TAX EVASION IN INDIA: CAUSES AND REMEDIES

Abstract:
Tax evasion occurs when individuals deliberately fail to comply with their tax obligation. The
resulting tax revenue loss may cause serious damage to the proper functioning of the public
sector, threatening its capacity to finance its basic expenses. This study investigated the overview
of the opinion of tax professionals regarding the tax evasion in India, delineating the number of
factors responsive for tax evasion and examining the possible remedies to reduce the problem of
tax evasion. This study is carried out with the objectives like the causes of income tax evasion,
The impact of tax evasion in India, etc. To collect the information regarding tax evasion in India
a well designed questionnaire with five point likert scale has been used. As per their opinion
income tax evasion is prevalent in India high tax rates, corruption in public sector units, multiple
tax rates and inefficient tax authorities are the main causes of tax evasion.

INTRODUCTION
In India, most of the persons do not pay their taxes. They try to avoid this by some illegal means
or by taking the benefit of some loopholes in the Indian tax system. Tax evasion is the term for
the efforts by individuals, corporate, trusts and other entities to evade taxes by illegal means. It is
the deliberate, misrepresentation or concealment of the true state of their affairs to the tax
authorities to reduce their tax liability or to avoid the tax liability by declaring less incomes,
profits or gains than actually what they earned or overstating their expenses. Thus the amount
which would have been used for economic and social development is used for anti social
activities. All this creates black money and social evils in the society. Thus tax evasion is not a
problem in development of country but also harmful for the country. The level of Evasion Tax
also depends on the chartered accountants and tax lawyers who help companies, firms, and
individuals evade paying taxes. Tax Evasion is a crime in all major countries and the guilty
parties are subjected to imprisonment and fines.
Differences between Tax Avoidance and Tax Evasion
Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage, to
attempt to reduce the amount of tax that is payable by means that are within the law whilst
making a full disclosure of the material information to the tax authorities. Examples of tax
avoidance involve using tax deductions, changing one's business structure through incorporation
or establishing an offshore company in a tax haven.
By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other
entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers
deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to

reduce their tax liability, and includes, in particular, dishonest tax reporting (such as under
declaring income, profits or gains; or overstating deductions).
Tax avoidance may be considered as either the amoral dodging of one's duties to society, part of
a strategy of not supporting violent government activities or just the right of every citizen to find
all the legal ways to avoid paying too much tax. Tax evasion, on the other hand, is a crime in
almost all countries and subjects the guilty party to fines or even imprisonment. Switzerland is
one notable exception: tax fraud (forging documents, for example) is considered a crime, tax
evasion (like under declaring assets) is not.
Tax resistance is the refusal to pay the tax for conscientious reasons (because they do not want to
support the government or some of its activities), sometimes breaking the law to do so. Some
donate their unpaid taxes to charity, while others (at least in the US) take creative "deductions"
such as not paying a percentage of tax equal to the defense budget. In either case, they typically
do not take the position that the tax laws are themselves illegal or do not apply to them (as tax
protesters do) and they are more concerned with not paying for what they oppose than they are
motivated by the desire to keep more of their money (as tax evaders typically are). Some have
suggested the term tax avoision for people who adopt the techniques of tax avoidance in the
service of tax resistance, thereby doing tax resistance legally.

NUMBER OF TAX PAYERS IN INDIA

According to the report released by Indian Finance Ministry, estimated number of taxpayers for
financial year 2011-12 stands at just 3.24 crore people. That means, less than 3 people in 100 pay
taxes .Out of these 3.25 crore people, 89 per cent pay taxes in the tax slab of 0 5 Lakh rupees,
while on the other end of spectrum, only 1.3% of all tax payers have income about 20 Lakh.
Table 1: Number of Tax Payers in India & their Slabs
Slab
0-5 Lakh
5-10 Lakh
10-20 Lakh
More than 20 Lakh

Number in Lakh
288.40
17.88
13.78
4.06

Percentage of tax payer

89%
5.5%
4.3%
1.3%

Source: Report released by Ministry of Finance, April, 2012. The table number 1 clearly shows
the inequality in the earnings of Indian people Imagine, in a country of 120 crore people, only
4 Lakh people earn above 20 Lakh rupees a month and when we go through the discussion how
much tax is collected it can be understand with the below table:

Table 2: Income Tax Collection

Slab
0-5 Lakh
5-10 Lakh
10-20 Lakh
More than 20 Lakh

In crore
15010
21976
17858
93229

% of tax collected
10.10%
14.80%
12.10 %
63 %

Source: Report released by Indian Finance Ministry, April, 2012

Although, only 1.3 per cent of all tax-payers earn more than 20 Lakh in India, they account for a
whopping 63 per cent of all the taxes collected by Indian Government. So 4.6 Lakh Indians pay a
total of 93,229 crore rupees of tax. That comes to an average of roughly 23 Lakh per person. This
all shows that huge amount of tax is evaded by the citizens of India.
OBJECTIVES OF THE STUDY:
This study is carried out with the following objectives:
1) To find out the causes of income tax evasion.
2) To find out the impact of tax evasion in India
3) To suggest some ways to improve income tax compliance.
RESEARCH METHODOLOGY:
Secondary data analysis saves time that would otherwise be spent collecting data and,
particularly in the case of quantitative data, provides larger and higher-quality databases that
would be unfeasible for any individual researcher to collect on their own. In addition, analysts of
social and economic change consider secondary data essential, since it is impossible to conduct a
new survey that can adequately capture past change and/or developments. In this, we used
primary and secondary data .

ANALYSIS AND INTERPRETATION:

Particulars

Strongly
agree

agree

Neither
Disagree
agree nor
disagree
Result
4
9
1
4
Q.1 Opinion by respondents for Income tax evasion in India

Strongly
disagree
2

Table: 3

Result
Strongly agree
agree
Neither agree nor disagree
Disagree
Strongly disagree

Table 3 shows, Out of 20 respondents, 4 strongly agree with the opinion of high tax
evasion in India, 9 agree with this, 1 neither agree nor disagree. However 4 of total
responses have disagreed with this and 2 strongly disagree.
Q.2 Causes of tax evasion in India listed by respondents
Table: 4
Particul
ars

High
tax
rate

Comple Inefficie Ineffective

x
tax nt tax Enforcemen
system authorit t of law
y

Result

Generation Low tax Multipl

of
black morality e taxes
money in
public
sector
3
5
1

Result
High tax rate

Complex tax system

Inefficient tax authority

Ineffective Enforcement of
law

Generation of black money

in public sector

Low tax morality

Multiple taxes

Table 4 depicts the causes for Income tax evasion in India. Majority of the respondents identified
that high tax rates (8), complex tax system and low tax morality are the main reason of tax
evasion in India. Beside this corruption in public sector unit, multiple taxes and inefficient tax
authorities are the other source of tax evasion.
Q.3 Impact of Income tax evasion in India listed by respondent
Table: 5
Particulars

Result

Reduction in Increase
Countrys
inflation
economy
growth
3
7

in Impact
moral

on Increase
in Decrease in
corruption
countrys
reputation
6

Table 5, shows the impact of Income tax evasion in India. Tax evasion and thereby establishment
of parallel economy has been creating the following serious impacts on the social and economic
system of the country. Most of the respondents are agreed on the opinion that tax evasion has
been causing increase in inflation, Reduction in Countrys economy growth and reduction in
countrys economic growth as an enormous volume of income is diverted to this unaccounted
sector resulting in growing continuation of parallel economy of the country. Moreover, Black
money has resulted in transfer of funds from India to foreign countries through clandestine
channels which decrease countrys reputation globally.

Result
Reduction in Countrys
economy growth
Increase in inflation
Impact on moral
Increase in corruption
Decrease in countrys
reputation

Q.4 suggestions for improvement in income tax compliance

Table: 5
Particular Reduction in tax Strong
rate
system
s
Result
9
3

surveillance Simplified tax Strong corruption

law
law
4
4

Result
Reduction in tax rate
Strong surveillance system
Simplified tax law
Strong corruption law

Table 5 shows that most of the respondents are in opinion of reduction in tax rates to reduce tax
evasion in India. Further, tax evasion can be reduced with the help of Simplified tax law, Strong
corruption law, and Strong surveillance system.
IMPACT OF INCOME TAX EVASION

1. Tax evasion and thereby establishment of parallel economy has been creating the following
serious impacts on the social and economic system of the country. Tax evasion has been
causing reduction in countrys economic growth
2. The direct effect of tax evasion is the loss of revenue, increase in inflation
3. Impact on moral
4. Increase in corruption
5. Increase in prices of land and houses
6. Black money has resulted in transfer of funds from India to foreign countries through
clandestine channels which decrease countrys reputation globally.
SUGGESTIONS FOR IMPROVEMENT IN INCOME TAX COMPLIANCE:

1.
2.
3.
4.
5.
6.

Tax rate should be reduce

Strong surveillance system
Tax law should be Simplified
Strong corruption law
Should be cover Loopholes in tax subsidy and Grants
Annual Information Return

Limitations
1. In some primary data collection methods there is no control over the data collection.
Incomplete questionnaire always give a negative impact on research.
2. Some respondents do not give timely responses. Sometimes, the respondents may give
fake, socially acceptable and sweet answers and try to cover up the realities.
3. The data collected by the third party may not be a reliable party so the reliability and
accuracy of data go down.

CONCLUSION:
This study has surveyed the opinion of income tax professionals regarding tax evasion in India.
As per their opinion income tax evasion is prevalent in India. They opinioned that high tax rates,
corruption in public sector units, multiple tax rates and inefficient tax authorities are the main
causes of tax evasion. They suggested that reduction in tax rates, simplifications of tax laws,
remove loopholes in the tax system and some extent proper processing of information available
the under the annual information return can be best tool for improving Indian tax compliance.
Therefore there is a need for creating transparent, friendlier and less discriminatory
administrative system. Further there is also a need to educate the people about Indian Tax law
and create such an environment in which they pay their due taxes, do not evade the tax and feel
proud in discharging their duty to pay the taxes.

Bibliography:
1. McGee Robert W.
, Tax Evasion in Armenia: An Empirical Study,
http://edoc.bibliothek.unihalle.de/servlets/MCRFileNodeServlet/HALCoRe_derivate_00003041/Tax%20Evasion
%20in%20Armenia.pdf
2. Nickerson Inge, When Is Tax Evasion Ethically Justifiable? A Survey Of German
Opinion, http://sbaer.uca.edu/research/allied/2005vegas/legal/12.pdf
3. Rossi Marcelo J., The Ethics Of Tax Evasion: A Survey Of Law And Business Students
In Argentina, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=875892
4. McGee Robert W. , Is It Unethical To Evade Taxes In An Evil Or Corrupt State? A Look
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APPENDIX:
Questionnaire
1) Opinion for Income tax evasion in India:
a. Strongly agree
b. Agree
c. Neither agree nor disagree
d. Disagree
e. Strongly disagree
2) Causes of tax evasion in India:
a. High Tax Rates
b. Complex tax system
c. Inefficient tax authorities
d. Ineffective enforcement of law
e. Generation of black money in public sector
f. Low tax morality
g. Multiple taxes
3) Impact of Income tax evasion in India:
a. Reduction in Countrys economy growth
b. Increase in inflation
c. Impact on moral
d. Increase in corruption
e. Decrease in countrys reputation
4) Suggestions for improvement in income tax compliance:
a. Reduction in tax rate
b. Strong surveillance system
c. Simplified tax law
d. Strong corruption Law