Tax evasion involves unlawfully evading tax obligations. It is a serious offence that bears harsh penalties and criminal charges. For example, tax fraud falls under the category of tax evasion, which includes failing to pay taxes or paying less than what is necessary. It also includes lying about income, claiming deductions without supporting documents, failing to disclose cash transactions, etc. The penalty for withholding income information might vary from 100% to 300% of the total tax. You must pay the necessary taxes to avoid fines and criminal punishment.

How does Tax Evasion Occur?

Tax evasion refers to failing to pay taxes on time, which is unlawful in India. The following are some methods that tax evasion occurs in India:

(i) Non-payment of due taxes:

 One of the most frequent methods of tax evasion. Even if a tax is owed, an individual or organization willfully fails to pay it.

(ii) Smuggling to save different taxes:

Many firms use smuggling to avoid paying state taxes, customs fees, and import-export levies. Smuggling is a criminal violation under Indian law, and the punishment might be increased if it is done for tax evasion.

(iii) Submit incorrect tax returns:

An individual files a tax return but provides misleading or erroneous information to decrease or avoid paying taxes. It also qualifies as tax evasion because the individual did not provide complete information and paid less tax.

(iv) Maintaining fake financial statements:

Businesses may use misleading financial records such as account books and balance sheets to reflect a low annual income. For example, a company may fail to declare sale receipts to understate its total income and decrease its annual tax liability.

(v) Keep money outside India:

The IT department does not manage international bank accounts. Some people use an international bank account to hold money without disclosing their overall income. 

(vi) Fake documents to claim exemption:

The government gives individuals exemptions to ensure they have more cash. People, however, take advantage of these exemptions by creating fraudulent documents, even if they do not qualify for them.

(vii) Bribery :

Bribing an income tax official to change the amount of tax due is another method of tax evasion. Individuals pay bribes to remove or reduce tax records in their name.

Penalties for Tax Evasion

The income tax department may levy various penalties if a person is found guilty of tax evasion. Individuals and businesses may face penalties if they fail to pay their taxes on time. The following are some punishments for tax evasion:

(i) You may be required to pay between 100% and 300% of the tax on undeclared income.

(ii) If you fail to pay the required tax, the income tax department may apply a penalty, which cannot exceed the amount owed in taxes.

(iii) If a corporation fails to deduct tax (such as TDS) when making payments, the penalty may include payment of the tax due.

(iv) A company must have itself audited and submit an audit report. If it fails to do so, it may face a penalty of Rs 1.5 lakh or 0.5% of its sales turnover (whichever is less).

(v) The company may be fined Rs 1 lakh if an accountant’s report is not provided as ordered. 

(vi) If an individual fails to file tax statements within the specified time frame, he shall be subject to a daily penalty of Rs 200. 

(vii) Section 44AA[1] specifies how a person or company should maintain its accounts. If it does not follow the criteria, a Rs 25,000 penalty may be imposed.


Eshwar S, 5th year B.A, LL. B(Hons.), Veltech School of Law, Chennai.


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