Introduction:
Taxes are the main source of income of any government to implement the public welfare programs etc., Taxpayers contribute a lot to the economy of the nation. It is the responsibility of the individual or the firms to pay the tax which they are liable to pay. Payments of taxes help in the development of the nation especially, for developing countries like India.
Anurag Singh Thakur, Minister of Finance said that only 1% of the Indian population pays income tax. 5.78Cr tax returns were filed by taxpayers for the financial year 2018-19 till February 2020 and Out of this only 1.46 Cr individual taxpayers filed returns declaring income above Rupees 5 lakhs.[1]
Another major issue besides tax evasion is money laundering. It is an illegal means of not disclosing the original origin of money by diverting and transferring the illegal money through various commercial and bank transactions making it legitimate.
Concept of Tax Evasion
Tax Evasion means an individual or business entity or firm avoids paying the tax due completely or some amount. It is an illegal action and involves misrepresentation or concealing of income or cash transaction and showing deductions without valid proof. It involves avoiding tax liability by showing less profits or income
It is a criminal offense and people who have been charged for tax evasion are liable for criminal charges and penalties as per the Chapter XXII of the Income Tax Act, 1961. It results in hefty penalties and maximum term up to 7 years.
Different Ways Evasion of Tax
- Smuggling- To avoid payment of taxes some goods are transported across borders illegally.
- Non-payment of due Taxes.
- Filing Incorrect Income Tax returns.
- Providing inaccurate financial documents and statements.
- Submitting fake or incorrect proofs to claim exemptions and deductions – This includes submitting High Rent Receipts, claiming HRA though living in own house, evading stamp duties in cases of capital gains etc.,
- Evasion of various taxes like Sales, Value Added Tax, Income Tax, Customs Duty and Excise Duty
Difference between Tax Avoidance and Evasion
Tax evasion means illegal methods to avoid paying taxes whereas tax avoidance is a legal means to lower the obligations of a taxpayer of paying tax. Tax Avoidance includes the investment of income or showing certain valid deductions and exemptions with proper proof.
Prevention of Tax Evasion
At present, there is a huge rise in the evasion of tax by the taxpayers. To prevent it certain measures are needed to be taken such as:
- Reducing the present tax rates.
- Changing the penal provisions.
- Taxation of agricultural Income.
- Compulsory Maintenance of Accounts & audit by companies or firms.
- More elaborate Income Tax Return form.
Penalties & Punishments
The Penalty for tax evasion will be in a high percentage of the tax evaded amount, it includes a collection of 100% to 300 % of the tax when the amount is due.
Also, for failure to file a return of income in time, false statement and verification, wilful attempt to evade tax, fabrication of accounts and documents and failure to deposit tax deducted or collected at source for such offenses a minimum rigorous imprisonment of 3 to 6 months will be levied. In cases of abetment of false return a minimum period 3 to 6 months and fine will be levied and punishment includes those who rendered professional assistance.
If it is done by a firm or company partners then the officers, directors of the company, may be responsible, unless proved that the offense was committed without their knowledge.
Similarly, for the offense of the Hindu Undivided Family (HUF), the Karta, is deemed to be guilty, unless proved that the offense was committed without their consent.
Sec 271 AAB of the Income Tax Act,1961 mentions different scenarios with respect to penalty:
- If the taxpayer agrees and admits about the concealed (undisclosed) income then, 10% of the previous year’s concealed amount with interest will be levied as a penalty.
- If the taxpayer does not admit the concealed amount but declares in the Income Tax Return then 20% of the concealed amount will be levied as a penalty.
- If the amount is undisclosed for the previous year then a minimum penalty of 30% and a maximum penalty of 90% will be levied.
Concept of Money Laundering
It is one of the serious issues of the World. Money laundering is an illegal means of concealment of the origin of money. It is a process where money which is illegal after several transactions and commercial or foreign transfers appears to have been originated legally through legitimate sources.
IMF estimated that globally money laundering is estimated to be in between 2 % to 5 % of the world’s GDP.
Money laundering involves placement of money from illegal activities, layering it through several transactions and integration with the legal financial system.
There are so many ways in which individuals conceal money. Some of them are:
- Depositing large sum of money earned illegally in small amounts in a financial institution under different fake names, by using various bearer instruments like money orders.
- Creating a Trust or Corporation or a non-profit organization or an account in different names in a different country and transferring large sums of money.
Different Ways of Money Laundering
There are different ways of money laundering as Smurfing, Bulk Cash Smuggling, Cash Intensive Businesses, Trade based Laundering, Shell companies, Round tripping, Gambling, Real Estate, Black salaries, Tax amnesties, Fictional Loans, Transaction laundering, and false invoicing.
Prevention of Money Laundering Act, 2002
One of the legislation which was enacted with an objective to prevent money laundering in India is “Prevention of Money Laundering Act, 2002”. The provisions of the Act provides an obligation to all financial institutions, Intermediaries, banks, etc.,
According to Sec 3 of the Act money laundering includes concealment, possession, acquisition or use and claiming as untainted property.
As per Sec 4 of the Act for the offence committed by the persons (Individuals/ juristic persons) the punishment for money laundering will be rigorous punishment for a minimum of 3 years which may extend to 7 years and fine which may be up to Rs.5 Lakhs.[2]
Enforcement Directorate[3]
The Directorate of Enforcement is a specialised financial investigation agency under the Department of Revenue, Ministry of Finance, Government of India. It is set up with an objective for the enforcement of two Acts i.e., the Foreign Exchange Management Act,1999 and the Prevention of Money Laundering Act,2002.
The main functions of the ED are to investigate the contraventions of FEMA,1999 and investigate offences of money laundering under PMLA,2002.
Measures for Prevention of Money Laundering by Different Countries
The G7 countries in 1989 to prevent money laundering has formed the “Financial Action Task Force on Money Laundering” (also known as FATF). The main functions of FATF include implementation, promoting anti-money laundering measures, and monitoring of its member countries in its implementation.
Also, several countries like Bangladesh, India, Canada have enacted Money laundering prevention Act. Countries like Australia, Afghanistan have established Financial Intelligence Units.
Recent Amendments
Recently in the Finance Act,2019 certain amendments in the Prevention of Money Laundering Act,2002 have been made such as insertion of explanation u/s 2 (u); insertion of explanation u/s 3 of the Act to the provision of “offense of money-laundering”; Omission of proviso u/s 17 (1) and 18 (1) of the Act and insertion of explanation u/s 45(2) of the Act
Case Laws
Nikesh Tarachand Shah vs Union Of India[4]
In this case, the petitioners challenged the constitutional validity of Section 45(1) of the Prevention of the Money Laundering Act 2002 for the grant of bail for a person. This Section has imposed additional conditions for the grant of bail. The Supreme Court struck down the aforesaid provision on the ground that it violated Article 14 and Article 21 of the Constitution of India.
M/S Kranti Associate Pvt. Ltd. & Anr vs Masood Ahmed Khan & Ors[5]
In this case, the Supreme court held that the National Consumer Disputes Redressal Commission (NCDRC) could be considered a Court since it had all the trapping of a Civil Court. Hence, has powers similar to the Adjudication Authority under the PMLA.
State Of West Bengal vs Narayan K.Patodia[6]
In this case, an FIR was registered contending that one person has forged under a fake name alleging that he was a businessman and obtained registration under the Sales Tax Act. It was found that he forged and defrauded the sales tax department of Rupees 32 Lakhs. The DSP has forwarded to file an FIR to the concerned officer of police. The High court quashed the FIR holding that DSP does not have the power to do so.
Conclusion
The amount of tax which is to be paid is not overburdened on the taxpayers. An ample scope and time is given for the taxpayers to pay money. But unfortunately, nowadays many people are avoiding the payment of taxes which is an illegal act. Though, people are given ample time and are aware of the criminal charges and penalties they tend to do the illegal act of tax evasion. All the tax evasion and money laundering are leading to create black money which is harmful to the society also is seriously affecting the economy across the globe. Hence, proper prevention methods should be taken to prevent both the issues of money laundering and tax evasion else, it causes severe damage to the economy of the world.
References:
[1] https://www.financialexpress.com/economy/only-1-of-india-pays-income-tax-govt-shows-proof-tax-evasion-still-a-major-roadblock/2088141/
[2] https://dea.gov.in/sites/default/files/moneylaunderingact.pdf
[3] https://enforcementdirectorate.gov.in/about_ed.html
[4] WRIT PETITION (CRIMINAL) NO. 67 OF 2017
[5] SLP (Civil) No.20428 of 2007
[6] (2000) 4 SCC 447
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