Consequences of Evading Tax and Not Filing a Return

CA Naveen Kumar Agrawal (Chartered Accountant / MBA) (939 Points)

14 August 2008

Every year, as July 31 approaches, we see large advertisements issued by the Income Tax Department of India, advising citizens to pay income tax and file their tax return to ensure “peace of mind.” Indeed, by not complying with the law, you invite possible action from the authorities. The cost of complying with the law is always less than the price you have to pay for not doing so. Let us take a closer look at the two main types of non-compliance in tax matters.

Types of Non-Compliance

Non-payment or short payment of tax than is due, and failure to file one’s income tax return—these are two violations that attract stern action from authorities. Other types of violations are less severe.

Tax Evasion

A taxpayer always wants to pay as little tax (or none at all) as possible. It’s a normal human instinct to save money. While it can be done lawfully through sensible tax planning, if done with a wrong intention, it assumes the form of tax evasion. To put it plainly, Tax Evasion is against the law. You can plan taxes without evading them. When you use the exemptions and deductions available to you in order to minimize the amount of tax you need to pay, you are “planning your taxes.” On the other hand, if you conceal your income or any other financial information so as to escape being taxed—either totally or in part—you are “evading taxes.”

While tax evasion is punishable by law, the concept of tax planning has opened up career avenues for thousands of educated youth, grooming them into financial consultants, creating employment for them and using them to spread awareness among taxpayers about managing money in a better way.

Failure to File Your Income Tax Return

An income tax return is a statement that tells the authorities how much you have earned during the previous Financial Year, how much of your money you invested, what your expenditure was and how much tax you need to pay based on your taxable income. It also gives them details about these that are relevant to your tax obligations.

If you don’t file your return, the tax authorities will not get a picture of these details. It’s your annual financial statement that you are obliged to share with the government because you earn a certain level of income in India.

Not paying the taxes due or not filing your return can lead to punitive action from authorities. Let’s look at the types of action that can be initiated against defaulters.

Types of Action

There are basically 3 types of action that can be initiated against a person who has violated provisions of tax laws:

	Charging interest: If you have not paid taxes by the due date, interest at the rate of 1% per month or part of the month is charged. Interest is more of a reactive way of taking action, in that the defaulter is punished after he has failed to do the needful. He may not mind parting with some money as interest so long as he gets some time to organize his finances and then pay the tax due.
	Imposing a penalty: A penalty is like a fine and tends to tarnish one’s image and track record. So it acts as a deterrent to one who thinks he can relax and avoid filing a return or paying taxes or defaulting in some other way.
	Prosecution: If you were charged interest by the tax authorities because you did not pay taxes in time, none of your contacts would probably know it. Very few might come to know if you were assessed a penalty. But ‘Jail’? No one likes to visit a jail even on a study tour let alone as a criminal! Yet if you failed to pay income tax, you could land up behind bars for a period ranging from 6 months to 7 years, depending on the amount of tax evaded. This is in addition to interest, penalty and any fine, if levied.

Why Take Punitive Measures?

They say that in any society, self-censorship is the best form of censorship. Similarly, obeying the law of the land pro actively is one of the surest indicators of societal progress. It shows that the citizens are educated, aware, empathic and responsible. But if you fail to obey the law (as in tax evasion, for instance), the governing authority has to step in, and put in place a system to recover the loss suffered and at the same time discourage offenders in particular and the public in general from repeating instances of unlawful behaviour.

Let us conclude with this funny but thought-provoking point made by a former U.S. Senator Elihu Root in a 1913 debate:

“I guess you will have to go to jail. If that is the result of not understanding the Income Tax Law I shall meet you there.”