What are some of the best methods to prevent tax evasion?

Caveat: In Indian perspective

Tax is a compulsory contribution to state revenue, levied by the government on its citizens or residents Income, Business profits, or added to the cost of some goods, services, and transactions.

“Tax evasion this term is generally used to designate criminal tax fraud, in which the taxpayer intentionally and deliberately understates his income or overstates his deduction and/ or credit for the purpose of underpayment of tax liability” - (your Dictionary.com).

There is a constant tug of war between the taxpayers and the tax collectors - the former trying to minimize the outgo and latter to maximize the collections!

Tax evasion may take forms such as “Underreporting or non-reporting of Income”, “Falsifying Income Records”, “Claiming fake and illegitimate exemptions, deductions, losses, and business expenditure” etc.

Risk of tax evasion are possible raid on business and residential premises of the evader, which means loss of business, humiliation, litigation, reopening of assessments of the past years and additional cost of interest and penalty. In such cases the total tax outgoings may be more than the undisclosed income.

It reminds me famous saying of Sayings of Vladimir Lenin “The bourgeoisie are today evading taxation by bribery and through their connections; we must close all loopholes.”. Tax Evaders will try hard to evade, whereas government should make all efforts to defeat the evaders and their intentions.

Sabyasachi Mukherjee J. of the Supreme Court in CWT v. Arvind Narottam [1988] 39 Taxman 368/173 ITR 479 (SC), said:- "One would wish, as noted by Chinnappa Reddy, J. in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC), that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization. But the question, which many ordinary taxpayers very often in a country of shortages with ostentatious consumption and deprivation for the large masses, ask, is, does he with taxes buy civilization or does be facilitate the waste and ostentation of a few. Unless waste and ostentation in Govt. spendings are avoided or eschewed, no amount of moral sermons would change people's attitude to tax avoidance." [Source: taxmann.com ]

In my view, the following may help in reducing the Tax Evasion:

1. Lower Tax Rates: High Tax rate does not result in Higher Tax Collection. Instead, it will lead to High Tax Evasion and Increased Tax Collection Cost for the Tax Authorities. Bringing Down the Tax Rates and keeping it within Single-Digit or at a reasonable rate will definitely help in reducing the evasion, as people may not mind paying it. However, the government can levy higher taxes on the persons, who are earing higher Income, I.e. Progressive Taxation System. This can be done by levying a reasonable surcharge.

2. Simplified Tax Laws: Enforce Simplified Tax Laws, so that even common man can understand these laws and pay his liability. The complex Tax laws with end number of Exemptions, Deductions, Deeming Fictions, etc. make taxpayers confused and may also make them ignorant in some cases.

Don't differentiate between the occupation of the citizens and enforce the uniform tax law with a lower tax rate whether be it a Salaried Individual, Farmer, Business Man, or Government Individual, Civil Servants, etc. Have a uniform tax law irrespective of occupation. For Example, the government can tax rich farmers, whose income crosses the specified slab. This increases the confidence and morale among the fellow citizens. And Will give an answer to “Why Only Me”

3. Reduced Corruption: The high rate of corruption deters, the Tax Payer from making prompt and honest payment of Tax. Even the corruption of Tax officials often gives an opportunity to the TaxPayers to take the risk of Evasion. Due to this Tax Payer takes a chance and thinks that they can settle later with the Corrupt officials. Therefore, strict vigil and strict action against the corrupt including the politicians, boost the confidence of the TaxPayers to make prompt and honest payment of Taxes.

Example establishment of Independent Body reporting directly to President or CAG, CJI, or Lokpal, etc. Further State Governments should reinstate “Lokayukta” and should give sufficient powers to act against anyone irrespective of position and power. These “Lokayuktas” should directly report to “President or CJI, or Lokpal”. This helps in cleaning dirt from the system.

4. Incentivize the Tax Payer: In-country like India Tax Payers are not in receipt of any direct benefits from the Government for making prompt tax payments. This is one of the reasons for having lessor number of income taxpayers compared to its huge population levels. The percentage of the number of income taxpayers to the total population is still in Single Digit.

This % doesn't mean that the rest all are poor and having a problem to their daily bread. It just indicates “Rest Don’t Pay Taxes Honestly”.

In countries like Sweden, 27% of taxpayer money goes towards education and healthcare, whereas 5% goes to the police and military, and 42% to social security. Further People receive free education and subsidized healthcare support and public transport services.

On the contrast, the Cost of Education, Healthcare and other basic amenities here in India, is very high and lobbying by the Private Schools, Hospitals with the Involvement of Politicians or Business tycoons, Celebrities and without adequate regulation to curtail them, made this primary amenities costly may be one of the reasons for not paying taxes honestly.

For Example, Fees in private schools in Bangalore start from 75K!. Is this impossible for the government to regulate and curtail the unreasonable fee structures?

No! This is merely a lack of Intent from the part of the government! What makes it so costly to educate a nursery or LKG kid and Charge 75K? “Don't say or take shelter behind “Quality” for LKG Kid”

Building Fund ! Building Career or Building Structures and Assets for the School!

Therefore, if the government can give free Education, Healthcare, Insurance and strike down the private lobby’s and thereby uphold the equality as laid down in Indian Constitution, there is no reason for the people to evade the Taxes at least for the majority.

Further education is the “Fundamental Right” of every child by virtue of Article 21-A of the Constitution of India inserted as per The Constitution (Eighty-sixth Amendment) Act, 2002 and the same should be implemented with the Intent by the Government. To give effect to this “Fees Structure” of the private schools to be monitored and maximum Cap shall be fixed by the Government. Also, ensure that there is equality in respect of the quality of education and government-run schools also should produce the same quality as that of Private Schools.

Like-wise the government instead of asking for a caste certificate may insist the citizens to produce ITR Copy to avail these free benefits! That's all

6. Educate the Tax Payer: Lack of honesty, Greed, Absence of spirit of civic responsibility is one of the reasons for being corrupt and for evading taxes. Educate the Child, Youths, and citizens about their role in Nation building right from Childhood and elders should be role model for honest Tax Payments and thereby create a path for youths.

7. Curtails the Cash Economy: Educate the citizens to avoid the Cash Payment or Receipt and curtail the cash economy by taking strict action. The existence of the Informal economy is one of the reasons for Higher Tax Evasion. Also, charge tax on Cash withdrawals beyond a certain limit. This helps the government to build an efficient income tracking system and thereby reduces avoidance.

8. Monitor Tax professionals: Take action against the professionals who are helping the Evaders! And also establish strong vigil on them.

9. Strengthen Tax Withholding Systems: Stong TDS mechanism will help the government to have a track on the Income of the Tax Payer. Also, give an option to the Tax Payer, withdraw the TDS Balance by filing Quarterly Returns may be Interim Returns instead of waiting a too long time to get a refund!

10. Onetime Window for Evaders to Come Clean: This should be done by imposing a reasonable Tax rate and not at 60% or 70% of the Income so evaded. Efficient Onetime Window for Evaders to Come Clean, help the evader to rectify the mistake already committed.

11. Harassment by Tax Authorities: Invoking senseless deeming fiction, Angel Taxation, Inviting taxpayers to unnecessary tax litigations, error in interpretation of tax law by Tax Authorities, imprudent behaviour of authorities, draconian provisions of law, the power to make retrospective amendments, frequently fixing taxpayer under provisions such as Section 68 to 69, rejecting share valuation by drawing analogy beyond a stretch of the imagination, lack of giving opportunity to be heard, freezing Bank accounts at shorter notice, etc will decrease the confidence of the taxpayer and thereby taxpayer make look for unethical avenues.

“Rich can go to “COURT” and poor and middle-class CAN not go to “COT” with peace”

12. Strict Action: Strict Action against Tax Evaders like cancelling Passport, directly recovery from the Property through a fast track courts, Penalty & Criminal Prosecution, etc. will deter the Tax Evaders.

It is often seen that big Tax Evaders are there either in the system or public life. For example, rich & greedy politicians, businessmen, celebrities, bureaucrats, etc. Also, believe that the Politicians, bureaucrats, etc being part of the government or legislature, need to set an example by declaring their Income Properly and by Paying Income Tax honestly.

Whatever be the Case lets pay taxes honestly and discharge our constitutional duty!

Ultimately rulers and ruled must have trust with each other and ruled should create a sense of trust through his true, honest and welfare activities towards the public at large.

Happy Reading!