TAX PRESENTATION

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TAX PRESENTATION

Key Points:
 Definition of Taxation: Mandatory financial charge imposed by governments to fund
public expenditure.
 Types of Taxes:
 Direct Taxes: Income tax, corporate tax (levied on income/profits).
 Indirect Taxes: GST, customs duties (levied on goods/services consumption).
 Purpose of Taxation:
 Funds government responsibilities (public welfare, infrastructure, defense,
economic stability).
 Challenges in Taxation:
 Tax Evasion: Illegal practices (e.g., underreporting income, falsifying
deductions).
 Tax Avoidance: Exploiting legal loopholes to minimize tax obligations.
 Impact of Tax Evasion and Avoidance:
 Loss of government revenue.
 Disruption of economic equity.
 Global and local statistics:
 Developing countries lose $100 billion annually due to illicit financial
flows (UNCTAD, 2020).
 MNCs’ profit shifting costs $240 billion annually (OECD, 2015).
 India’s revenue loss is ₹6 lakh crore annually (CBDT, 2020), ~2.5% of
GDP.
 Consequences:
 Hinders funding for infrastructure, welfare, and public services.
 Exacerbates socioeconomic inequalities.
 Policy Approaches:
 Address Tax Evasion: Stringent enforcement and penalties.
 Address Tax Avoidance: Legislative reforms, international cooperation, robust
compliance frameworks.
 Need for Understanding: Essential to distinguish between tax evasion and avoidance
to devise effective countermeasures for a balanced and equitable tax system.
Emergence of the Problem of Tax Evasion and Avoidance: Key Points PG 6-7
1. Early Tax Implementation in India
 Low tax rates initially reduced the temptation to evade taxes.
2. Rise in Evasion (1930s)
 Wealthier taxpayers began underreporting income.
 World War II created conditions favoring tax avoidance and evasion.
3. Post-Independence Worsening
 Economic controls and licensing policies led to black markets, increasing
evasion.
4. 1956 Kaldor Reforms
 Proposed integrated taxation system to address evasion under the assumption
that if a taxpayer evaded tax on one income base, they could be taxed on
another.
 Approach proved ineffective as tax evasion persisted.
5. High Tax Rates (Pre-1973-74)
 Increasing rates incentivized evasion.
 Bribery and corruption grew alongside costly electoral processes.
6. ‘No Harassment Tax’ (NHT)
 Illegal payments to tax officials to avoid harassment in tax procedures.
7. Complex Tax Code
 Numerous provisions added to curb evasion complicated administration and
enforcement.
8. Lack of Scientific Tax Management
 Ineffective administration allowed exploitation by evaders.
9. Impact of Inflation
 Persistent inflation from the First Five-Year Plan exacerbated the issue.
 Black money fueled inflation, undermining controls and increasing tax
liabilities.
 Inflation led to higher property values, raising taxes in monetary terms.

DIFFERENCE BETWEEN TAX EVASION AND TAX AVOIDANCE- PG 8 OF PROJECT


MAIN DIFFERENCES- PG 8
Aspect Tax Evasion Tax Avoidance
Definition The illegal act of not paying or The legal arrangement of affairs to
underreporting taxes owed. minimize tax liability.
Legality Illegal and punishable under Legal but often considered
law. unethical.
Nature Deliberate and fraudulent Strategic exploitation of legal
concealment of facts. provisions.
Methods Misreporting income, falsifying Using loopholes, deductions,
records, or hiding assets. exemptions, and tax planning.
Transparency Involves secrecy and false Activities are reported but
reporting to authorities. structured to reduce liability.
Intent To deliberately defraud the To reduce tax liability within the
government. framework of the law.
Moral Universally condemned as Debated; seen as unfair by some
Perspective illegal and harmful to society. but within the law.
Consequences Leads to penalties, fines, and May result in scrutiny or legal
potential imprisonment. amendments to close loopholes.
Impact on Directly deprives the Reduces revenue legally but
Revenue government of legitimate impacts equitable tax collection.
revenue.
Ethical Unethical and criminal Legal but often criticized for
Consideration behavior. exploiting tax systems.
Examples Not reporting income, creating Investing in tax-saving
fake expenses. instruments, setting up businesses
in tax havens.
Intentions of Violates the intent and Aligns with provisions but
Law provisions of tax laws. undermines the spirit of taxation.
Common Actors Individuals or businesses Primarily businesses or wealthy
engaging in illegal practices. individuals using tax advisors.
Role of Tax No legitimate role; often Tax advisors and lawyers actively
Advisors involves collusion with structure plans.
fraudsters.
Government Prosecuted as a criminal May lead to regulatory changes to
Action offense. eliminate loopholes.
OFFICIAL ESTIMATES OF TAX EVASION IN INDIA- PGS 9 TO 11
1. Measurement Challenges:
 Tax evasion and avoidance are difficult to measure accurately.
 Estimates rely on approximations due to data limitations and subjectivity.
2. Early Estimates:
 National Planning Committee (1940s): Tax evasion between Rs 2,000–8,000
million.
 Taxation Enquiry Commission (1953-54): Acknowledged widespread evasion.
3. Professor Nicholas Kaldor (1956):
 Estimated Rs 5,760 million of non-salaried income evaded annually.
 Total losses (evasion + avoidance): Rs 2,000–3,000 million (1953-54).
4. Wanchoo Committee (1964):
 Tax evasion: Rs 4,700 million.
 Total evaded tax: Rs 14,000 million.
 Black money in the economy: Rs 70,000 million.
5. Voluntary Disclosure Schemes:
 Concealed income disclosed: Rs 15,000+ million.
 Yields: Rs 887 million (1980-81) and Rs 87 million (1984-85).
6. Recent Studies:
 1975-76: Concealed income Rs 99,580–118,700 million (15%-18% of GDP).
 1983-84: Concealed income Rs 315,840–367,680 million (8%-21% of national
income).
7. Characteristics of Tax Evasion:
 Prevalent across all income groups; opportunities vary by income type.
 Minimal evasion in salaried income (TDS applied).
 Significant evasion in self-employed professions and business incomes.
 High-income groups evade more due to higher potential gains.
8. Indirect Tax Evasion:
 Understatement of land/building values: Losses in stamp duty, capital gains,
and wealth taxes.
 Factory production underreported to avoid excise duties.
 Sales below cost plus tax to evade sales and local taxes.
9. Historical Insights:
 1952: Tax evasion described as a "fine art" (Professor C. N. Vakil and P. R.
Brahmananda).
 High tax rates (up to 1973-74) incentivized evasion (profits up to 4300%).
10. Black Money Economy:
 Parallel economy intertwined with the official economy.
 Black money often laundered into legitimate wealth through clever
mechanisms.

CONSEQUENCES OF AVOIDANCE AND EVASION PG 12- 13


Economic Implications:
 Tax avoidance and evasion lead to the proliferation of black income and wealth.
 Black money disrupts the economy by hoarding goods, creating shortages, and
driving inflation.
 Inflation lowers living standards, leading to labor unrest, reduced productivity, and
loss of national income.
 Black money fuels inflation and vice versa, tightening the formal money market.
 Insufficient tax revenues force the government to resort to deficit financing,
worsening inflation.
 Black money undermines tax system fairness and diverts resources from productive
uses to wasteful consumption.
 Smuggling and wasteful spending are supported by black money.
 Honest taxpayers bear an unfair burden, fostering frustration and eroding tax
compliance.
Social Implications:
 Black money deepens social divides between the wealthy ('Haves') and the poor
('Have-nots'), creating unrest.
 Extravagant dowries and weddings, driven by black money, strain the middle class.
 Black money donors gain social influence by funding educational, religious, and
cultural activities.
Political Implications:
 Black money significantly finances political campaigns, often exceeding legal
expenditure limits.
 Businessmen gain undue political influence through black money contributions.
 Political decisions often favor contributors' business interests, undermining fairness
and governance.

STEPS TO TACKLE AVOIDANCE AND EVASION PG 14-16


Tax Avoidance and Evasion
 Rooted in societal materialism; complete elimination is impractical.
 Measures to mitigate:
 Closing tax law loopholes.
 Strengthening detection and administrative standards.
 Raising public awareness.
2. Amendments to Income Tax Act, 1961
 Broaden the definition of income to tax all earnings except specified exemptions.
 Introduce "net worth increment" taxation for fairness.
 Include agricultural income under central taxation; current partial integration is
ineffective.
 Extend Section 64 to club income from assets transferred between spouses.
 Propose treating the family as a single tax unit with safeguards for divorce cases.
3. Voluntary Disclosure Schemes
 Schemes have had limited success in uncovering black money.
 Examples:
 1951, 1965, and 1975 schemes disclosed small percentages of national
income.
 1978 demonetization yielded ₹7,000–8,000 million.
 1981 Special Bearer Bonds raised only ₹3,730 million, failing to meet
expectations.
 Challenges: Skepticism, low returns, and misuse concerns.
4. Expense Allowances and Tax Rates
 Inflated expense claims prevalent among businesses.
 Solution: Verify expenses rigorously rather than liberalize allowances.
 Cap tax rates at 50% for incomes above ₹2 lakh with smoother slabs to curb evasion.
5. Complexity of Tax Laws
 Frequent amendments (over 1,350 changes between 1961–1976) have created
confusion.
 Simplify laws and introduce changes through well-scrutinized bills.
6. Tax Evasion Forms
 (1) Outside the tax system (e.g., small shopkeepers).
 (2) Concealed transactions within the system.
 Recommendation:
 Conduct regular, systematic surveys.
 Strengthen field machinery and use external information sources like bank
records.
7. Deterrence Through Penalties and Prosecution
 Current penalties are insufficiently strict.
 Rare prosecutions and delays reduce effectiveness.
 Example: Only 173 convictions in India (1961–1984) versus 5,924 in the UK.
(PG – 17 & 18)
 Adopt stringent penalties and rigorous prosecution policies to deter evasion.
 Hold enablers like accountants accountable.

1. Administrative Quality and Talent


 Tax evasion prevention hinges on effective administration.
 Attracting top talent requires improved pay and career prospects for tax
officers.
2. Challenges for Income-Tax Officers in India
 Current pay scales and modest living conditions undermine officers'
confidence and authority.
 Need for improved pay, job titles, accommodations, and educational facilities
for officers' families.
3. Training and Knowledge Requirements
 Officers need expertise in various laws and industries to handle diverse cases
effectively.
 Comprehensive and ongoing training is essential for all tax department staff.
4. Case Handling and Expertise
 Complex cases should be managed by senior or experienced teams.
 New and junior officers often struggle against skilled professionals like
chartered accountants.
5. Incentives and Penalties
 Efficient officers should be rewarded; lapses must be penalized.
 Honest taxpayers should be incentivized with rewards, recognition, and
preferential treatment.
6. Public Awareness and Social Responsibility
 Develop a societal conscience against tax evasion.
 Publicize penalties and prosecutions for tax evaders to deter non-compliance.
7. Transparency in Tax Matters
 Remove secrecy; ensure accounts are transparent.
 Penalized individuals should be excluded from official roles and government
recognition.
8. Strengthening Tax Administration
 Invest in advanced technology and human resources for better compliance and
enforcement.
9. Tax Policy Reforms
 Simplify laws, reduce rates, and expand the tax base to promote voluntary
compliance.
10. Public Education Campaigns
 Use diverse media to educate citizens about tax responsibilities and benefits of
compliance.
11. Encouraging Voluntary Compliance
 Offer tax rebates, credits, and other incentives to foster voluntary adherence.
12. International Cooperation
 Collaborate globally to combat cross-border tax evasion and implement
transparency standards.
13. Enhanced Penalties and Enforcement
 Impose strict penalties and enforce measures like asset seizure to deter tax
evasion.
McDowell Co. Ltd. v. CTO (1985 3 SCC 230)- PG 21
Ap excise case

Background:
According to the A.P. Excise Act, excise duty must be paid before liquor leaves the
distillery.
Initially, buyers directly paid this duty to the Excise Department, while manufacturers
only collected the liquor’s price (not including the duty).
Manufacturers paid sales tax only on the price they received (excluding excise duty).
First Supreme Court Decision (1977):
The Court ruled that excise duty paid directly by buyers should not be included in the
manufacturer’s turnover.
Rule Change and New Problem:
After this decision, the rules were changed to make manufacturers responsible for excise
duty, but buyers continued paying it directly.
The tax authorities argued that excise duty must now be included in the manufacturer’s
turnover, and the High Court agreed.
Supreme Court Constitution Bench Ruling:

The Court revisited the issue, overruling its earlier decision.


It ruled that excise duty is the manufacturer’s responsibility, even if the buyer pays it
directly.
Excise duty, being part of the price of liquor, must be included in the manufacturer’s
turnover for sales tax purposes.
Key Takeaways:
Manufacturers cannot exclude excise duty from their turnover just because buyers pay
it directly. It’s considered part of the price of liquor.
The Court emphasized that taxes must be paid honestly, without using artificial
methods to avoid them.
Moral and Practical Insights:

Justice Reddy highlighted that tax avoidance harms society, especially in


underdeveloped or developing countries, where resources are scarce.
While taxpayers often distrust how their money is spent, this distrust doesn’t justify
avoiding taxes through dishonest means.
Majority opinion: Tax planning is acceptable if legal, but using tricks to evade taxes is
unethical and should not be encouraged. Everyone has a duty to pay their fair share of
taxes honestly.
Case Summary: Maneklal Agarwal v. Deputy CTO- PG 23-26
Facts:

Maneklal Agarwal leased his property to family members at very low rents, who then sublet it
at higher rents.
Tax authorities assessed the property’s rental income based on its fair market value (Rs.
6,38,400 after deductions), dismissing the lower income reported by the appellant.
The High Court upheld the assessment, ruling that the income belonged to the appellant.
Key Issues:

The case highlights tax avoidance, where an individual manipulates transactions to report
lower income.
The Supreme Court supported lower authorities' factual findings, emphasizing that income
earned by the appellant must be taxed in his hands.
Legal Principles:

Tax authorities can assess the "right person" under ITO v. Ch. Atchaiah.
Tax planning is legal if genuine but becomes impermissible if it involves artificial
arrangements or colorable devices (McDowell and Co. Ltd. v. CTO).
Tax Avoidance vs. Evasion:

Avoidance: Minimizing tax within the law (e.g., CIT v. A. Raman and Co.).
Evasion: Illegal manipulation to reduce taxes.
The Ramsay principle stresses analyzing the overall outcome of transactions, not just
individual steps.
Implications:

Honest tax planning is acceptable.


Avoidance using dubious schemes harms public revenue, ethics, and fairness (McDowell
dissent by Justice Reddy).
STATUTORY PROVISIONS
1. Section 271H: Penalty for late filing of income tax returns (Rs. 10,000 to Rs.
100,000).
2. Section 270A: Penalty for concealment of income; assessing officer must prove
deliberate concealment.

Offense Penalty Explanation

This applies when the


Penalty of 50% of taxpayer's total income is
the amount of underreported in
Underreporting of underreported comparison to the assessed
Income income. income.

Penalty of 200% of If the underreporting of


Underreporting due the amount of income is due to deliberate
to misreporting of underreported misreporting (e.g.,
income income. misrepresentation of facts).

3. Section 271B: Penalty for failing to audit accounts as per Section 44AB.
Offense Penalty Explanation
Penalty of 0.5% of total
Failure to get sales, turnover, or gross The taxpayer is required to get their
accounts audited as receipts, subject to a accounts audited under Section 44AB,
required under maximum penalty of Rs. which applies to businesses meeting
Section 44AB 1,50,000. certain thresholds.
Penalty of 0.5% of total
Failure to furnish sales, turnover, or gross This applies when a taxpayer fails to
tax audit report receipts, subject to a furnish the audit report as required
within the maximum penalty of Rs. under Section 44AB, even if the audit
prescribed time 1,50,000. is done.

4. Section 234E: Penalty for non-compliance with TDS/TCS rules (Rs. 200 per day, up
to total TDS amount).

5. Key Provisions of Section 234E


Provision Details
Sub- If a person fails to deliver or cause to be delivered the prescribed statement
section (TDS/TCS) within the time limit, they will be liable to a fee of Rs. 200 per day for
(1) every day the failure continues.
Sub- The total fee will not exceed the amount of tax deductible or
section collectible under the TDS/TCS provisions.
Provision Details
(2)
Sub-
section The fee must be paid before delivering the statement, as specified in Section
(3) 200(3) or Section 206C(3), for tax deducted or collected at source.
Sub-
section
(4) This section applies to statements delivered for TDS/TCS on or after 1st July 2012.

6. Section 276C: Penalty for tax evasion (imprisonment 6 months to 7 years and fine) if
income understated by over Rs. 25 lakhs.
Provision Details
Section Offense of willful attempt to evade tax, penalty, or interest by concealing
276C(1) income or providing false information to the tax authorities.
- Imprisonment: The person will be punished with imprisonment for a term
Punishment of 6 months to 7 years.
for 276C(1) - Fine: A fine will also be imposed in addition to imprisonment.
The punishment mentioned above applies to any person who wilfully
Section attempts to evade tax by concealing income or providing false statements
276C(2) with the intent to evade tax.
A person will be deemed to have committed an offense under this section if
they deliberately conceal any income or make false representations to
Explanation evade tax.

7. Section 139A: Penalty for providing false PAN information during filing.
Provision Details
This section mandates that every person who is required to furnish
Section a return under the Act must quote their PAN in such return, and
139A(1) also in documents related to tax transactions.
If a person has provided false information while applying for or
Section furnishing PAN details, or if they have submitted incorrect PAN
139A(5) details during the filing of tax returns, a penalty may be levied.
- A penalty may be imposed for providing false PAN details or
submitting incorrect PAN.
- The penalty can be a sum of up to ₹10,000 for each instance of
Penalty false or incorrect PAN.
The penalty may be imposed by the Assessing Officer (AO) if
Section they are satisfied that the false PAN details were intentionally
139A(6) provided or the PAN itself is fabricated.
- Correct PAN is necessary for accurate tax processing.
PAN - False or incorrect PAN details may lead to misrepresentation in
Information income tax filings.
Provision Details
The penalty amount for providing false PAN information can be
Penalty up to ₹10,000. This is imposed by the Assessing Officer after an
Amount inquiry.
- The penalty is applicable if the PAN details provided during
filing are incorrect or false.
Imposition of - If the tax authorities believe the individual deliberately provided
Penalty false PAN details, they may impose the penalty.
Scope of The section applies to cases where false PAN details are provided
Section while filing a tax return or submitting tax-related documents.

Penalties for Tax Evasion and Avoidance:


1. Section 270A: Penalty up to 200% of tax payable on undisclosed income.

2. Section 271A: Penalty of Rs. 25,000 for failing to maintain proper books of account.

3. Sections 220(1) & 221(1): Penalty for default in tax payments or failure to clear dues

4. Key Provisions of Section 220


Provision Details
When an assessee receives a demand notice for tax payable
Section under the Act, they must pay the tax within 30 days from the
220(1) date of the service of the notice.
If the tax is not paid within 30 days, the Assessing Officer
Section (AO) may levy interest on the outstanding amount from the due
220(2) date until the date of payment.
Application for Extension of Time: An assessee can apply to
Section the AO to extend the time for paying tax. The AO can allow
220(3) payment in installments if sufficient reasons are given.
Failure to Pay Tax: If the assessee does not pay the tax or fails
Section to apply for an extension, the AO can take recovery
220(4) actions (e.g., attachment of assets).
If the assessee is aggrieved by the demand or decision of the AO,
Section they can file an appeal against the order before the appropriate
220(5) authority.
Penalty for Penalty may be levied under Section 221 if the
Non- assessee deliberately refuses to pay the tax after receiving the
Payment demand notice.
Tax recovery may involve attachment of property, bank
Recovery accounts, or other assets under the provisions of the Income
Methods Tax Act.

Key Provisions of Section 221


Provision Details

If an assessee fails to pay the tax as demanded under section 220(1),


Section 221(1) the Assessing Officer (AO) may impose a penalty for non-payment.

Amount of The penalty can be a sum not exceeding the amount of tax in
Penalty arrears and can be imposed in addition to the tax due.

The penalty will not be imposed if the assessee proves that their failure
Section 221(2) to pay was due to reasonable cause (e.g., genuine financial hardship).

Non- If the assessee refuses or neglects to pay the tax, penalty can be imposed
Compliance without considering any reason for non-payment.

IMPACT ON GOVERNMENT REVENUE:


1. Tax Revenue Shortfall: India loses ~3.5% of GDP annually to tax evasion and
avoidance, equating to ₹9.5 lakh crore (FY 2023-24).
2. GST Tax Gap: The GST compliance gap (5-7%) causes annual revenue losses of
₹1.2-1.4 lakh crore.
3. Corporate Tax Avoidance: Multinational corporations shifting profits result in
annual corporate tax losses of ₹45,000–₹70,000 crore.
4. Reduced Public Spending: Revenue loss impacts government funding for services
like education, healthcare, and infrastructure, e.g., FY 2022-23 healthcare budget was
₹89,155 crore, below international health spending benchmarks.

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