Tax Evasion Cause, Effects and Solutions

Tax evasion is the illegal practice of willfully defrauding the Income Tax Department by not
reporting income or not paying income tax on one's earnings, either in part or in full. Evading
taxes is a serious crime, and anyone found guilty could face hefty fines, jail time, or both. Still,
that does not stop people from committing fraud and evade tax.

Only 1% of Indias population pays taxes as per the latest data disclosed by the
government for assessment year 2014-15. This indicates that there is a major flaw in the
mindset of the average Indian. When Taxes are the major source of revenue of India government.
Tax evasion causes economic inequality that is how some people are getting richer and others are
getting poorer.

Thus the amount which would have been used for economic and social development is used for
anti social activities. Thus tax evasion is not a problem in development of countrys economy but
also harmful for the country.

Let us explore on why the average Indian doesnt pay taxes and how it affects the economy of
our country.

THE MAGNITUDE OF TAX EVASION

In total, there were 2.87 crore individual income tax returns in 2012-13 (out of a population
of 125 crores). 1.6 crores of this did not actually pay any tax, so, effectively, income taxpayers
amounted to 1 percent! To give a comparative sense, Canada (of course, a G8 country), had the
same2.88 crore returns, out of a population of 3.5 crores!

India loses 14 trillion rupees ($314 billion) from tax evasion annually according to celebrated
economist Arun Kumar, author of The Black Economy in India. General government tax
revenue is an estimated 18 percent of Indias $1.5 trillion in gross domestic product, the
lowest among the four BRIC nations, International Monetary Fund data show. Of this, 72% is
held abroad.

MAJOR CAUSES FOR TAX EVASION

They don't understand the concept of Taxation - People hate what they don't
understand. Tax is a burden to a certain extent but in essence tax is the major source of
fund of the government and these funds are used to provide some basic needs of a citizen
such as safety, protection, peace and order.

Rampant Corruption - These people hate to pay tax because they know that the tax they
are paying has greater worth than the actual services they are receiving from the local
government. These people had mistrusted the system. Thus, when you are in doubt of
something, you'll certainly hate in doing.
 High Tax rates

Inefficient Tax Authorities

Multiple Taxes

EFFECTS OF TAX EVASION

Loss of Revenue to the Government

Tax Evasions direct impact is the loss of the Government revenue. Since the
Government fails to get sufficient tax revenue due to large-scale tax evasion, it is forced
to resort to high taxation and deficit financing which again carry their ill-economic
effects.

Dual Economy

The increase in the amount of black money in India over a period of time due to tax
evasion leads to the perpetual growth of economic dualism which consists of Parallel
economy (black money economy) operating side by side with
the Official or Reported economy on the country.

The black economy represents 1/5th of the aggregate economic transactions. There is also
interaction between the reported and unreported activities such that it is difficult to
identify black money from the white money economy. Such a Parallel Economy will ruin
the entire economic development of the country.

Under-estimation

A large underground economy and growth of black income lead to under-estimation of

Since unreported tax income is excluded from GDP calculations, the estimates of savings
and consumption of nations to the national income and measurement of other economic
variables would be biased and misleading for accurate policy making and planning
considerations.

Widening the Gap between the Rich and the Poor

Tax Evasion by the majority of the population causes regressive distribution of income in
the society. The rich become richer and the poor become poorer. By way of concentration
of income and wealth in few hands, the black money widens the gap between the rich and
the poor.
 Distribution of Resources

Tax evaders are always in a position to put their prior claim over the scarce goods in the
market due to their readiness and ability to pay more, thereby depriving the honest and
poor people from their legitimate share. This obviously reduces the net economic welfare
of the Indian society at large.

Deteriorates the General Moral Standards of the Society

Tax Evasion is largely responsible for the deterioration of general moral standards of the
society. It implies a deviation from the accepted norms in society and from the point of
view of the society is unethical.

Socially, we can say that the structure and ethics of a society undergoes a massive
change.

Social values of honesty, hard work, thrift and simplicity get eroded. Even the political
institutions and organizations lose their credibility as they also gradually become a part of
the entire system of tax evasion.

SOLUTIONS TO TAX EVASION

Minimize cash transactions

Close loopholes in Tax laws

Penalties and Prosecution

To discourage tax evasion, tax laws should provide for monetary penalties and for the
prosecution (and imprisonment) of tax evaders.

Statutory Provisions

Statutory provisions like compulsory filing of tax returns by everyone with a taxable
income; compulsory maintenance of accounts by businessmen and professionals and their
compulsory auditing if income or turnover exceeds a specified limit and compulsory
canalizing of transactions involving payment exceeding Rs.20, 000 through banks should
be introduced.

Tax raids and Seizures

Increase awareness among taxpayers by conducting seminars, conferences and

Ensure the political changes do not affect well defined tax structure. Make tax
administration more independent and autonomous without losing final control of
Government.

Audit, tax collection, depositing and filing provisions to be more strengthened and
updated.

Encourage taxpayers to pay tax by more friendly schemes.

Give relief provisions to huge tax payers.