Volume - 5, Issue- 9,September 2017 IC Value : 56.

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EPRA International Journal of Economic and Business Review SJIF Impact Factor(2016) : 6.484
ISI Impact Factor (2013): 1.259(Dubai)

Research Paper

TAX EVASION IN INDIA: A STUDY OF ITS

IMPACT ON REVENUE OF THE
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GOVERNMENT

1
Assistant Professor of Commerce, University College of Arts,
Dr. Devarajappa S1 Tumkur University,Tumakuru-572103, Karnataka, India

ABSTRACT

T ax is a major source of government revenue and it contributes for the overall development and prosperity
of a country. Raising government revenue in terms of income tax, custom duty, excise duty,
entertainment tax, VAT, land revenue tax etc. from various sectors in order to initiate development and welfare
programmes that are meant to improve the company’s situation. But the country has been facing a massive problem
with tax evasion. People who should be paying taxes have found ways not to pay them and, as a result, it may be said
that the income of the country has been suffering. India is facing major problems like Tax Evasion, Black money,
existence of parallel economy show that Indian taxation system requires some major reforms in the future ahead to
address all this problems. In this backdrop the present paper explores the tax evasion concepts and examine amount
of tax evasion in India. For this purpose the required data have been collected from secondary sources.

KEYWORDS: Tax Evasion, Tax Estimation, Revenue, GDP

INTRODUCTION number of dependents for tax rate purpose and establishment

Tax evasion occurs when the efforts are made by of good relationship with tax payers .
individuals, Firm’s Trusts and various other entities to avoid AroraR.S. and Rani Vanita (2010) Studied the causes and
paying taxes by illegal and unfair means. The evasion of tax Remedies for Tax evasion & corruption in the Indian Income
usually takes place when taxpayers deliberately hide their tax system . They investigated the opinions of tax professionals
incomes from the tax authorities in order to reduce their tax from the different districts of Punjab regarding tax evasion
liability. Evasion of tax, takes place when the people report and corruption in Indian Tax system. They pointed out the
dishonest tax that includes declaring less gains, profits, or high tax rates ,corruption ,social acceptance of tax evasion,
income than what has been actually earned and they even go low probability of detection and low tax morality are the
for overstating deductions. main causes of tax evasion. Further they opined that excessive
REVIEW OF LITERATURE discretionary powers available with income tax authorities,
Singh and Sharma (2007) made an attempt to study the harassment to tax payers, lack of integrity on the part of
perception of tax professionals with regard to Indian Income income tax officials, lack of processes are the factors which
Tax System by collecting primary data from 100 tax lead to corruption. They suggested the rationalization of tax
consultants operating in Punjab and Haryana. They tried to rates, simplification of tax laws, extensive use of TDS system
investigate the role of tax consultants played in the revenue and proper processing of information available under the
collection process by helping their clients in understanding Annual Information Return for increasing tax compliance.
the complex tax system and meeting their legal obligations.
Lalitwadhwa and Dr. Virender Pal 2012 They opinioned
Factor Analysis of data showed that seven factors –reduction
that high tax rates, corruption in public sector units,multiple
in tax evasion, extension of relief to taxpayers, incentives for
tax rates and inefficient tax authorities are the main causes of
dependents and honest tax payers, broadening the tax base, e-
tax evasion. They suggested that reduction in tax rates,
filing of returns, adequacy of deductions and impact of exempt
simplifications of tax laws, remove loopholes in the tax system
exempt tax system played an important role in determining
and some extent proper processing of information available
the effectiveness of Indian tax system. While concluding the
the under the annual information return can be best tool for
authors suggested for adjustment of income tax rates according
improving Indian tax compliance.
to price level changes, broadening of tax base, strict measures
against tax evaders, extensive use of TDS, consideration to

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e-ISSN : 2347 - 9671, p- ISSN : 2349 - 0187 Dr. Devarajappa S
V. Kalpana 2015 (Tax Evasion - A Major Threat to Economic ESTIMATING TAX EVASION
Development and Growth – Causes and Remedies) This review The difference between actual revenue collection
paper focused on highlighting the causes and ill effects of tax and an estimation of potential collection is the tax gap. It is an
evasion in the overall development of the Indian economy . estimate of total leakage, comprising the effects of tax
Low tax morale , low quality of services in return for taxes avoidance, tax evasion and corruption. Typically, however,
and low transparency and accountability of public institutions the tax gap is referred to as estimated tax evasion. Estimating
have led to high tax evasion in our country. tax evasion can be direct or indirect. The indirect method
Mr. NishantRavindraGhuge and Dr.Vivek links tax evasion to the underground economy since the latter
VasantraoKatdare2016, (A Comparative Study of Tax could be thought of as the size of economic activity that
Structure of India with respect to other countries) The study would be taxed if reported in tax returns. A more direct
found that Indian tax structure lags behind on almost every method of estimating the tax gap, in particular for VAT, is to
indicator. There is a strong requirement for a serious review obtain potential VAT revenue from the country’s input-output
and actions from the government are needed in simplifying matrix and to compare it with VAT revenue collection. These
the tax structure. methodshave revealed that as much as one- third of potential
VAT collection andhalf of income tax collection may remain
OBJECTIVES AND METHODOLOGY OF uncollected.
THE STUDY EFFECTS OF TAX EVASION
This study is carried out with the following objectives: Tax evasions have numerous ill effects on the tax payer, total
1) To Study the concept of tax evasion revenue and the society.
2) To find out the extent of income tax evasion. The important effects are;
3) To find out the impact of tax evasion in India 1. It’s most important adverse affect is perhaps on
To meet the above objectives of the study, the equity. A wage-earning factory worker pays tax. A
required data have been collected from secondary sources, restaurant worker whose income is the same but
such as Internet, websites, professional magazines, referred who receives part of his income in tips does not
journals, newspapers and conference books. In addition reveal it for tax purposes. Thus, one
tobooks on income tax and reports published are also used. bluecollarworker gains at the expense of the other.
For the purpose of analysis of the data, the statistical tool This is horizontal inequity. A salaried employee in
like, Correlation Analysis and Regression Analysis have been the organised corporate sector earns the same
employed. And these can be calculated by using the following reported as the their incomes appear to be the same
formulae. for tax purposes.
2. The tax evasion distorts economic efficiency. In
sector, that are less subject to the administrator’s
scrutiny, there will be moreinvestment. That may
one reason why certain service sectoractivities- for
HYPOTHESIS OF THE STUDY example, the construction industry- have grown,
H1: There is no significant increase in the amount of Tax so phenomenally as companies move across national
Evasion in India. barriers in a globalised world economy.
H2: There is no significant association between Estimated Similarly, the unorganised sector may evade taxes
Revenue (ER), Actual Revenue (AR) and Amount of Tax much more easily than the organised sector. It is no
Evasion (TE). wonder that, in the VAT where there usually a
SOURCES AND CAUSES OF TAX EVASION threshold level below which taxpayers are not
The evil of tax evasion starts where the national expected to keep detailed accounts,allowing them
interest ends. Mainlythere are three reasons for tax evasion to pay a small percentage of their turn over as tax
(1) Exorbitant rates of taxes (termed compounding), there is a clustering of
(2)Lack of simplicity/transparency in tax laws registrants just below this threshold. Small
(3) Inefficient and corrupt government administration. taxpayers have remained very difficult to tax and
In India corporate evade taxes in order to maintain maintain a constant presence in the list of
some black money to be used for transactions with government administrative corners
bodies and government servants. Professionals evade taxes in 3. As inequity and inefficiency lead to lower revenue
order to save for future/rainy days since tax rates are very intake for government, its functional capacity,
high that too multiple in number. Politicians and public efficiency and effectiveness suffer because of tax
servants generally evade taxes since their income is out of evasion. Capacity suffers due to lower availability
bribes and illegal. of resources. The result could very well be an
Tax evasion is the outcome of individual taxpayer increase in tax rates, or the imposition of distortive
behaviour and social norms on the supply side, and taxes, thereby initiating a vicious cycle of inequity
shortcomings in tax administration on the demand side. To and inefficiency.
begin with, the tax structure has to perceive as equitable across 4. Tax evasion being under-reporting of income implies
various groups of taxpayers. Also, if marginal rates are too underestimation of GDP and all its commensurate
high, tax payers are likely to findways to evade tax. Across macro economicramifications. Since the denominator
the world, these aspects are well recognized today, and the is under-estimated, the ratios of tax to GDP, the
outcome of international tax harmonisation has been a lowering fiscal deficit to GDP, and public debt to GDP are
in the rate structure (to improve incentives) and attempts at all over estimated. The perceived higher tax/GDP
broadening the tax base (to reduce inequities). ratio leads to false comfort, but exaggerated
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EPRA International Journal of Economic and Business Review| SJIF Impact Factor(2016) : 6.484
deflationary action may be taken to rein back an the department in the public eye. The initiative for undoing
exaggerated fiscal deficit or public debt ratio. the danger lies with the department. The instructions issued
5) Tax evasion has been causing reduction in country’s by the Central Board of Direct Taxes on the new procedure
economic growth for making assessments in small income cases make a
6) The direct effect of tax evasion is the loss of bolddeparture from the past and are likely to achieve more
revenue, and increase in inflation significant results than the earlier small income scheme.
7) Black money has resulted in transfer of funds from 5. Allowance of Certain Business Expenses
India to foreign countries through clandestine Entertainment expenditure which is incurred primarily for
channels which decrease country’s reputation the furtherance of the tax payers business and is directly
globally. related to its active conduct should be allowed to be deducted
8) Tax evasion leads to poor standards of living of the up to the ceilings prescribed under section 37 (2A) of the
rural masses and the people BPL as the government Income-tax Act, 1961.
cannot undertake welfare measures at the national 6. Changes in Penal Provisions
level. Penalty serves its purpose only so long as it is with in the
9) It also brings disequilibrium in the economic condition reasonable limit.Once it crosses that limit, it is more likely to
of the country resulting in the rich becoming richer increase the rigidity of the taxpayer’s recalcitrance than to
and the poor becoming poorer. reform him. A penalty based on income instead of tax hits the
10) Due to tax evasion of majority of the rich population, smaller taxpayer more harshly. The quantum of penalty
the government is forced to increase the rates of tax imposable for concealment of income should be with reference
every assessment year for increasing its revenue to the tax sought to be evaded, instead of the income concealed.
which results in increased tax burden of those who 7. Vigorous Prosecution Policy
pay taxes promptly. The department should completely reorient itself to a more
MEASURES TO FIGHT TAX EVASION: vigorous prosecution policy in order to instill fear and whole
1. Reduction in tax rates some respect for the tax laws in the minds of the taxpayers.
Prevalence of high tax rates is the first and for most reason for Further, where there is reasonable chance of securing a
tax evasion,because this is what makes the evasion so profitable conviction, the tax dodger should invariably be prosecuted.
and attractive in spite of the attendant risks. The present high 8. Intelligence and Investigation
level of taxation leaves the Government with little scope for To cope with the increasing refinement and sophistication of
maneuverability for raising additional resources in times of the techniques of tax evasion, there is a need for complete re-
emergency. The maximum marginal rate of income tax, orientation in the department’s approach to its methods of
including surcharge, should be brought down in order to create intelligence as investigation. The machinery for intelligence
an impact, the reduction in the rates of taxation should be at and investigation at the command of the department should
one stroke also be thoroughly overhauled and streamlined to tackle
2. Minimisation of controls and licenses adequately the menace of tax evasion.
A committee of experts should be appointed to enquire into 9. Taxation of agricultural income
the utility of all existing controls, licensing and permit systems, Agricultural income, which is at present outside the central
and suggest elimination of such of these as are no longer tax net, offers plenty of scope for camouflaging black money.
considered necessary. This committee may also suggest There is urgent need for agricultural income being subjected
changes in law and procedures so as to ensure that the controls to a uniform tax more or less on par with the tax on other
which are absolutely essential for the health of the economy incomes so as to eliminate the scope for evasion of direct
are administered more effectively and with the least taxes imposed by the Union Government.
harassment to the public. 10. Compulsory maintenance and audit of accounts
3. Regulation of donations to political parties A statutory provision may be made requiring maintenance of
There is a need to keep political institutions free of accounts by all persons in profession, and by businessmen
corruption. Removal of the ban on donations by companies where the income from business is in excess of exempted
to political parties is, therefore, not favoured.. Reasonable limit or turnover or gross receipts are in excess of Rs. 50 lakh
grants-in-aid should be given by the Government to national in any one of immediately three preceding years. A provision
political parties and suitable criteria should be evolved for may be introduced in the law making presentation of audited
recognising such parties and determining the extent of grant- accounts mandatory in all cases of business or profession
in-aid to each of them. Irrespective of the decision of where the sales /turnover /receipts exceeds the exemption
government on the question of financing political parties, the limit.
parties may be required to get their accounts audited and 11.Permanent Account Number
published annually. The maximum amount eligible for The absence of a uniform system of indexing all taxpayers in
deduction on account of donations to political parties should the country on a permanent basis has to some extent been
be 10 per cent of the gross total income, subject to ceiling of responsible for the difficulties experiences by the department
rupees ten thousand. The deduction to be allowed should be in tackling tax evasion. It will be necessary to have an additional
30 per cent of the qualifying amount of the donation. code, a ‘Records Locator Code’, to help locate the records of
4. Creating Confidence among Small a taxpayer when the case is transferred from one circle to
taxpayers another after the permanent account number has been allotted.
The practice of being to meticulous in small cases, where no To avoid confusion with the permanent numeric code, this
worthwhile revenue is involved, has done much to damage of records locator code may be short alphabetic code.

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e-ISSN : 2347 - 9671, p- ISSN : 2349 - 0187 Dr. Devarajappa S
Table-1: showing estimated amount of tax evasion for last 15 year (Rs in Crores)
Revenue Estimated Actual Revenue Estimated Tax
Year
(ER) Collection (AR) Evasion (TE)
2000-01 74467 68305 6162
2001-02 73972 69198 4774
2002-03 82445 83088 -643
2003-04 103400 105088 -1688
2004-05 134194 132771 1423
2005-06 170077 165216 4861
2006-07 229272 230181 -909
2007-08 304760 312213 -7453
2008-09 345000 333818 11182
2009-10 387008 378063 8945
2010-11 446000 446935 -935
2011-12 500651 493947 6704
2012-13 565835 558658 7177
2013-14 636318 638543 -2225
2014-15 705628 695797 9831
Source: Annual Report of ministry of finance,
Government of India 2016

Table-2: Correlation Co-efficient(r) between ER, AR and TE.

Estimated Revenue Actual Revenue Tax Evasion
Estimated Revenue 1 -- --
Actual Revenue 0.999707524 1 --
Tax Evasion 0.246339186 0.222828383 1
Source: Compiled from Table-1

Table: Regression Analysis of ER, AR and TE

Adjusted R
Inputs Multiple R R Square Square Standard Error Observations
ER to TE 0.246 0.061* -0.012 217106.395 15
AR to TE 0.223 0.050* -0.023 217106.395 15
Source: Compiled from Table-1 *5% level of significance

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EPRA International Journal of Economic and Business Review| SJIF Impact Factor(2016) : 6.484
From the table-1, shows the Estimated Revenue, language, then there will be least or no scope for us to be
Actual Revenue and the amount of tax evasion from 2000-01 exploited by any institution or authority. So let us fulfill our
to 2014-15. During the study period, the maximum Tax duties first and claim our rights next.
Evasion is found in 2008-09, i.e., 11182 crore, followed by Further there is also a need to educate the people
2014-15, 2012-13 and 2000-01 were also significant of amount about Indian Tax law and create such an environment in which
recorded. To find the association between estimated revenue, they pay their due taxes, do not evade the tax and feel proud
actual revenue and amount of tax evasion, Correlation in discharging their duty to pay the taxes.
coefficient has be calculated, from the table-2, it can be said
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of Tax Evasion in India, Regression coefficient has been Finance, Volume 5, No. 1, pp. 45-56.
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of expecting for change to happen, let us be the change agents 6. Annual Report of ministry of finance ,Government of India
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responsibilities promptly. If each one of us speaks the same

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