Introduction
Taxation is the pillar of any country’s economy, serving as the main source of income for the government to finance fundamental services like infrastructure growth, health, education, and public well-being. In India, a growing economy with a huge population, the significance of tax
compliance cannot be emphasized. Still, with several reforms and stringent rules, tax evasion is still among the most acute and scary challenges afflicting the Indian taxation system. The culture of deep-seated tax evasion not only destroys the economy but also widens the income gap between the rich and poor, and in doing so, stunts the growth and development of the nation.
This blog targets presenting a detailed examination of tax evasion in India, its causes, implications, and the most potent solutions that can help reduce significantly this endemic issue.
Understanding Tax Evasion
Tax evasion is the intentional practice of not paying taxes through illegal means. This may involve underreporting income, overstating expenses, concealing money in offshore banks, or indulging in black
money transactions. In India, evasion of taxes happens both in direct taxes (such as income tax and corporate tax)
and indirect taxes (like GST).
Why Tax Evasion is Such a Huge Problem in India?
India possesses one of the lowest major economy tax-to-GDP ratios at 11-12%. This is well belowthe global average for developing countries, which ranges between 15-20%. Over 70%of working people in India do not pay income tax. This shocking percentage has a direct relation to the government’s capacity to deliver improved public services and sustain economic stability.
Primary Reasons for Tax Evasion in India
1. Excessive Tax Rates: Most people and companies feel that tax rates in India are too high,
particularly under the income tax slabs and corporate taxes, and therefore opt for illegal means
to evade taxes.
2. Highly Complicated Tax Structure: Indian taxation is criticized for being highly complicated and not transparent enough, which creates problems for ordinary taxpayers in complying with tax requirements.
3. Corruption: The existence of corruption in tax agencies deters honest taxpayers and enables tax evasion to become rampant.
4. Tax Illiteracy: Many of India’s population, particularly rural residents, have no idea about tax rules and their responsibility.
5. Cash-Based Economy: India has a predominantly cash-based economy, so it becomes easy to perform
unreported transactions without any digital trail.
6. Political Influence: High-net-worth individuals and corporates tend to use their political influenceto avoid taxes without attracting legal wrath.
Implications of Tax Evasion
The consequences of tax evasion extend well beyond the revenue lost to government. Its implications are
prevalent and go a long way in impacting the economic stability and growth of the country. The most significant implications are:
• Government Revenue Loss: Billions of rupees in revenue are lost every year, lessening the government’s capacity to provide for public welfare schemes.
• Income Inequality: Tax evasion mainly favors affluent individuals, enhancing the gap between the rich and the poor.
• Underground Economy: A dual black money economy arises, further distorting
country’s economic system.
• Increased Tax Burden on Genuine Taxpayers: When the majority of society avoids paying tax, the burden disproportionately shifts to honest taxpayers.
• Economic Growth Impacted: Reduced tax collection restricts the government’s investment in infrastructure, healthcare, and education.
What Has the Government Done Till Now?
The Indian government has done a lot to prevent tax evasion through several reforms and digital steps, including:
• Introduction of Goods and Services Tax (GST) to streamline indirect taxes.
• Implementation of Income Declaration Schemes to encourage voluntary disclosure of
unaccounted money.
• Launch of Digital India Programme to promote cashless transactions.
• Enforcement of Aadhaar-PAN linking to track tax evaders.
• Introduction of Benami Property Transactions Act to target hidden wealth.
Though these measures have yielded some encouraging results, they have not been sufficient to eradicate theproblem completely.
The Best Solution: Overall Digital Taxation System
In the final solution to prevent tax evasion in India, there is a need to adopt an overall digital taxation
system. The large-scale use of digital technologies has the potential to transform tax administration, making
it more transparent, efficient, and tamper-proof.
How Can Digital Taxation System Help?
1. Blockchain Technology: Blockchain technology can offer a decentralized and tamper-proof digital record,
making every transaction transparent and traceable.
2. Artificial Intelligence (AI) & Data Analytics: AI can scan large amounts of data to identify suspicious
transactions and spot potential tax evaders.
3. Mandatory E-Invoicing System: All business transactions must be documented by e invoices, with no room left for manipulation.
4. Facial Recognition for Tax Filing: Integrating Aadhaar-based facial recognition into tax filing portals
can avoid duplicate PAN cards and fake accounts.
5. Digital Payment Ecosystem: Popularizing UPI, card transactions, and other digital payment means
will hugely cut down on cash transactions.
6. Taxpayer Education Programs: Organizing mass awareness drives to inform citizens
about taxation laws and why one should pay taxes.
Legal Reforms Needed
• Clarify the Income Tax Act for easy comprehension by ordinary citizens.
• Make the Whistleblower Protection Law more effective in order to entice tax evaders to come forward.
• Implement strict punishment for chronic tax evaders with large fines and imprisonment.
• Create separate Tax Compliance Courts that will accelerate the process of prosecution for tax evasion.
Conclusion
Tax evasion is a cancer that keeps consuming India’s economic progress. Though the government has made various attempts to contain this evil, the final solution is to have a transparent, digital-led, and corruption-free tax administration system. Implementation of next-generation technologies such as blockchain, AI, and compulsory digital payments can significantly curb tax evasion and boost revenue collection.
But no reform or technology will work unless the public is actively involved. The citizens need to understand
that tax payment is not only a legal requirement but also a moral responsibility towards the development of the country. The vision of an independent and affluent India can be achieved only when each citizen pays their share to the economy.
By adopting digital transformation and creating a culture of tax compliance, India can finally shatter
free from the chains of tax evasion and usher in inclusive economic growth.
By….
Indramani Kumar,
BB.A LL.B , 4th Year
Lovely Professional University.
