Economic Impact of Tax Evasion and Tax Avoidance

International Journal of Economics, Commerce and Research (IJECR) ISSN (P): 2250-0006; ISSN (E): 2319-4472 Vol. 10, Issue 1, Jun 2020, 101–106 Š TJPRC Pvt. Ltd.

ECONOMIC IMPACT OF TAX EVASION AND TAX AVOIDANCE ATIBHA VIJAYA SINGH Assistant Professor in Law, Usha Martin University, Ranchi, India ABSTRACT Residents of India are required to make good on Income regulatory expense by way of different taxes, according to law.

They need to invest and help on regulatory obligations for nourishment, house, voyaging, restorative treatment, vehicle on streets as well. Thus, it can be seen that since birth to death an individual makes good on regulatory expense, and thus pays taxes as required. In India, neither does it gives standardized services nor free medical facilities which are given by the developed nations. These whole sentiments make the tax payer feel taxes as weight and at the same time in general keep away from tax or limit his tax risk. In India, individuals take taxes as burden and not as a cost to be paid for development. Along these lines, India needs tax culture like created nations. On other hand, the Government

Municipal or Government gives cooking gas at concessional rate or by giving sponsorship, National Defence, Infrastructure Developments, welfare plans like business programs, pay rates of the administration official. All these require resources. Resistance of tax will make it hard for government to meet its income targets and reach to the majority at an equivalent pace. In this way, the sum which would have been utilized for monetary and social improvement is utilized for hostile to social exercises to capture the culprits. This makes black money and social shades

Original Article

releases various duties like Health care by setting up Government emergency clinics, Education which is given either by

of malice in the general public. Along these lines, tax evasion ad tax avoidance is not only an issue for development of nation, yet additionally hurtful for the nation.

KEYWORDS: Tax Avoidance, Tax Evasion, Gross Domestic Product, Unaccounted Income & Tax Gap

Received: Dec 24, 2019; Accepted: Jan 14, 2020; Published: Feb 29, 2020; Paper Id.: IJECRJUN202014

INTRODUCTION Taxes assume a vital role in structuring the income for government in India and help to generate revenue. Because of the forceful nature that is imposed by the government on the people, individuals are influenced towards the techniques of tax evasion and tax avoidance, which consequently causes financial disparity.1 Tax evasion and tax avoidance are processes which if practiced would be becoming obstacle for states as they delineate tax resistance.2 This causes inconvenience for government, as their initiatives or measures are kept at bay and welfare schemes confronting intense checks. This creates trouble in carrying up the monetary reasonability endowed upon the government.3 Value disintegration and inflation are brought about by accumulation of black money.4 Where tax evasion persist black money follows, since tax avoidance and tax evasion is the technique to create black money

1

Pierre Tim Bohm, Residential Segregation as Part ofImperialpolicies, 216-220(LIT Verlag, 2016), https://books.google.co.in/books?id=-wSJDwAAQBAJ&pg=PA222&lpg=PA222.

2 Stlanley S Suley, Tax administration in underdeveloped countries, University of Miami Law Review,(1-9-1958), https://pdfs.semanticscholar.org/f74e/2b0fd989afe2b8aaf4fa3609bde7eba329cb.pdf.

3 Sreemoy Talukdar, Union Budget 2017: Critics are wrong, Shocking tax evasion figures alone justify demonitisation, FirstPost (Feb 02, 2017, 4:20 p.m.) https://www.firstpost.com/politics/union-budget-2017-critics-are-wrong-shocking-tax-evasion-figures-alone-justifydemonetisation-3243796.html.

4 Neela Rejesh P, Tax Evasion in India- ways methods and controls, CAClubindia (June23, 2014, 10 am), https://www.caclubindia.com/articles/tax-evasion-in-india-ways-effect-and-control-20851.asp. www.tjprc.org

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which progresses toward and transforms into its accumulation.5 In this manner, tax evasion and tax avoidance builds inflation and causes loss of revenue and is tenacious in negative effect of ethical quality.6 Tax evasion is a danger for organization and its financial condition, as there is no creditability been seen from eyes of speculators, and furthermore a disregard in their possession accordingly delineating a terrible consequences for clients, public and government relations or contracts. This sort of practice builds unfair competition, tainted money, terrorism, warfare, human trafficking and drug smuggling.

DETERMINING THE ISSUE International Bar Association has characterized tax evasion as a technique, which has a critical contrary effect over human rights of individual living in development of nation, for not allocating resources properly. The danger of tax evasion has an unfavorable impact over monetary advancement and value of integration of the nation. Because of low revenue been collected due the malice techniques been practiced, the capital gets hampered for government and thus act an obstacle for human rights.7Thus these abusive practices of tax evasion and Tax avoidance tend to show low tax morale of the individuals, and creates a sense of dissatisfaction in the minds of the honest tax payer.

Gross Domestic product (GDP) is the total productivity of a nation, it takes into account all the merchandise and ventures taken in the concerned nation. Country’s financial development and overall economic growth can be perceived by GDP.8Gross Domestic Product portrays complete estimation of creation in the nation in disregard to whether it is for public use or benefit or otherwise. It could be stated that all the exports if taken by reducing the imports in it defines precisely the GDP. Gross domestic product demonstrates financial soundness of nation.9 Table 1 20 20 20 20 20 20 20 20 20 20 20 20 01 02- 03- 04- 05- 06- 07- 08- 09- 10- 11- 1203 04 05 06 07 08 09 10 11 12 13 02 GD 5.8 3.8 8.5 7.4 9.4 9.5 9.3 6.7 8.5 8.9 6.6 4.4 1 4 2 7 8 7 2 2 9 1 9 7 P Source : NITI AYOG from 2001-2014; year 2014 – 2019 from statics.com F. Y.

20 1314

20 1415

20 1516

20 1617

20 1718

4.7 4

7.4 1

8.1 5

7.1 1

6.6 8

20 18 19 7.2 3

Above table delineates GDP and subsequent year of the applicable GDP. In this manner, it is demonstrated that GDP has considerably increased from year 2003 – 2008. After 2008, there is gradual downfall with stability for 2009 – 2011, for two years. Again after these years, there has been gradual descent. After 2014 till date, the GDP is not considerably impressive but consecutive different years gradual variance is seen. In overall, table demonstrated above the GDP from 2005-2008 stands the maximum, in comparison to different years been depicted. Thus, it highlights that there is a disturbing issue in the monetary status of the nation. In spite of the fact that there are different arrangements in the enactments, still government are not ready to battle the issue, which shows inability of acceptance and usage among people or flaw in execution.

5 Mahesh C.Bijawat, Economic Crimes (Tax Evasion) By People in Film Industry: Its impact on national economy, The Indian Journal of Legal Studies, 1991, vol. XI, at l21.

6 Mama Bhauria, Tax Evasion in India causes and remedies, https://www.academia.edu/6810585/Tax_Evasion_In_India_Causes_And_Remedies.

7 IBAHRI, States duty to tackle tax evasion and mobilise resources for human rights outlined in IBAHRI report(Dec 14,2017), https://www.ibanet.org/Article/NewDetail.aspx?ArticleUid=EDD4F1AB-9DD9-4E57-9BE1-6EE5B9BA0944 8 Jim Chappellow, Gross Domestic Product- GDP, Investopedia (Jun.27, 2019), https://www.investopedia.com/terms/g/gdp.asp.

9 Economic growth, Focus Economics, https://www.focus-economics.com/economic-indicator/gdp

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Tax collection in Crore Table 2 Revenue Realization Financial Year Corporation Income 2000-01 35696 31764 2001-02 36609 32004 2002-03 46172 36866 2003-04 63562 41387 2004-05 82680 49268 2005-06 101277 63689 2006-07 144318 85623 2007-08 193561 120429 2008-09 213395 120034 2009-10 244725 132833 2010-11 298688 147560 2011-12 323224 170788 2012-13 356326 201795 2013-14 394678 242906 2014-15 428925 265787 Source: Budget Directorate (CBDT)

Other 845 585 50 140 823 250 240 340 389 505 687 787 844 1007 1085

Total 68305 69198 83088 105089 132771 165216 230181 314330 333818 378063 446935 493959 558965 638543 695797

Growth annually in % Corporation Income _ _ 2.6 0.8 26.1 15.2 37.7 12.3 30.1 19.0 22.5 29.3 42.5 34.4 34.1 40.7 10.2 -0.3 14.7 10.7 22.1 11.1 8.2 15.7 10.2 18.2 10.8 20.6 8.7 9.4

Total Direct Taxes in % Corporation Income 52.3 46.5 52.9 46.2 55.6 44.4 60.5 39.4 62.3 37.1 61.3 38.5 62.7 37.2 61.6 38.3 63.9 36.0 64.7 35.1 66.8 33.0 65.4 34.6 63.7 36.1 61.8 38.0 1.6 38.2

Table 2 above delineates income acknowledgment by both Direct taxes and Indirect taxes. India has few taxpaying individuals due to which there is low per capita income. By comparing Table 1 and Table 2 above it shows there has been a gradual increase the organizations and substantial income generated, still there has not been efficient increase in GDP, thus clearly demonstrating tax evasion and tax avoidance and portraying a negative effect on the general public.

ANALYSIS, FINDINGS AND DISCUSSIONS Population: Rourkela, Odisha; Sample: Charter Accountant and Tax Practitioner Total Number: 20 Twenty Tax Practitioners, including Charter Accountant and Tax Practitioners were interviewed with help of an interview schedule. By this, following was deduced:

Figure 1

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Tax avoidance is said to be performed when business structures commonly under-report their income which lessens GDP. Because of underestimation of income, the proportion among GDP and tax and other variables is overestimated. This prompts embellishment of monetary deficiency prompting concealment of economy.10 Sometimes business structures make tax game plans that vanish or move their liabilities to low or no tax zone. This technique takes the form of Tax Evasion. This hurts government as revenue is diminished and inflation happens, gradually. Tax trouble additionally moves at a disturbing cost, which makes a constant taxpaying individual vexed. Tax avoidance is an obstacle to produce government money and appropriately utilizing for welfare of public. This sort of planning affects the rights of public, as it is contrary to the sentiment of nation and acts as hurdle towards national integrity.11 For sustainable development and execution of policies to support the poor or downtrodden, it is basic that funds are raised by the legislature that is required. But, it is essential for the developing countries; these techniques are not practiced as for a developing country there is necessity to rely upon the revenue. Taxes contribute towards administration and responsibility of state. For setting up a tax structure, the administration investigates request of the general population, as their economic rights are reliant and help in forming a trust and credible relationship between the citizens and the government. By this way, compliance of procedures could strengthen from the side of citizen and political participation could be witnessed. These would reinforce the tax framework for administration, as fortifying the tax framework is basic for building up the state. Tax avoidance and tax evasion acts as an obstacle for redistributive idea and for execution strategy.

Government requires funds for infrastructure, social security programs, to handle destitution, execution of different policies, for giving job opportunities, for building streets, bridges, modern advancements or other auxiliary improvements.12 The connection between tax dodgers and tax gatherers resembles the game of hide and seek.13Lord Greener has expressed that there is since long battle among governing bodies and tax dodgers, who aims at shedding off the burden of tax from their shoulder. Tax evasion is determined by tax rate and structure which the concerned government puts for the citizen to follow, unemployment rate and the extent of income and disappointment with government.14 Different tax escape clauses which are accessible and ceaseless impedance of tax payers to interfere with works of revenue agents increases methods of defilement and bribery. Theses all helps tax avoidance and tax evasion endeavor, effectively.

For checking this issue, there must be stiffer punishments as seen in USA and Britain, wherein tax evasion or tax avoidance is treated as felony and heinous crime, which attract stricter punishments and fines.15 Thus, Tax evasion and Tax Avoidance is detrimental for the development of society and has huge devastating effects. It always attaches itself with the underlying effect of the disorientations of the society, and always acts to divide the society by creating two groups namely, one who pays taxes and one who avoid or evade taxes, thus creating a contrast and imbalance in the society, which has decentralizes the spirit of nation as the faith on Government diminishes.

10

Tax Evasion and role of Tax Administration, Chapter -4, http://shodhganga.inflibnet.ac.in/bitstream/10603/53204/8/chapter%204%20tax%20evasion%20and%20role%20of%20tax.pdf.

11 CWC Investors brief on Tax Evasion and Tax Avoidance, Research Briefing, https://members.tuac.org/en/public/edocs/00/00/11/56/telecharger.phtml?cle_doc_attach=5820.

12 ITC Federal Ministry for economic cooperation and development, Addressing tax evasion and tax avoidance by developing countries

by GIZ Sector Programme Public Finance, Administrative Reform, Published by Deutsche Gesellschaft fur International Zusammenarbeit (GIZ) GmbH 13 Chapter 6, Methods of Tax Evasion Causes and Effects, http://shodhganga.inflibnet.ac.in/bitstream/10603/150631/17/12_chapter%206.pdf 14 Michael J. Graetz, Tax reform unrevealing, Journal of Economic Perspectives (Volume 21, Number 1, Winter 2007) at 69–90 15 Mathew Morse, Effects of Tax Evasion in United States, PhD, https://www.albany.edu/honorscollege/files/Morse_Thesis.pdf.

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Government creates faith upon its citizen to cater to its needs and see that all the different groups are equally taken and kept appropriately, and above all, none of the citizen has a feeling of deprivation. But, these postulates of tax evasion and tax avoidance add on to dissatisfaction. Thus, government insists upon accumulating the revenue which ought to be collected and reducing the tax gap. Tax Gap is the difference between the tax collected and the tax ought to be collected.

Thus, the government looks forward for the economic system, wherein there is lesser tax gap so that agenda laid before the Government could be successfully fulfilled.

Direct tax is eluded as a significant source of government's income. If the tax rate is expanded, then there will be increase in government’s revenue which would be accessible in time and would diminish inflation rate. Indirect taxes are paid by consumers. If the Indirect taxes are expanded, then producers would go for cost cutting measures and would act as an obstacle towards productivity. There must be minimum taxes in order to offer standard to taxation framework and rearrangements of taxes must be established. Rural masses pay less government taxes when compared with urban class.

Numerous taxes and different rates have added to the issue of complexity. High tax evasion has dependably been an issue for the business class. Tax evasion and tax avoidance are adopted due to corruption in tax department. Education and awareness among individuals ought to be held in mass scale with enormous overwhelming participation. By decreasing tax rates, inflation rate would be controlled. Two distinct boards for direct tax and indirect tax are specifically Central Board of Direct taxes and Central Board of Indirect Taxes and Customs, likewise, however these two consequent offices need in coordination, which adds to the haphazard condition.16 These two boards must be combined into one board or body so that work gets simpler and streamlined with technicalities involved in it.

CONCLUSIONS The menace of tax evasion and tax avoidance acts as hindrance for development of society, as it is detrimental for society.

Thus, it can be stated that as drop of water fills the ocean, in such way effort by each citizen of not tending towards the techniques of tax evasion and tax avoidance would help in creating a society free from theses menace and public welfare could be set up in true sense. Thus, it is duty of people as well with the government to look and adopt good tax morale, because government alone cannot fight the menace of tax evasion and tax avoidance.

REFERENCES 1.

Pierre Tim Bohm, Residential Segregation as Part of Imperialpolicies, 216-220(LIT Verlag, 2016).

2.

Stlanley S Suley, Tax administration in underdeveloped countries, University of Miami Law Review.

3.

Tyagi, A. Recommendations of the Thirteenth Fc on Tax Devolution and Grants–Implications for Equity and Incentives.

4.

Sreemoy Talukdar, Union Budget 2017: Critics are wrong, Shocking tax evasion figures alone justify demonitisation, First Post.

5.

Neela Rejesh P, Tax Evasion in India- ways methods and controls, CA Club India (June23, 2014, 10 am).

6.

Mahesh C. Bijawat, Economic Crimes (Tax Evasion) By People in Film Industry: Its impact on national economy, The Indian Journal of Legal Studies, 1991, vol. XI, p. l21.

7.

Carneiro-Alphonso, A. J. Growth Prospects: Emerging Economies of the World.

16

Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management (Volume 3 Issue 1, January-June 2017), at 7.

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Atibha Vijaya Singh 8.

Mamta Sharia, Tax Evasion in India causes and Remedies.

9.

Salim, A. Public Finance: Revenue and Expenditure.

10. IBAHRI, States Duty to Tackle Tax Evasion and mobilise Resources for Human Rights Outlined in IBAHRI Report (Dec 14, 2017).

11. Jim Chappellow, Gross Domestic Product- GDP, Investopedia (Jun.27, 2019). Economic growth, Focus Economics.

12. Singh, A., & Benjamin, R. (2017). An Analysis of Price Forecast & the Price Level Changes Owing to the Implementation of GST in India. International Journal of Financial Management (IJFM) ISSN (P): 2319–491X; ISSN (E): 2319-4928 Vol, 6, 1-4.

13. Tax Evasion and role of Tax Administration, Chapter -4. CWC Investors brief on Tax Evasion and Tax Avoidance, Research Briefing.

14. Scientific Society of Advanced Research and Social Change SSARSC International Journal of Management (Volume 3 Issue 1, January-June 2017) at 7.

15. ITC Federal Ministry for economic cooperation and development, Addressing tax evasion and tax avoidance by developing countries by GIZ Sector Programme Public Finance, Administrative Reform, Published by Deutsche Gesellschaft fur International Zusammenarbeit (GIZ) GmbH 16. Chapter 6, Methods of Tax Evasion Causes and Effects.

17. Michael J. Graetz, Tax reform unrevealing, Journal of Economic Perspectives (Volume 21, Number 1, winter 2007) at 69–90.

18. Mathew Morse, Effects of Tax Evasion in United States, PhD.

AUTHOR PROFILE

ATIBHA VIJAYA SINGH, From 2016 – 2019, did PhD from National University of Study and Research In Law, Ranchi. From 2011 – 2013, did LLM from Hidayatullah National Law University, Raipur. Did 5years LLB from 20062011 from BharatiVidyapeeth University’s New Law College, Pune. Did ISC from St. Joseph Convent School, Rourkela in 2006. Did ICSE from Mt. Carmel School, Rourkela in 2004.

Did Course in GST Account Assistant from Skill India, Certificate course In Cyber Law, Certificate course In Corporate Law, Diploma in Business Law [Asian Law School], Diploma in Intellectual Property from WIPO. Worked in Career Launcher(CL), as visiting legal faculty from December 2012 till April 2013, Worked with Poddar Associastes from December 2012 to February 2015 as law assistant, Trade mark registry, as trade mark examiner, from March 31, 2016 till January 19, 2017, In Durgapur and Rourkela Law College as Assistant Professor in law from March, 2017 to June 2018, Visiting faculty in Padmanava Engineering College Rourkela from July 2018 till November 2019, Asst Professor of law at Usha Martin University, Ranchi from December 2019 till date.

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