Root out Tax Evasion : Daily Current Affairs

Date: 21/01/2023

Relevance: GS-3: Fiscal Policy and their effects on the economy; Tax structure and Tax Reforms.

Key Phrases: Tax-to-GDP ratio, Tax avoidance, Tax Evasion, Fiscal Policy, Tax Reforms, Capital Expenditure, Gross Capital Formation, Corporate Tax, Policy stability, Effective tax rate, Developing Nations and Advanced Economies, Revenue impact.

Context:

Tax evasion and avoidance have always been a headache for the government which has a negative effect on the growth of the Indian economy.
Therefore, in order to raise the tax-to-GDP ratio, the Centre has to do well to plug evasion and avoidance on several counts.

Key Highlights:

India is a country of 1.4 billion people with a rising middle class.
- On the face of it, the country presents untapped growth potential.
In June 2021, India joined the Inclusive Framework of G20 countries to reduce the impact of MNE tax abuse.

Issues of Tax Evasion:

No Tax on Agriculture Income
- The agriculture and allied sector has contributed only to 18 percent of GDP, where about 45 per cent of the population are employed.
- However, as the income from agriculture is not taxed, irrespective of the level of income, unaccounted money is shown as agricultural income by vested interests.
GST Evasion by Fake invoices
- There have been many ways by which GST evasion has been happening, such as issuing fake invoices (without supplying goods and services) and claiming input tax credit (ITC); and round-tripping, especially when the distance of transport is short, where within the valid time of e-way bill, the goods could be transported more than once and unbundling of a single supply contract to reduce the tax incidence.
False revelation by Non salaried Person
- Although the share of personal income tax in the total tax collection by the Central Government is only about 15 per cent, it is extremely lopsided.
- It was mentioned in the 2018-19 Budget speech that the average salary earner pays three times more than a non-salaried taxpayer and this does not include those who submit income tax returns but pay nil tax.
- This anomaly is essentially due to non-revelation of true income by the non-salaried.
MNE (Multinational Enterprises) Tax Abuse
- As for MNE tax abuse, profits have been artificially shifted to low or no-tax locations.
  - It was estimated that India lost about ₹75,000 crore due to tax abuse by MNEs in 2020-21.
Illicit trade and smuggling
- Illicit trade and smuggling is a popular way to avoid tax which needs to be resolved for a healthy economy.
  - According to a FICCI CASCADE report, the two most smuggled goods because of overtaxing are alcoholic beverages and tobacco products.
  - As per the report, the estimated tax loss to the government due to illicit trade is ₹13,331 crore for tobacco products and ₹15,262 crore for alcoholic beverages.
  - Both these sectors account for nearly 49 per cent of the overall tax loss to the government due to illicit markets.

Tax Evasion

Tax evasion is the illegal non-payment or under-payment of taxes, usually by deliberately making a false declaration or no declaration to tax authorities – such as by declaring less income, profits or gains than the amounts actually earned, or by overstating deductions.
It entails criminal or civil legal penalties.

Tax Avoidance

Tax avoidance is the legal practice of seeking to minimize a tax bill by taking advantage of a loophole or exception to the rules, or adopting an unintended interpretation of the tax code.
It usually refers to the practice of seeking to avoid paying tax by adhering to the letter of the law but opposed to the spirit of the law.

Way Forward:

Although the Finance Ministry and the GST Council have been working to curb GST evasion, the free flow of data across the GST Network (GSTN) with other systems such as FastTag, Centralised Processing Centre of Direct Taxes, the Aadhaar, Passport, PAN and other portals that is evolving will go a long way in improving GST compliance.
Those who show their annual income from farming of more than a specific amount can be taxed marginally.
- It is politically a very tough move, but definitely it will help to curb tax evasion.
The more the GST compliance, the better the revelation of true income by professionals, businessmen and traders, and the increase in income tax from the non-salaried taxpayers.
- The direct and indirect tax departments should get their act together to generate more income tax from non-salaried taxpayers.
By being the head of G20 countries in 2023, India should make use of its premier position to reduce MNE tax abuse.
Government should work to plug tax evasion due to illicit trade and smuggling.

Conclusion:

These improvements aren’t easy to achieve. They depend on hard-to-wrangle fundamentals such as basic digital infrastructure and political will.
- Despite the challenges, Tax evasion can be tackled effectively for a healthy economy.

Source: Business Line

Mains Question:

Q. What is the difference between tax evasion and tax avoidance? Also mention the issues related to tax evasion and suggest measures to address these issues. (150 Words).