Definition: Tax evasion can be understood as a tax practice, wherein the assessee, i.e. an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), firm or body corporate, etc. intentionally attempts to avoid or reduce the payment of taxes, by using unauthorized methods or downright frauds. Both illegal non-payment or underpayment of taxes comes under this category.
To be precise, in tax evasion, the taxpayer consciously furnishes inaccurate financial information or hides certain material facts, to suppress income and inflate expenses.
For the purpose of tax evasion, the assessee, resorts to different types of manipulations such as non-disclosure of exact income, concealing the particulars of income, hiding the source of income, or manipulating the account books in a way that it results in the reduction of the overall tax burden.
Forms of Tax Evasion
There are many ways adopted by assessees, to avoid the payment of taxes by illegal ways. Some of those forms are discussed in the points given below:
- Not representing material facts or suppressing the same.
- No record of investment or capital gains in the accounting records.
- Claiming an expense that has no physical receipt.
- Accounts manipulation, by recording false entries.
- No record of certain receipt in the account books which has a substantial effect on the total income.
- Not reporting a foreign transaction or deemed foreign transaction or certain domestic transaction specified under Chapter X.
Assessee guilty of evading taxes is subject to prosecution and penalty. When the assessee applies the above-mentioned means to avoid the payment of taxes, then a penalty @200% is levied under section 270A of Income Tax Act, 1961, as this comes under misreporting of income.
VT Ltd. fitted an inverter worth Rs. 30,000, at the Director’s residence, but it was treated as fitted in the company’s Accounts department. The purpose is to treat it as office machinery to qualify for higher depreciation, i.e. 15%, which would otherwise attract a depreciation of 10%. The increased amount of depreciation leads to the reduction in profit and ultimately the tax liability. As facts are falsely represented, it amounts to tax evasion.
Tax evasion is not only illegal but unethical too, because it has an element of deceit tax authorities, to reduce the burden of the tax. Taxpayers often submit misleading documents, suppressing or omitting material facts and details, deliberately stating untrue statement as true, showing lower income than the actual income, conscious violation of tax rules, etc.