Have you ever wondered how the tax evader reduces his taxable income by unscrupulous means? Tax evasion is a serious issue, not just in India but also across several global countries. On that note, here’s looking at a few methods by which evaders avoid taxes and how they impact society as a whole.
Methods Used to Evade Taxes
There are methods by which the tax evader reduces his taxable income through illegal and fraudulent practices. Some of them include the following:
- Not filing income tax returns
- Inflation of deductions
- Creating fake invoices or deductions
- Overstating of business expenditure
- Falsely fabricating travel and other claims
- Claiming dependents who do not exist in reality
- Concealing assets and income in offshore accounts across other countries with stringent regulations on baking secrecy
- Not billing for purchases/transactions
- Using Benami transactions and shell companies for tax evasion. A shell company is an organization without any major business activity and is created only to hold assets or enable financial transactions.
- Benami transactions are financial or property deals made in others’ names to hide actual ownership.
- Investments in tax havens or shelters are another tax evasion method for several high-net-worth individuals or businessmen.
- Some may also invest in bogus or fraudulent schemes that carry out transactions only to show artificial losses or promise attractive returns. These manipulate taxation codes to lower liabilities.
These are some manipulative methods that lower the taxable income that is reported to the authorities officially. Submission of false books of accounts or financial documents leads to income being shown as lower than the actual earnings. This is where the taxes payable come down to a large extent. Evading taxes equates to higher personal gain for these taxpayers, which primarily fuels such activities.
Impact of Tax Evasion on Society
Tax evasion has a widespread societal impact that cannot be avoided. Economic growth and efficiency are greatly distorted and disrupted through evasion and the loss of revenue for the Government. At the same time, recurrent evasion also hinders the masses’ belief and trust in the government’s ability to ensure a more equitable and fair taxation system. This leads to a weakening of social justice, and lost revenues also disrupt the Government’s ability to make investments in vital sectors, including infrastructure, education, research, and more.
At the same time, lowering tax revenues also impacts the ability of the Government to function properly in many cases, along with its overall effectiveness and resources. This may also lead to higher tax rates or distortive taxes, which leads to a vicious cycle of inequality eventually. Evasion leads to the creation of a parallel economy of black money, which may also lead to funds being transferred to global countries through secret channels. This may also lower the reputation of the country worldwide. Tax evasion ultimately hinders the country’s developmenty and may also hinder aid to those below the poverty line since the Government will have limited money to spend on the country’s upliftment.