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Tax Avoidance and Tax Evasion: The Indian Case

Published online by Cambridge University Press:  28 November 2008

Anil Kumar Jain
Anil Kumar Jain
Affiliation:
Banaras Hindu University
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Extract

‘Tax avoidance’ and ‘tax evasion’ are terms so frequently referred to in economic and business relationships today that they constitute part of our conversational language and people in general use these terms even without knowing their exact meaning and difference. Whereas tax avoidance implies a situation in which the taxpayer reduces his tax liability by taking advantage of the loop-holes and ambiguities in the legal provisions, in the case of tax evasion, facts are deliberately misinterpreted and the tax liability is understated. Thus, while tax avoidance is perfectly legal and is, at times, referred to as ‘tax planning’, tax evasion is illegal and, therefore, carries with it the risk of penalties and prosecutions under the tax laws. As such, the black economy comprises the sum total of all the various methods of tax evasion but does not include tax avoidance. Accordingly, whereas the consequences of the two phenomena are different for the taxpayers, both reduce the revenue of the Exchequer and consequently need to be checked to the greatest extent possible.

Type
Articles
Information
Modern Asian Studies , Volume 21 , Issue 2 , April 1987 , pp. 233 - 255
Copyright
Copyright © Cambridge University Press 1987

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References

The author is Reader in Economics, Banaras Hindu University, Varanasi (India) and currently an academic visitor to the London School of Economics. He wishes to express a deep sense of gratitude to Professor A. B. Atkinson, Professor of Economics at the London School of Economics, for his valuable comments and suggestions.

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2 No Harassment Tax is the amount of ‘on money’ or illegal money that the taxpayers generally pay to the tax officials for not being harassed in their tax assessments and getting things done in a smooth manner. Harassment may take several forms such as calling taxpayers to tax offices repeatedly and not completing the assessment on one pretext or the other, frequent adjournments, arbitrary rejection of accounts, making unnecessary additions to profits or income and thus compelling the taxpayers to go in appeal, non-granting of instalments in payment of taxes, etc. All these considerably increase the compliance costs for the taxpayers. In order to minimize such costs in the form of inconveniences, taxpayers generally prefer to pay some ‘on money’ so that their assesments may be completed expeditiously and in the right manner. In such cases, the officials also do not generally work against the law but they grant certain conveniences to the taxpayers. Such ‘on money’ does not depend on the quantum of tax payments involved but differs from case to case depending upon the nature of the tax official and the status which the taxpayer enjoys in the society.

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13 For centuries, the Hindu Joint Family, called the Hindu Undivided Family (HUF) under the Indian Income Tax Act, has been the constituent atom of the social order in India. It is essentially an involuntary association of members of a family and under the Hindu Law, the properties and income of such a family are treated as that of one unit so long as the family continues undivided. The joint family fund has a common nucleus and belongs to all members in their joint capacity. Every member of the family has a right to use the family property irrespective of his interest in the joint family property. The earning members regard themselves as partners of a common concern and this ensures greater love and affection amongst family members. Each member works according to his capacity but gets according to his need. The entire family income is pooled together and is used to meet the expenses of the joint family. To preserve its age-old institution, the HUF has been treated as a distinct and separate taxable entity in India under every Income-tax Act since the Act of 1886.

14 Jain, Anil Kumar, ‘Tax Avoidance Through Hindu Undivided Family in India’, Public Finance, vol. 29, no. 1, 1974, pp. 121–30.Google Scholar

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25 Under the Voluntary Disclosure Scheme, the taxpayers are generally granted immunity from penalty and prosecution if they declare their undisclosed incomes or wealth within the stipulated date. They have to pay only the rate of tax announced under the Scheme and the tax officials do not ask for the details regarding the sources of such disclosed income or wealth. Thus, such schemes provide an opportunity for tax evaders to convert their black income or wealth into white income or wealth.

26 where Yo = present value of bonds; Yt = maturity value; r = rate of interest and t = time period.

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29 Estimates Committee (1981–82), 29th Report (Seventh Lok Sabha), Direct Taxes-Part II (April 1982), p. 82.Google Scholar

30 Ibid.

31 Estimates Committee (1980–81), 9th Report (Seventh Lok Sabha), Income Tax Department (April, 1981), p. 89.Google Scholar

32 Jain, Anil Kumar, ‘Income Tax: Vigorous Prosecution Policy Needed’, The Economic Times, vol. XXI, no. 169 (21 08 1981).Google Scholar

33 Estate duty has been abolished in India by the Finance Act, 1985 in respect of estates passing on deaths occurring on or after 16 March 1985.

34 Government of India, Ministry of Finance, Annual Report (1984–1985), p. 98.Google Scholar

35 EACR, no. 26, para. 26.Google Scholar

36 Kaldor, , Indian Tax Reform, p. 115.Google Scholar

37 Board of Inland Revenue (U.K.), 119th Report (1976), p. 17.Google Scholar

38 DTECFR, p. 68.Google Scholar