Tax evasion in India

Tax evasion in India is the illegal act of intentionally avoiding tax payments by misreporting or under-reporting income, concealing assets, falsifying records, or making false claims. This issue is significant in India, where tax compliance has long been a challenge. To tackle this, the Indian government has introduced voluntary disclosure schemes, which allow taxpayers to come forward, disclose undisclosed income or assets, and pay outstanding taxes without facing severe penalties or criminal prosecution. 

This article explores the definition of tax evasion in India, its consequences, methods of detection, voluntary disclosure programmes, and professional advice for clients involved in tax evasion.

In India, it’s a known principle that tax evasion is distinct from tax avoidance, which involves using legal methods to reduce tax liability. Evasion, on the other hand, violates tax laws and leads to legal consequences.

Consequences of tax evasion in India

India takes tax evasion seriously, and several penalties apply if the evasion is detected by tax authorities. These consequences may include:

1. Penalties: Taxpayers who evade taxes can face heavy fines. Penalties can reach up to 300% of the tax due, depending on the nature of the evasion.
2.  Interest: In addition to penalties, interest is levied on unpaid taxes. The rate of interest is typically 1% per month or part of a month, compounding over time.
3.  Prosecution: Tax evasion is a criminal offense in India. If significant fraud is involved, the offender could face imprisonment, potentially lasting up to 7 years.
4.  Seizure of assets: In extreme cases, tax authorities may seize assets or freeze bank accounts to recover unpaid taxes.

These penalties make it highly risky for individuals and businesses to engage in tax evasion, as the financial and legal consequences are severe.

How do Indian authorities usually find out about tax evasion?

Tax authorities in India employ various methods to detect tax evasion. These include:

1. Audits: Tax authorities conduct audits on individual and corporate tax returns. During audits, discrepancies between reported income and lifestyle indicators (like spending patterns, assets, and bank balances) are examined.
2. Information sharing: The Indian government collaborates with other countries under international agreements, such as the Common Reporting Standard (CRS), to exchange financial information including real asset purchases or high value item purchases. This helps detect unreported foreign assets.
3. Technology and data analytics: The Indian tax department uses data mining and machine learning to identify patterns and detect anomalies in tax filings. This helps identify cases where individuals or entities are likely evading taxes.
4. Third-party information: Information gathered from third parties, such as financial institutions or banks, can help uncover evasion. Tax authorities often compare data from different sources to detect discrepancies.
5. Whistleblower complaints: Anonymous tips from insiders or the public about undeclared income or assets often prompt investigations by tax authorities.

Opportunities to amend tax declarations or declare additional income

India offers avenues for taxpayers to amend their tax filings or declare additional income, allowing them to comply with the law without facing severe penalties. These options include:

1. Revised returns: Under Section 139(5) of the Income Tax Act, individuals can file revised returns if they discover that their original return was incomplete or incorrect. This allows for the rectification of errors or the declaration of additional income.
2. Income Declaration Scheme (IDS) 2016: The IDS, launched in 2016, allowed taxpayers to disclose previously undeclared income or assets by paying tax at a concessional rate (45%), which included tax, surcharge, and penalty. This scheme offered immunity from prosecution for those who came forward voluntarily.
3. Pradhan Mantri Garib Kalyan Yojana (PMGKY) 2016: This scheme was introduced after demonetisation to encourage individuals to declare unaccounted cash holdings. The scheme allows taxpayers to deposit unaccounted-for cash into government accounts with minimal penalties.
4. Black Money (Undisclosed Foreign Income and Assets) Act, 2015: This act allows taxpayers to disclose foreign income or assets that were not previously reported. It imposes a 30% tax on the undisclosed foreign assets and an additional 30% penalty, with immunity from prosecution.

These provisions give taxpayers the opportunity to correct their mistakes or declare additional income without facing the full force of penalties or prosecution.

Conditions for voluntary disclosure of tax evasion

Taxpayers seeking to benefit from voluntary disclosure programmes must meet specific conditions. These typically include:

1. Timing: Voluntary disclosure is only possible during a specified time window. Once the window closes, taxpayers can no longer participate in these schemes and must face the full consequences of evasion.
2. Full disclosure: Participants must disclose the complete extent of their unreported income or assets. Partial disclosure or concealing part of the evaded taxes may disqualify taxpayers from benefiting from these schemes.
3. Payment of taxes and penalties: Taxpayers must pay the outstanding taxes, interest, and penalties as per the scheme. The amount will be substantially lower than the penalties that would be imposed if the evasion were detected by the authorities rather than voluntarily disclosed.
4. Immunity from prosecution: Voluntary disclosure usually provides immunity from criminal prosecution, protecting taxpayers from potential jail time and other legal consequences. However, this immunity is contingent on full compliance with the programme’s requirements.

Consequences of voluntary disclosure of tax evasion

When taxpayers voluntarily disclose their evaded taxes, several positive consequences follow:

1. Reduced penalties: Voluntary disclosure allows taxpayers to pay a reduced penalty compared to what they would face if the evasion was detected by the authorities. In some cases, the penalty may be waived entirely.
2. Immunity from prosecution: One of the main benefits of voluntary disclosure is immunity from criminal prosecution. Taxpayers who disclose their evasion are not subject to criminal charges or imprisonment, provided they comply with all requirements.
3. Rectification of financial affairs: By disclosing hidden income and assets, taxpayers can regularise their financial affairs, ensuring they are in full compliance with tax laws moving forward.
4.  Confidence in the system: Coming forward under a voluntary disclosure scheme enhances the taxpayer’s credibility and can prevent future issues with the tax authorities.

When is voluntary disclosure no longer possible?

Voluntary disclosure is no longer possible in the following circumstances:

1. Completion of the statutory time limit: Once the authorities initiate an investigation or issue an assessment, voluntary disclosure becomes impossible. In such cases, the taxpayer must face the full penalties and potential criminal charges.
2. End of the scheme window: Every voluntary disclosure programme, such as IDS or PMGKY, has a fixed time frame. Once the scheme ends, taxpayers can no longer benefit from the reduced penalties or immunity.
3. Detection by authorities: If the authorities have already discovered the tax evasion, taxpayers can no longer take advantage of voluntary disclosure schemes. They will be subjected to full penalties and possible legal action.

Tax evasion issues often overlooked by foreigners

Foreigners, or even Indian residents with foreign income or assets, often overlook the requirement to disclose their offshore wealth. In India, residents are taxed on their global income, meaning that failing to report foreign assets constitutes tax evasion. 

Many individuals with foreign bank accounts or properties fail to disclose these holdings, assuming that they are outside the scope of Indian tax laws. However, the Indian government has made significant efforts to detect undisclosed foreign assets through international agreements and tax treaties. Similarly foreigners who sell foreign entities which derive significant value from an Indian asset or investment may be liable to pay taxes in India on the sale of such foreign entity.

Recommendations for clients who have committed tax evasion

As tax professionals, our best advice to a client who has committed tax evasion is to encourage them to come forward and disclose their evasion voluntarily. Here’s how professionals should act:

1. Provide legal and financial advice: Counsel the client on the benefits of voluntary disclosure, emphasising the reduced penalties and immunity from prosecution. It's essential to help clients understand the full scope of their obligations.
2. Ensure full disclosure: Advise clients to disclose all undisclosed income or assets. Partial disclosure can disqualify them from the benefits of the scheme.
3. Act promptly: Encourage clients to act within the window provided by the disclosure scheme to avoid penalties and criminal charges that may arise if authorities detect the evasion later.
4. Prepare for future compliance: Once clients disclose their evasion, they should ensure future tax filings are accurate and timely to avoid repeating the same mistakes.

Conclusion

Voluntary disclosure of tax evasion schemes in India provides taxpayers with a chance to regularise their financial affairs and avoid severe penalties or criminal prosecution. These schemes, while offering leniency, require full disclosure, prompt action, and compliance with all conditions. 

For tax professionals, guiding clients through the voluntary disclosure process is crucial to helping them overcome past mistakes and reintegrate into the formal economy. Ultimately, these programmes play an essential role in improving tax compliance, reducing black money, and contributing to the overall health of the Indian economy.

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Ashishkumar Bairagra has been in practice and a partner of M L Bhuwania and Co LLP since 2001. He handles international taxation matters, inbound and outbound investments, and consulting assignments. He offers consulting services to various family businesses and high-net-worth individuals on transition, expansion, exits, and entrepreneurship.