How Can GST Reduce Tax Evasion?

Tax evasion is one of the areas of concern for tax authorities in India. The Indian government introduced GST (Goods and Services Tax) to reduce incidents of tax evasion by replacing multiple indirect taxes such as service tax, excise duty, and value-added tax (VAT).

It eliminates cascading effects and double taxation in the Indian tax system. To answer how GST can reduce tax evasion, here are the ways to address it and align tax collection with the Indian tax laws.

What Is Tax Evasion and How Is It Different from Tax Avoidance?

Tax evasion is an illegal way to intentionally conceal income or assets to reduce the tax amount payable and tax obligations. Individuals evading tax usually mislead the income tax authorities using various means, resulting in a lack of transparency and tax breaks.

On the flip side, tax avoidance is a legal method wherein taxpayers adopt strategies such as deductions and exemptions and input tax credit claims within the tax code to reduce their tax liability.

For instance, you can contribute to retirement savings plans, invest in tax-advantaged accounts or claim legitimate business expenses to reduce your tax burden.

Common Methods of Tax Evasion

Here are some of the commonly practiced means of tax evasion:

● Cash Transactions

Businesses dealing in cash transactions such as car washes, restaurants, or freelancers can easily report lower income to evade taxes. Tax authorities find it challenging to track the actual income in such transactions.

● Gig Economy Income

The gig economy includes people with side hustles, rideshare drivers, or online sellers. This segment of earners might underreport their income by separating their electronic payments from the main source of income.

● Shell Companies

Shell companies exist only on paper and hence can easily avoid disclosing their income or assets. These companies might further funnel income deviating from tax regulations and avoid GST registrations to evade taxes.

● Fake Deductions

Fake invoices and deductions might include overstating business expenses, claiming dependents who are not there or claiming inflated travel expenses. In such instances, taxpayers aim to reduce the taxable income to evade taxes.

● Not Filing Income Tax Returns

Non-filing of income tax returns or GST returns (monthly returns or annual returns) is one of the common means to evade taxes. However, if the tax authority scrutinises and identifies non-filing, there are applicable penalties and adverse legal implications.

● Offshore Accounts

There are countries across the globe with strict banking secrecy laws. Tax evaders often use such off-shore bank accounts to evade taxes in their home country.

● Bribery

Individuals attempting to evade taxes might bribe a tax officer to reduce liability or overlook discrepancies. However, this is punishable by law as it adversely impacts the integrity of the tax system.

Impact of Tax Evasion

Tax evasion is a crime in India and has significant impacts as follows:

● Revenue Loss

The government generates revenue from taxes to fund essential services such as healthcare, education, social programs, and infrastructure. Tax evasion leads to loss of revenue for the government, wherein government initiatives are likely to be affected.

● Burden on Honest Taxpayers

When a certain segment of taxpayers evades taxes, honest taxpayers might face a disproportionate tax burden. This results in an unfairness in the tax system within the country.

● Eroding Trust in Government

Tax evasion results in a lack of trust in the public in the government as it affects equitable tax liability distribution. As a result, this weakens the social contract in a country.

●  Suppressed Economic Growth

As tax evasion reduces the government's tax revenue, it adversely impacts the government’s ability to invest in social welfare, healthcare, infrastructure, and education. This results in suppressed economic growth for the nation.

● Breeding Ground for Corruption

Tax evasion is a punishable offence that results from a lack of accountability and transparency. Further, bribing tax officers is a crime that results in corruption that hinders economic growth.

● Disincentive for Honest Work

Tax evasion by dishonest taxpayers discourages honest and hardworking taxpayers from ethical behaviour. Thus, it impacts their honest work to pay taxes to the government.

Solutions to Address Tax Evasion

Here are the solutions to address tax evasion:

●  International Cooperation

As tax evaders might consider offshore bank accounts to save funds, it is essential to strengthen international cooperation and information sharing. This enables tax authorities to extract information about taxpayers' financial holdings and offshore income, ensuring transparency.

● Data Utilisation

Utilising data analytics followed by additional advanced technologies in tax collection can help analyze financial transactions and identify inconsistencies, if any. Streamlined investigation and optimised resource allocation can significantly help address tax evasion.

● Enhancing Tax Legislation and Enforcement

Robust tax laws and regulations followed by periodic tax legislation review can help address tax evasion effectively. This can facilitate financial practices aligned with tax laws to prevent tax evasion in the country.

● Educating the Public

Enhancing public awareness can help align tax laws and tax collection by the government. It further educates the masses and facilitates a practice of tax compliance and informed decision-making and prevents tax evasion.

Further, invoice-wise tracking and matching of invoices is essential to be taught to taxpayers for compliance attitudes and compliance monitoring.

●  Stronger Penalties

Increased penalty amounts, strict penalty and fine rules and enforcement measures such as potential imprisonment can be legal means to address tax evasion in the country. This will likely reduce the attempts of businesses and individuals to evade taxes.

● Whistleblower Programmes

Whistleblower is an initiative wherein a knowledgeable taxpayer can report tax evasion by dishonest taxpayers. The government offers financial incentives to whistleblowers to promote tax compliance and fairness in the tax system.

Penalties for Tax Evasion

The Income Tax Department levies penalties on tax evaders. If you do not disclose your income, the tax authorities levy a penalty of 100% to 300% under Section 271(C). However, the exact penalty depends on the following factors:

●  If the taxpayer declares the undisclosed income, a penalty of 10% applies to the preceding year's hidden income.

●  In case misreporting results from an actual mistake, the tax authorities levy a penalty of 50% on the previous year’s hidden income.

●  If the taxpayer has a genuine intent to evade taxes, a penalty of 300% applies to the hidden income.

In addition, if tax officials conduct a raid to discover undisclosed income, the penalty applies under Section 271(AAB). Here are the conditions when tax officials levy penalties:

● If the due taxes are unpaid, the tax officials can levy penalties less than the amount of taxes.

●  The Income Tax Act, 1961, mandates filing income taxes under Section 139, Subsection 1 for every financial year. In case of late income tax return filing, a penalty of ₹5,000 applies.

●  In case of inaccurate information disclosure during income tax return filing, the tax authorities further levy penalties wherein TDS (Tax Deducted at Source) is deducted from the taxpayer’s salary.

●  If the taxpayer provides an incorrect PAN card number, a penalty of ₹10,000 applies.

●  In case a person filing income tax identifies inaccuracies after filing the report and is unable to correct it within 10 days of submission, the tax officials levy a penalty of ₹50,000.

Conclusion

Preventing tax evasion is crucial to ensure effective tax collection and government revenue generation. To understand how GST can reduce tax evasion, it is essential to know the penalties that tax authorities levy on such instances.

Public awareness can significantly reduce tax evasion by facilitating fair practices and whistleblower policies while ensuring GST compliance. To avoid paying penalties, ensure you pay your tax dues and file your income tax returns timely.

💡If you want to streamline your payment and make GST payments via credit card, consider using the PICE App. Explore the PICE App today and take your business to new heights.

FAQs