage of their income in taxes. The maximum tax rate is 30% for people making over Rs. 15 lakh per year, with tax rates varying according on income level.

The Goods and Services Tax (GST) system, a value-added tax imposed on the provision of goods and services, is also in place in India. Sales tax, service tax, and excise duty were all replaced by the GST, which was a single tax.

The terms "tax avoidance" and "tax evasion" are sometimes used interchangeably. But there is a big distinction between the two. Tax evasion entails using dishonest and unlawful ways to evade tax obligations, whereas tax avoidance refers to the lawful use of tax planning strategies to reduce the tax due. Tax evasion, on the other hand, involves the use of tax credits, deductions, and exemptions which may entail falsifying transactions, hiding assets, or underreporting income.

Tax evasion and avoidance have serious legal repercussions in India, and there are strong laws and procedures in place to address these problems. This essay looks at how India's tax laws and policies affect tax avoidance and evasion legally.

Indian tax avoidance
In India, tax avoidance refers to the ethical use of tax planning techniques to reduce tax liability. The practice of organizing one's finances to take full advantage of all tax deductions, credits, and exemptions is known as tax planning. Taxpayers are encouraged to use tax planning since it is acceptable and lawful. The Income Tax Act of 1961 offers a number of credits, exemptions, and deductions that can be used to minimize taxes.

Tax planning, however, can occasionally be mistaken for tax avoidance. Utilizing tax law gaps to lower tax liability is known as tax avoidance. The government has taken many steps to stop tax evasion after realizing the need to do so. To fight tax evasion, the Finance Act of 2012 included the General Anti-Avoidance Rule (GAAR). If it is shown that a transaction was created principally with the intention of avoiding taxes, GAAR gives the tax authorities the authority to classify the transaction as a prohibited avoidance transaction.

Additionally, the government has put in place a number of safeguards to stop tax evasion through transfer pricing. The price of products and services between related parties is referred to as transfer pricing. Transfer pricing manipulation is a common strategy used by multinational corporations to move revenues from high tax countries to low tax jurisdictions.

A comprehensive framework for determining the arm's length price for transactions between related parties is provided by the Transfer Pricing Regulations, which were implemented by the Indian government. The requirements also mandate the preservation of thorough records to support transaction pricing.

Tax avoidance in India has greatly decreased as a result of the implementation of GAAR and Transfer Pricing Regulations. Nowadays, taxpayers are less likely to use aggressive tax planning techniques that could be interpreted as tax avoidance.

India's tax evasion
In India, tax evasion refers to the use of dishonest and unlawful techniques to avoid paying taxes. Underreporting income, concealing assets, misrepresenting transactions, and manipulating records are just a few examples of the myriad ways that people evade taxes. Tax evasion is a serious crime that may lead to legal action.

The Indian government has recognized the need to combat tax evasion and has implemented a number of steps to do so. Tax evasion is punishable by fines and penalties under the Income Tax Act of 1961. In order to obtain proof of tax evasion, the act also gives the tax authorities the authority to undertake searches and seizures.

To combat tax evasion relating to undeclared overseas income and assets, the government has also introduced the Black Money (Undisclosed overseas Income and Assets) and Imposition of Tax Act, 2015. The act imposes severe fines and penalties for noncompliance.

Tax evasion has been reduced as a result of the Goods and Services Tax (GST) adoption. Value-added tax (VAT) is imposed on the provision of goods and services and is known as GST. The GST has streamlined the tax code and made it harder to evade taxes. The entire GST system is online, and all transactions are immediately recorded. Tax evasion has become more difficult as a result.

India's legal implications of tax evasion

Although tax evasion is not forbidden in India, it does have legal implications.

Some of the legal implications of tax evasion in India include the following:

1. The exclusion of tax benefits
   The ITA offers taxpayers a number of tax breaks and deductions. The tax authorities, however, have the right to invalidate such perks and deductions if they think a taxpayer has engaged in tax evasion. The tax authorities may refuse the deduction, for instance, if a taxpayer claims a deduction for a donation made to a charity organization but the donation was made to a fictitious organization created to evade taxes.
   
2. Penalty
   The ITA establishes penalties for a number of income tax-related offences. A taxpayer may be required to pay a fine if it is determined that they participated in tax avoidance. Depending on the offence committed and the amount of tax saved, the penalty amount may change.
   
3. Examining and investigation
   If a taxpayer is suspected of participating in tax avoidance, the tax authorities may review their tax returns. The authorities may open an investigation if they discover proof of tax evasion. Examination of bank statements, books of accounts, and other documents pertaining to the taxpayer may be part of the investigation.
   
4. Prosecution
   Taxpayers who are proven to have participated in tax avoidance may face criminal charges. Tax evasion is punishable by a fine or even jail time. The amount of tax that was avoided and the specifics of the case determine the severity of the sentence.
   

Tax evasion's legal implicationTax evasion is a serious crime that has many legal implications, such as fines, penalties, incarceration, and harm to one's reputation.

The following are a few legal implications of tax evasion:

1. Civil Penalties
   Tax evaders may be subject to civil penalties such as fines, interest, and penalties on the amount of unpaid taxes, among other things. The penalty might be as much as 78% of the unpaid tax amount, depending on the severity of the offence.
   
2. Criminal Penalties
   Tax evasion may result in accusations that carry serious penalties, including jail time and large fines. A person found guilty of tax evasion may be sentenced to up to five years in jail, depending on the amount of taxes that were avoided and other factors.
   
3. Loss of Professional and company Licenses:
   If found guilty of tax evasion, a person may lose their professional or company licenses. For instance, a chartered accountant could have his license revoked.
   
4. Asset Seizure
   To cover outstanding taxes and penalties, the CIT may seize a tax evader's assets, including as bank accounts, vehicles, and residences.
   
5. Reputational Damage
   Tax evasion can harm a person's reputation, particularly if they are well-known or in a position of trust.
   
6. Increased Inspection
   After being found guilty of tax evasion, a person may face future inspection by the CIT. Additionally, the CIT may conduct more frequent tax return audits.

In summary, tax evasion is a serious offence with substantial legal repercussions. Taxes must be paid honestly and precisely to prevent any legal implications.

The Ethical implications of Tax Avoidance:

Tax evasion is lawful, but it creates ethical concerns because it denies the government funds that may be used for social welfare programmes. Wealthy people and businesses who can afford to retain tax professionals and attorneys to assist them in finding loopholes in tax laws and policies frequently engage in tax avoidance.

This practice is viewed as unethical because it burdens others in society who are less well-off and cannot afford to avoid paying taxes. The medium and lower income groups bear a disproportionate amount of the burden of paying taxes because they lack the means to do it legally.

The idea of fairness and equity in tax collecting is also undermined by tax avoidance. Everybody is required to pay their fair share of taxes, according to the idea behind tax legislation. But when people and businesses practice tax avoidance, they effectively get away with paying less tax than they ought to. As a result, individuals who cannot afford to avoid paying taxes bear a disproportionate amount of the burden of doing so.

Additionally, tax evasion jeopardizes the pact that people have with their government. According to the social contract, residents agree to pay taxes in exchange for the government's delivery of public goods and services. By not paying their fair share of taxes, people and businesses who participate in tax evasion basically violate this social contract.

The Ethical Implications of Tax Evasion:

It is illegal and unethical to avoid paying taxes that are owed, so tax evasion includes breaching the law. People and businesses who purposefully underreport their income or inflate their expenses in order to lower their tax liability sometimes engage in tax evasion.

The idea of fairness and equity in tax collecting is threatened by tax evasion. It burdens individuals who do pay their taxes honestly since they are forced to increase their payments to make up for the revenue lost to tax evasion.

Written By: Kshitiz Kumar, Shri Jainarayan Mishra P.G. College (University of Lucknow)
Email: [email protected]