TITLE OF THE RESEARCH PAPER 

Impact of Tax Avoidance and Tax Evasion on The Economy

By

Name of the Student: Aishani Chakraborty

Roll No.: 2019118

Semester: 3

Name of the Program: 5 year (B.A., LL.B.)

Name of the Faculty Member: Mr. Abhishek Sinha

Date of Submission: 11 Decemeber 2020

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NYAYAPRASTHA “, SABBAVARAM, 
VISAKHAPATNAM – 531035, ANDHRA PRADESH

Impact of Tax Avoidance and Tax Evasion on the Economy 1

TABLE OF CONTENTS

ACKNOWLEDGEMENT.........................................................................................................3

OBJECT OF THE STUDY........................................................................................................4

SCOPE OF THE STUDY..........................................................................................................4

SIGNIFICANCE OF THE STUDY...........................................................................................4

LITERATURE REVIEW...........................................................................................................4

RESEARCH METHODOLOGY –............................................................................................4

TYPES OF RESEARCH –.........................................................................................................4

RESEARCH QUESTION –.......................................................................................................4

ABSTRACT...............................................................................................................................5

INTRODUCTION......................................................................................................................5

Tax Avoidance........................................................................................................................6

Perception of court’s on Tax Avoidance............................................................................7

Tax Loopholes and Tax Shields..........................................................................................7

Tax Evasion and Trust Fund Taxes........................................................................................8

Employment Tax Fraud Examples.....................................................................................9

Intentional Tax Evasion vs. Mistakes...............................................................................10

Causes of Tax Evasion......................................................................................................10

Perception of Judiciary on Tax Evasion...........................................................................10

Outcome/ consequences of Tax Evasion or Avoidance....................................................10

Aftermath of Evasion and Avoidance...............................................................................11

Actions taken by Indian Government to stop these activities:..........................................12

Consequences of Avoidance and Evasion........................................................................13

Steps to Tackle Avoidance and Evasion...........................................................................14

CONCLUSION........................................................................................................................19

BIBLIOGRAPHY………………………………………………………………………..…..20

Impact of Tax Avoidance and Tax Evasion on the Economy 2

ACKNOWLEDGEMENT

I w0uld like t0 thank Abhishek Sinha sir f0r giving me an 0pp0rtunity f0r deeply studying
ab0ut ancient India. This pr0ject is a result 0f dedicated eff0rt. It gives me immense pleasure
t0 prepare this pr0ject rep0rt 0n “Impact 0f Tax Av0idance and Tax Evasi0n 0n the
Ec0n0my”.

My deepest thanks t0 0ur Lecturer, f0r guiding and c0rrecting vari0us d0cuments with
attenti0n and care. I thank him f0r c0nsultative help and c0nstructive suggesti0n in this
pr0ject. I w0uld als0 like t0 thank my parents and my c0lleagues wh0 have helped us f0r
making the pr0ject a successful 0ne.

Impact of Tax Avoidance and Tax Evasion on the Economy 3

OBJECT OF THE STUDY –

● To understand what is the difference between tax avoidance and evasion

● To understand the implications of tax avoidance and evasion on the economy.

SCOPE OF THE STUDY –

The study is limited to Indian studies.

SIGNIFICANCE OF THE STUDY –

The study helps us to gain knowledge about taxes, how to avoid larger taxes but also the
repercussions of tax evasion.

LITERATURE REVIEW –

The researcher has taken information from various books, web sources, case laws, articles
and case laws.

Web sources –

https://advance.lexis.com – This site contains articles, books and various case notes about
my project topic.

https://jstor.com - – This site contains articles, books and various case notes about my
project topic.

RESEARCH METHODOLOGY –
This study is based on doctrinal mode of research.

TYPES OF RESEARCH –
This research is critical, explanatory studies.

RESEARCH QUESTION –
1. Whether there is any difference between tax avoidance and tax evasion
2. Whether tax avoidance and tax evasion impacts the economy

Impact of Tax Avoidance and Tax Evasion on the Economy 4

ABSTRACT
Taxati0n is 0ne 0f the maj0r devices used by G0vernment t0 extract m0ney 0r 0ther valuable
things fr0m pe0ple in 0rder t0 run the Administrati0n and t0 pr0m0te the well-being 0f its
pe0ple. Br0adly speaking, lax is an instrument in regulating c0nsumer purchasing p0wer in t
elati0n t0 g00ds and services, by pr0viding incentives f0r pr0ducti0ns, investment 0r savings.
Taxati0n is n0t 0nly a fuse between savings and investments, just t 0 reduce gap between the
tw0, but may als0 be used as an instrument f0r res0urce all0cati0n, Inc0me-redistributi0n,
and ec0n0mic stabilizati0n. These vari0us taxati0n functi0ns require that it is harm0nized
with devel0pment strategy and changing ec0n0mic structure and n0t be treated simply as a
functi0n 0f yielding m0re revenue expediently 0r t0 fulfill immediate revenue requirement.
Every tax has an explicitly defined base. In defining the tax base, the tax auth 0rities have t0
categ0rically state what is t0 be taxed and further, what is t0 be included and excluded in the
tax base. Besides, s0me elements 0f the tax base may have t0 be permitted as deducti0ns and
s0me part 0f the tax may have t0 be exempted fr0m tax. 0nce the tax base has been defined,
the tax rates are t0 be specified.

INTRODUCTION
Taxati0n is 0ne 0f the maj0r devices used by G0vernment t0 extract m0ney 0r 0ther valuable
things fr0m pe0ple in 0rder t0 run the Administrati0n and t0 pr0m0te the well-being 0f its
pe0ple. Br0adly speaking, lax is an instrument in regulating c0nsumer purchasing p0wer in t
elati0n t0 g00ds and services, by pr0viding incentives f0r pr0ducti0ns, investment 0r savings.
Taxati0n is n0t 0nly a fuse between savings and investments, just t 0 reduce gap between the
tw0, but may als0 be used as an instrument f0r res0urce all0cati0n, Inc0me-redistributi0n,
and ec0n0mic stabilizati0n. These vari0us taxati0n functi0ns require that it is harm0nized
with devel0pment strategy and changing ec0n0mic structure and n0t be treated simply as a
functi0n 0f yielding m0re revenue expediently 0r t0 fulfill immediate revenue requirement.
Every tax has an explicitly defined base. In defining the tax base, the tax auth 0rities have t0
categ0rically state what is t0 be taxed and further, what is t0 be included and excluded in the
tax base. Besides, s0me elements 0f the tax base may have t0 be permitted as deducti0ns and
s0me part 0f the tax may have t0 be exempted fr0m tax. 0nce the tax base has been defined,
the tax rates are t0 be specified. 0ur G0vernment is wedded t0 s0cialistic pattern 0f s0ciety. It
is the f0rem0st duty 0f the G0vernment t0 bring 0ut such welfare and devel0pment pr0grams

Impact of Tax Avoidance and Tax Evasion on the Economy 5

which will bridge the gap between the rich and the p 00r. Inc0me-tax Department functi0ns
under the direct c0ntr0l and supervisi0n 0f Central B0ard 0f Direct Taxes (CBDT) which is
under the c0ntr0l 0f finance ministry 0f the G0vernment 0f India. Tax Av0idance and Tax
Evasi0n are tw0 terms that serves a c0mm0n purp0se i.e ‘T0 reduce the am0unt 0f tax fr0m
pers0n, firm 0r any legal entity’s earnings” but 0ne difference which can be drawn fr0m these
tw0 c0ncepts is that 0ne aims t0 d0 it in a legitimate manner and 0ther strives f0r an
illegitimate manner.

Tax Evasi0n and Tax Av0idance are tw0 techniques which are used and applied by many
pe0ple f0r the purp0se 0f reducing their tax liability. These acti0ns are perf0rmed 0nly after
c0nsulting an expert in the field 0f tax. Tax av0idance is a c0mpletely legal pr0cedure while
Tax Evasi0n is c0nsidered t0 be crime in the wh0le w0rld. Tax Av0idance is defined as a
practice 0f using all the legal means t0 pay the least am0unt 0f tax p0ssible.1 The c0re
difference which can be ascertained fr0m these tw0 c0ncepts 0f taxes is that Tax evasi0n is a
criminal 0ffence and whereas Tax av0idance is perfectly legal thing.

Tax Av0idance

Tax av0idance is the legitimate minimizing 0f taxes and maximize after-tax inc0me, using
meth0ds included in the tax c0de. Businesses av0id taxes by taking all legitimate deducti0ns
and tax credits and by sheltering inc0me fr0m taxes by setting up empl0yee retirement plans
and 0ther means, all legal and under the Internal Revenue C0de 0r state tax c0des.

S0me Examples 0f Tax Av0idance Strategies 

 Taking legitimate tax deducti0ns t0 minimize business expenses and l0wer y0ur

business tax bill.2 
 Setting up a tax deferral plan such as an IRA, SEP-IRA, 0r 401(k) plan t0 delay taxes
until a later date. 
 Taking tax credits f0r spending m0ney f0r legitimate purp0ses, like taking a tax credit
f0r giving y0ur empl0yees paid family leaves. 

Characteristics 0f Tax Av0idance:

1
https://taxguru.in/income-tax/tax-avoidance-tax-evasion.html#_ftn2
2
https://www.thebalancesmb.com/business-tax-deductions-from-a-to-z-397616

Impact of Tax Avoidance and Tax Evasion on the Economy 6

Tax Av0idance is a way 0f reducing the taxes thr0ugh the medium pr0vided by g0vernment
but bef0re m0ving t0wards th0se ways, it is imp0rtant t0 analyze tax av0idance fr0m depth.
Here are the f0ll0wing features f0r tax av0idance:

1. Tax Av0idance inv0lves the legal expl0itati0n 0f tax laws t0 0ne’s 0wn advantages.

2. Every attempt by legal means t0 prevent 0r reduce tax liability which w0uld 0therwise be
incurred, by taking advantage 0f s0me pr0visi0ns 0r lack 0f pr0visi0ns in the statutes 0f the
c0untry.

3. An arrangement entered int0 s0lely by 0r primarily f0r the purp0se 0f 0btaining a tax
advantages.

Percepti0n 0f C0urt’s 0n Tax Av0idance

R0le 0f judiciary 0n the c0ncept 0f Tax Av0idance can be traced back 0n the judgment which
was pr0n0unced by Justice Chinnapa Reddy’s in the Mcd0well’s Case[5]. This case defines
the distincti0n between the term tax av0idance and tax evasi0n in a crisp manner, it defines
Tax Av0idance as “the art 0f d0dging tax with0ut breaking the law”. The incepti 0n 0f Tax
Av0idance can be traced back fr0m England as in the case 0f IRC v. Duke 0f Westminster[6],
L0rd T0mlin said “Every Man is entitled, if he can, t0 0rder his affairs, s0 that the tax
attaching under the appr0priate Acts, is less than it 0therwise w0uld be. If he succeeds in
0rdering them s0 as t0 secure this result, then, h0wever unappreciative the c0mmissi0ners 0f
Inland Revenue 0r his fell0w tax gatherers may be 0f his ingenuity, He cann0t be c0mpelled
t0 pay an increased am0unt 0f tax.”

Tax L00ph0les and Tax Shields

A tax l00ph0le is tax av0idance. it's a clause in the tax laws that pe0ple creates a h0le pe0ple
can g0 thr0ugh t0 reduce their taxes. It's a way t0 av0id paying taxes, but since it's in the tax
c0de it's n0t evasi0n.

Since the tax c0de is s0 c0mplex, savvy tax experts have f0und ways t0 l0wer taxes f0r their
clients with0ut breaking the law, taking advantage 0f parts 0f the law. If y0u are tempted t0
use a tax l00ph0le, be aware that the tax laws are c 0mplex and difficult t0 interpret. Getting a
c0mpetent, h0nest tax expert can save y0u fr0m g0ing 0ver the line t0 tax evasi0n. 

Impact of Tax Avoidance and Tax Evasion on the Economy 7

Tax shields are an0ther strategy f0r av0iding taxes. A tax shield is a deliberate use 0f tax
expenses t0 0ffset taxable inc0me. The number 0f tax shields has been reduced since 2018,
with the Tax Cuts and J0bs Act rem0ving 0r limiting many Schedule A deducti0ns.3

Tax Evasi0n and Trust Fund Taxes

Tax evasi0n is a crime in which an individual 0r a business entity intenti0nally underpays 0r

hide their certain am0unt 0f inc0me in 0rder t0 save m0re am0unt 0f taxes. This meth0d is
certainly illegal in all the c0untries. Tax Evasi0n is basically n0n-payment 0f taxes by means
0f n0t rep0rting all taxable inc0me, 0r by taking n0t all0wed deducti0ns. It 0riginated in
England between 1920 -1925.

Tax evasi0n by its very nature falls 0utside the f0ur c0mers 0f any taxati0n statute and d0es
n0t merit the judicial, legislative 0r m0ral benedicti0n. It is prima facie unacceptable and
cann0t be sancti0ned by the auth0rities 0n any pretext 0r argument whats0ever, as it
functi0ns as the parasite which feeds 0n the fiscal health 0f the ec0n0my and drains it 0f
valuable tax revenue which fl0ws int0 the stream 0f black m0ney fl0wing thr0ugh the veins 0
f a parallel ec0n0my. “In the law 0f taxati0n, the term ‘Evasi0n’ at times is used t0 indicate
0r t0 signify tw0 different types 0f activities”. “In the first place the term ‘Evasi 0n’
designates th0se types 0f activities 0f the tax- payers which th0ugh, technically are against
the very intent and the p0licy 0f the law, in the sec0nd place it c0vers all th0se fraudulent
activities 0f a tax-payer, which are entered int0, with a view t0 escaping payment 0f taxes t0
the revenue by ad0pting illegal means”.

Tax evasi0n is m0st c0mm0nly th0ught 0f in relati0n t0 inc0me taxes, but tax evasi0n can be
practiced by businesses 0n state sales taxes and 0n empl0yment taxes. 0ne c0mm0n tax
evasi0n strategy is failing t0 pay turn 0ver taxes y0u have c0llected fr0m 0thers t0 the pr0per
federal 0r state agency.

These taxes are called trust fund taxes, because they are given in trust t 0 a business, with the
expectati0n that they will be turned 0ver t0 the appr0priate state 0r federal agency. Failing t0
pay empl0yment taxes t0 the IRS and sales taxes t0 a state taxing auth0rity and 0ther federal,
state, and l0cal taxes can mean high fines and penalties.5

Examples 0f Tax Evasi0n/Tax Fraud Practices

3
id.

Impact of Tax Avoidance and Tax Evasion on the Economy 8

In general, it's c0nsidered tax evasi0n if y0u kn0wingly fail t0 rep0rt inc0me 0r y0u d0n't file
an inc0me tax return. S0me practices c0nsidered tax evasi0n/tax fraud:

1. Under-rep0rting inc0me (claiming less inc0me than y0u actually received fr0m a

specific s0urce, particularly cash inc0me.
2. N0t rep0rting an inc0me s0urce.
3. Pr0viding false inf0rmati0n t0 the IRS ab0ut business inc0me 0r expenses
4. Deliberately underpaying taxes 0wed.
5. Substantially understating y0ur taxes (by stating a tax am0unt 0n y0ur return which is
less than the am0unt 0wed 0n the inc0me y0u rep0rted).
6. 0verstating the am0unt 0f deducti0ns.
7. Keeping tw0 sets 0f b00ks.
8. Making false entries in b00ks and rec0rds.
9. Claiming pers0nal expenses as business expenses.
10. Claiming false deducti0ns with0ut having d0cuments t0 supp0rt them
11. Hiding 0r transferring assets 0r inc0me.

Empl0yment Tax Fraud Examples

Tax evasi0n isn't limited t0 inc0me tax returns. Businesses that have empl0yees may be
c0mmitting tax evasi0n in several ways: 

1. Failure t0 withh0ld/pyramiding: An empl0yer fails t0 withh0ld federal inc0me tax 0r

FICA taxes fr0m empl0yee paychecks, 0r withh0lds but fails t0 rep0rt and pay
these payr0ll taxes. 
2. Empl0yment leasing, which the IRS explains is hiring an 0utside payr0ll service that
d0esn't turn 0ver funds t0 the IRS.
3. Paying empl0yees in cash and failing t0 rep0rt s0me 0r all 0f these cash payments.
4. Filing false payr0ll tax returns 0r failing t0 file these returns.4

Intenti0nal Tax Evasi0n vs. Mistakes

S0metimes taxpayers make mistakes; this is c0nsidered negligence, n0t intenti0nal tax fraud.
But the IRS will pr0bably send y0u a n0tice 0f penalties and interest due. In the case 0f a
mistake that results in an underpayment 0f taxes, f0r example, the IRS can still imp0se a
penalty 0f 20% 0f the am0unt 0f underpayment, in additi0n t0 requiring repayment.

Impact of Tax Avoidance and Tax Evasion on the Economy 9

Causes 0f Tax Evasi0n

The nature 0f the tax, the gr0wing taxati0n, the high rate 0f tax, ec0n0mic planning in the
c0untry, the administrative machinery resp0nsible f0r the enf0rcement and c0llecti0n 0f the
tax, the inn0cence 0f the taxpayer, the deliberateness 0f the taxpayer and the deliberateness 0f
the tax, pers0nnel, n0 pr0secuti0n 0f tax evaders, frequent charge in law, the mutual distrust
between the tax payer and the taxing auth 0rity and the psych0l0gical fact0rs etc. are all
j0intly and severally resp0nsible f0r evasi0n 0f the tax.4

Percepti0n 0f Judiciary 0n Tax Evasi0n.

There are several cases relating t0 evasi0n 0f taxes. S0me 0f the evasi0n 0f tax are like in the
case 0f Uni0n 0f India v. Playw0rld Electr0nics Pvt. Ltd. & endash5 the c0urt declared that
“It is the 0bligati0n 0f every citizen t0 pay the taxes h0nestly with0ut res0rting t0
subterfuges”. In the case 0f Calcutta Chr0m0type Ltd. V. C0llect0r 0f C. Ex., Calcutta &
endash6, the H0n’ble SC 0bserved “C0l0urable devices, h0wever, cann0t be part 0f tax
planning. Dubi0us meth0ds res0rting t0 artifice 0r subterfuge t0 av0id payment 0f taxes 0n
what really is inc0me can t0day n0 l0nger be applauded and legitimated as a splendid w0rk
by a wise man but has t0 be c0ndemned and punished with severest 0f penalties.”

Outc0me/ c0nsequences 0f Tax Evasi0n 0r Av0idance

As we have already seen the meth0ds thr0ugh which tax evasi0n takes place these meth0d
effect very harsh 0n the nati0n. These are harmful f0r the sustainable gr0wth and
impr0vements 0f s0ciety and the wh0le nati0n as well. Tax evasi0n gives d0minance t0 the
causati0n 0r f0rmati0n 0f illegal gains which pe0ple try t0 hide and d0dge tax by d0ing this
but due t0 this rich secti0n became m0re wealthier and p00r secti0n is affected badly as
g0vernment d0n’t have en0ugh funds t0 d0 s0mething f0r weaker secti0ns as it d0n’t get the
c0rrect tax paid t0 it.
As the administrati0n fails t0 rem0ve these kinds 0f wr0ngd0ing apparently m0re harm is
d0ne t0 the feeble segment 0f the nati0n. Tax evasi0n gives rise t0 administrati0n t0 st0p the
devel0pment pr0grammes which it started t0 d0 s0me g00d t0 pers0ns individually and

4
Deepti Maheshwari, Evasion and avoidance of income tax in India a critical study, 5 May, 2009,
http://hdl.handle.net/10603/261370
5
1990 AIR 202.
6
2006 (77) RLT 1 (SC).

Impact of Tax Avoidance and Tax Evasion on the Economy 10

s0cieties as it g0es 0ut 0f wealth and en0ugh funds due t0 av0idance 0f tax by pe0ple.
Evasi0n barge int0 the p0licies made by g0vernment f0r s0ciety and twist the plan 0f
administrati0n by f0rming the main res0urces unavailable f0r pr0ject.

Evasi0n 0f tax by many pe0ple s0mewhere put an excessive l0ad 0n tax payers wh0 h0nestly
pay taxes every time, due t0 this they are enc0uraged t0 d0dge taxes after this kind 0f
biasness. Evasi0n and av0idance 0f tax is als0 harmful f0r the security 0f nati0n in s0me way
because due t0 it wh0le lead is pr0vided t0 th0se pe0ple wh0 try t0 d0dge tax and dish0nestly
make illegal m0ney and als0 lead the enemies in d0wnsizing gr0wth 0f nati0n. There are s0
many s0cial evils which takes place 0n small acc0unts but at end give rise t0 evasi0n 0nly.
E.g. taking bribe, f0rging d0cuments etc.

Aftermath 0f Evasi0n and Av0idance

Evasi0n 0f tax has been 0ne 0f the largest issues in 0ur c0untry. Due t0 it the rate 0f
generati0n 0f illegal gains has increased 0ver a peri0d and this is why 0ur c0untry faced s0
many pr0blems regard t0 the p0verty, the scams and many m0re s0ci0- ec0n0mic issues.

Let us discuss the maj0r impacts which are laid d0wn by this tax evasi0n 0r av0idance:

 Less payment 0f tax: This is the first and f 0rem0st impact which is laid d0wn by tax
evasi0n. This is s0meh0w predictable t0 us that wh0ever d0 tax evasi0n will n0t pay
the full tax and due t0 this act g0vernment gets unable t0 fulfil the fund requirement
f0r gr0wth and devel0pment and this is 0ne 0f the reas0ns that GDP falls d0wn.
 Increase in C0rrupti0n activities: we can say that c0rrupti0n 0r deceit is a reas0n and
impact f0r evasi0n 0f tax, in view 0f the fact, because 0f c0rrupt intenti0ns and t0
f0rm m0re m0ney pe0ple d0 evasi0n, and by seeing any 0ther pers0n d0ing tax
evasi0n pe0ple get enc0uraged t0 d0 this and they practice such kind 0f activities just
in greed 0f m0re m0ney making they generate this kind 0f illegal m0ney. 
 Increment 0f insufficiency: Because 0f evasi0n 0f tax the illicit business gets m0re
urge and that is why the individuals get deprived fr0m the essentials f0r their
expansi0n and ev0luti0n. Due t0 this rich pe0ple just save the m0ney and enj0y t0 the
fullest but the situati0ns 0f p00r pe0ple get m0re w0rse. 
 Funding in alternatives: Alm0st all the evaders 0f tax try t0 fund in their illegal gains
int0 the alternatives, 0ne 0f which is g0ld jewellery and by d0ing this they just secure
their wealth and this m0ney can be get back by just c0nverting the jewellery in actual

Impact of Tax Avoidance and Tax Evasion on the Economy 11

 m0ney. If we try t0 calculate this it will definitely increase the c0nditi0ns 0f 0ur
nati0n ec0n0mically.
 Transmissi0n 0f illegal gains: Many 0f the tax d0dgers aff0rd this kind 0f appr0ach
and by this they just m0ve their illegal m0ney generated by tax evasi0n in India, t0
the safest place i.e. F0reign funds, they hire the agents wh0 make this transmissi0n
p0ssible and just save these kind 0f tax evaders, and 0ne 0f the main weap0n 0f d0ing
this is changing inv0icing pr0cess 0f exp0rts and imp0rts. 
 Tr0uble 0n 0ther Tax payers: By all this tax evasi0n and av0idance d0ne by such
evaders there is n0 0ther way remains f0r g0vernment but t0 increase the further tax
rates, and due t0 these the h0nest tax payers suffer a l0t and p0verty increases by all
these activities.

S0, after all this discussi0n we can say that the activities related t0 tax evasi0n and tax
av0idance d0 n0thing g00d t0 the c0untry and the tax system 0f India must be ref0rmed in
0rder t0 end these kind 0f activities

Acti0ns taken by Indian G0vernment t0 st0p these activities:

Many measures have been taken fr0m a l0ng time in 0rder t0 st0p these kinds 0f activities by
ref0rming the tax laws in 0ur c0untry. By all these measures g0vernment has tried t0 l0wer
the black m0ney generati0n and he c0rrupti0n which is the ultimate g0al 0f tax evaders.

Let us l00k int0 s0me 0f the acti0ns which the Indian g0vernment has taken t0 curb this, till
n0w:
Tax rate deducti0ns is a great step taken by Indian g0vernment in 0rder t0 st0p activities
leading t0 tax evasi0n but s0meh0w this d0es n0t d0 m0re effect and d0es n0t generate m0re
revenue as the tax evasi0n happens in every estimate 0f inc0mes and tax rates.

Tax amnesties are als0 a g00d way t0 check the activities leading in tax evasi0n because by
this the pe0ple wh0 did tax evasi0n c0me f0rward and reveal each and every act 0f them due
t0 which they hide the m0ney, and als0 give the estimate 0f m0ney which they c0ncealed and
in lieu 0f this they get less punishments, but s 0meh0w this leads t0 a bad impact 0n pe0ple
wh0 h0nestly pay their taxes because then f0r th0se pe0ple it seems t0 be easy t0 d0 tax
evasi0n and afterwards 0n discl0sing that they w0n’t get any punishments which enc0urage
the 0ther pe0ple t0 d0 s0.

Impact of Tax Avoidance and Tax Evasion on the Economy 12

0ther measures like advance tax payments, TDS, 0bligati0n t0 pr0vide PAN and GIR 0n the
transacti0ns are s0me small measures but have big r0le in keeping check 0n such activities 0f
tax evasi0n. Survey by inc0me tax auth0rities is als0 a g00d acti0n t0wards it.
 Payment 0f taxes by E- means is a g 00d way t0 c0llect tax fr0m pe0ple as it is a simple
pr0cedure 0f c0llecting taxes with0ut any c0mplexity in it. 

Levying penalties 0n tax evaders and pr0secuting them f0r the evasi0n d0ne by them under
vari0us pr0visi0ns 0f Inc0me tax act is als0 a g00d measure t0 keep check. And als0 the
0fficer 0f inc0me tax have p0wer t0 summ0n the pers0ns 0n wh0m they have d0ubt that he
must have d0ne s0mething wr0ng in regard t0 this and then they can search his pr0perty in
0rder t0 find the black m0ney c0ncealed by him and then have p0wer t0 seize such pr0perty
0f the pers0n 0n finding s0me suspected black m0ney.

C0nsequences 0f Av0idance and Evasi0n

The c0nsequences 0f increasing tax av0idance and evasi0n which result in piling up 0f black
inc0me and wealth 0n a large scale are numer0us and far reaching. Black m0ney is playing
hav0c with the Indian ec0n0my and has far-reaching ec0n0mic and s0cial c0nsequences.
Since the c0ncealed inc0me g0es t0 enhance the wealth, tax evaders carry 0n huge
transacti0ns in the black market, pile up st 0cks 0f g00ds and thus bring ab0ut artificial
scarcity in the 0pen market resulting in higher prices. Inflati 0n adversely affects the standards
0f living 0f higher prices wh0 clam0ur f0r higher wages and res0rt t0 g0-sl0w p0licies,
strikes, etc. t0 enf0rce their demands. This inevitably leads t0 strained empl0yer empl0yee
relati0ns, l0ss 0f man-days and ultimately a decrease in nati0nal inc0me. Black m0ney c0mes
in the way 0f m0n g0vernment's eff0rts in bringing d0wn prices. In fact, black m0ney and
inflati0n g0 hand-in-hand and have m0re 0r less a cause and effect relati 0nship. Because 0f
this m0ney the 0pen market is always tight and the m0ney supply has t0 be increased t0 meet
credit requirements in the busy seas0ns. Since tax revenue d0es n0t gr0w fast en0ugh t0
match the devel0pmental and n0n-devel0pmental expenditures, g0vernment has frequently t0
res0rt t0 deficit financing which accentuates inflati0nary flexibility 0f the day tax system and
undermines its equity. Further, the large v0lume 0f black m0ney which passes thr0ugh
different hands d0es n0t fr0m nati0nal welfare. It diverts res0urces fr0m pr0ductive uses and
greatly helps in smuggling and enc0urages wasteful c0nsumpti0n expenditure, 0wing t0
evasi0n, the burden is heavier 0n the salaried class and h0nest taxpayers wh0 feel frustrated
as they have t0 pay m0re taxes because their fell0w men in 0ther pr0fessi0ns are evading

Impact of Tax Avoidance and Tax Evasion on the Economy 13

taxes. Thus, in the case 0f higher inc0me gr0up pe0ple, h0nesty bec0mes the first casualty
and disc0urages w0rk-eff0rt 0r enc0urages evasi0n. Black m0ney als0 disstabilizes m0netary
m0netary p0licy."

The s0cial c0nsequences 0f evasi0n are disastr0us. Black m0ney has created in s0ciety tw0
clear-cut gr0ups: (i) the Haves, and (ii) the Have n 0ts. While the Haves are bec0ming richer
day by day, the Have-n0ts are bec0ming p00rer. This has created s0cial unrest. Black m0ney
has enc0uraged the payment 0f huge d0wries and extravagant expenditures at the time 0f
marriage. The effect is badly felt by middle-inc 0me gr0up pe0ple wh0, many a time, d0 n0t
find suitable matches f0r their daughters as they cann0t aff0rd t0 pay g00d d0wries. Further,
with the help 0f black m0ney s0me pe0ple have bec0me pseud0-patr0ns 0f educati0n, art,
religi0n and 0ther s0cial disciplines. By d0nating black m0ney t0wards the c0nstructi0n 0f
temples, dharamshalas and 0ther religi0us instituti0ns, by bearing the expenses 0f Sadhus and
Sanyasees and by empl0ying intellectuals 0n better pay scales, these pe0ple c0me t0 have an
imp0rtant say in practically all s0cial matters. This saves them fr0m intellectual criticism.7

Black m0ney als0 plays an imp0rtant r0le in p0litics. It is c0mm0n kn0wledge that much 0f
p0litics is financed 0ut 0f black m0ney earnings. There is hardly any electi 0n whether f0r
Parliament 0r State legislature in which the expenditure is kept within the prescribed limit.
By d0nating large sums 0f black m0ney t0 different p0litical parties and financing electi 0ns
these businessmen c0me t0 have an imp0rtant say in p0litical matters. Further, these
businessmen are n0t merely c0ntent with general g00dwill in return f0r such c0ntributi0ns,
instead they expect and get immediate quid pr0 qu0.

Steps t0 Tackle Av0idance and Evasi0n

A l0t 0f tax av0idance takes place thr0ugh the diversi0n 0f inc0me t0 the sp0use and min0r
children. We feel that the sc0pe 0f secti0n 64 0f the Inc0me Tax Act, 1961 sh0uld be
extended s0 as t0 tax even inc0me arising 0ut 0f inc0me generated 0ut 0f assets transferred
fr0m husband t0 wife. H0wever, we think that the l0ng-term remedy lies in clubbing the
inc0mes 0f husband and wife and treating the family as 0ne unit 0f assessment. It is really
surprising that the Wanch00 C0mmittee which discussed the pr0blem 0f tax av0idance at
length in its Rep0rt did n0t fav0ur (by a maj0rity 0f three t0 tw0) the ad0pti0n 0f the family
as a unit 0f assessment. The principal argument against such a step is that it might disrupt the

7
Jain, Anil Kumar. “Tax Avoidance and Tax Evasion: The Indian Case.” Modern Asian Studies, vol. 21, no. 2, 1987,
pp. 233–255. JSTOR, www.jstor.org/stable/312646. Accessed 10 Dec. 2020.

Impact of Tax Avoidance and Tax Evasion on the Economy 14

families and w0uld cause undue hardship t0 middle-inc0me families where w0men res0rt t0
empl0yment t0 supplement family inc0me. H0wever, we are d0ubtful if such a step w 0uld
disrupt the instituti0n 0f marriage in a c0untry like India where the marriage b 0nds are s0
str0ng. There may be div0rces in the beginning but such div0rces in the maj0rity cases are
likely t0 be 0n paper.

Hence, we suggest that while ad0pting the family as the unit 0f assessment the Inc0me Tax
Act may be amended t0 pr0vide that even after div0rce if the inquiry reveals that the c0uples
are living t0gether, their inc0mes be aggregated f0r tax purp0ses. T0 pr0vide relief t0 middle
and l0wer-inc0me families, a pr0visi0n may be inc0rp0rated in the Act t0 pr0vide that the
inc0me 0f the sp0use w0uld be clubbed 0nly when her/his independent inc0me exceeds the
exempti0n limit. Unearned inc0me 0f the sp0use sh0uld be fully inc0rp0rated. With respect
t0 the earned inc0me, the Act may pr0vide that deducti0ns and exempti0ns permissible under
the Act t0 an individual may als0 be pr0vided t0 the sp0use and 0nly the balance be
aggregated f0r tax purp0ses.

The Indian G0vernment has tried several v0luntary discl0sure schemes fr0m time t0 time t0
unearth black m0ney. The first such scheme was intr 0duced in 1951. 1965 tw0 v0luntary
discl0sure schemes were intr0duced which resulted in a discl 0sure 0f Rs 2,670 milli0n 0nly.
Later 0n in 1975, an0ther such scheme was intr0duced in which Rs 6,800 milli 0n 0f inc0me
was discl0sed and Rs 2,320 milli0n rec0vered in inc0me tax. N0 d0ubt, the Nati0nal
Emergency which witnessed a large number 0f searches and seizure 0perati0ns c0ntributed t0
the success 0f this scheme in 1975 but still the declared inc 0me c0nstituted hardly 0ne per
cent 0f the nati0nal inc0me. The justificati0n f0r any v0luntary discl0sure scheme mainly
rests 0n the argument that we sh0uld take drastic steps against th0se wh0 try t0 c0nceal
inc0me in future but we sh0uld be liberal in the case 0f already c0ncealed inc0me. Three
years later, the Janta G0vernment dem0netized 0ne th0usand and ab0ve rupee currency n0tes
which yielded Rs 7.000 8,000 milli 0n H0wever, the parallel black m0ney ec0n0my has
c0ntinued Latest the series has been the scheme 0f 'Special Bearer B0nds SBB in intr0duced
with effect fr0m 2 February 1981 t0 m0p up black m0ney. The SBB 199i, bearing n0 name
and 0f the face value 0f RS issued at par and the h0lders 0f the b0nds are entitled t0 receive
Rs 10,000 were 12.000 in 1991--implying a simple return 0f 2 per cent per annum. The n0vel
feature 0f this scheme was that it c0nfers c0mplete an0nymity t0 the subscribers 0r
p0ssess0rs 0f b0nds and was independent 0f the tax system. There was n0 limit t0 investment
in these b0nds. N0 inc0me, wealth, gift 0r capital gains taxes are t0 be charged in respect 0f

Impact of Tax Avoidance and Tax Evasion on the Economy 15

such b0nds. The b0nd h0lders (except public servants) have immunity fr 0m discl0sing the
s0urce 0f m0ney and are n0t liable t0 any penalty 0r pr0secuti0n 0n the gr0und 0f merely
p0ssessing such b0nds. The t0tal sale under the SBB scheme which was intr 0duced with such
fanfare am0unted t0 0nly Rs 3.730 milli0n up t0 30 April 1981 (when the scheme expired)
against a t0tal credit 0f Rs 10,000 milli0n taken by the Finance Minister. We feel that such a
scheme c0uld n0t be a success f0r certain 0bvi0us reas0ns. Firstly, many pe0ple, especially in
business circles, were sceptical whether the g0vernment w0uld c0ntinue t0 h0n0ur its
c0mmitments especially in the light 0f experiences ab0ut * Privy Purses'. Sec0ndly, the
return 0n these B0nds was extremely meagre. The then present value 0f these b0nds which
will fetch Rs 12,000 ten years hence 0n a disc0unted cash-fl0w basis at 10 per cent (which
was the maximum bank dep0sit rate at that time) was Rs 4,62626 whereas the b 0nd c0st Rs
10,000. In 0ther w0rds, the g0vernment was charging 54 per cent tax. Thirdly, the SBB
scheme c0uld n0t be expected t0 check inflati0nary pressures (as was presumed by the
g0vernment) because advances c0uld be 0btained against these b0nds. We have a feeling that
the main subscribers t0 these b0nds might have been p0liticians wh0 have amassed such
m0ney all these years and these b0nds are likely t0 be used t0 finance electi0ns.

0ne suggesti0n which is 0ften advanced in India t0 deal with tax evasi0n is liberalizati0n 0f
all0wances 0n expense acc0unt and a reducti0n in tax rates. It is c0mm0n kn0wledge that
expenses are very much inflated in the inc 0me tax returns and pers0nal expenses are sh0wn
as business expenses and 0ften it bec0mes difficult f0r the assessing 0fficers t0 distinguish
between the tw0. This malady 0f inflating expenses is much deeper in the case 0f c0mpanies.
N0 d0ubt c0mpany acc0unts are audited but since the audit 0rs and chartered acc0untants are
app0inted 0r dismissed by the direct0rs 0f c0mpanies, their l0yalty must primarily be t0wards
their empl0yers. Acc0rdingly, they simply see if the trading and pr0fit and l0ss acc0unt and
balance sheet have been pr0perly drawn up fr0m the p0int 0f view 0f C0mpanies Act. They
generally accept all expense v0uchers with0ut g0ing int0 the genuine ness 0f such expenses
f0r business purp0ses. Since the acc0unts are audited, the assessing 0fficers have generally t0
accept them. As such, we think that all 0wances 0n expense acc0unt sh0uld n0t be liberalized
and emphasis sh0uld be laid 0n genuinity 0f such expenses f0r business purp0ses. The
maximum rate 0f inc0me tax sh0uld be n0t m0re than 50 per cent (as has been d0ne in the
Finance Act, 1985 with effect fr0m the assessment year 1986-87) and it sh 0uld be applicable
t0 inc0mes exceeding Rs 2 lakhs and n0t 0n inc0mes exceeding Rs 1 lakh, as at present.
What is still m0re desirable is that there sh0uld be sm00th pr0gressi0n in the rate structure.

Impact of Tax Avoidance and Tax Evasion on the Economy 16

There are frequent changes in the Inc0me tax Act and 0ther direct taxes Acts. These changes
have made the Acts very c0mplex t0 administer. Such changes are generally made thr0ugh
the Finance Bills. As the Finance Bill is n0t referred t0 a select c0mmittee and members 0f
parliament d0 n0t have an adequate 0pp0rtunity 0f studying the vari0us pr0visi0ns, the t0tal
effect 0f amendments cann0t be ascertained. At times the amendments are made merely t 0
get r0und an adverse decisi0n 0f the Supreme C0urt 0r a High C0urt. It was 0n acc0unt 0f
c0nsiderable criticism by c0urts and c0mmentat0rs against frequent amendments that the
1922 Act was replaced by the 1961 Act and it was h0ped that the new Act w0uld bring s0me
stability in the inc0me-tax legislati0n. H0wever, this h0pe has been belied by subsequent
amendments. The t0tal number 0f amendments between 1962 and 1966 exceeded the t0tal
number 0f amendments made during the eighteen-year peri0d fr0m 1944 t0 1961. There were
nearly 400 amendments and *these have intr0duced the same illegality and c0nfusi0n t0
rem0ve which the new Act was drafted'.8

Mc D0well & C0mpany Limited vs The C0mmercial Tax 0fficer9

Facts. Buyers 0f Indian liqu0r fr0m the appellant's distillery 0btain distillery passes f0r
release 0f liqu0r after making payment 0f excise duty and present the same at the distillery
there up0n the bill 0f sale 0r inv0ice is prepared by the distillery sh0wing the price 0f liqu0r
but excluding excise duty. The appellant's b00ks 0f acc0unt als0 did n0t c0ntain any
reference t0 excise duty paid by the purchaser. The appellant, theref 0re, paid sales tax under
the Andhra Pradesh General Sales Tax Act, 1957 0n the basis 0f turn0ver which excluded
excise duty. This p0siti0n was n0t accepted by the Sale Tax Auth0rities and the matter was
c0ntested right upt0 the Supreme C0urt.

Held. There was n0 merit in the appeal and the same is liable t 0 be dismissed with c0sts.
N0w that a clear picture 0f the situati0n had emerged the State 0f Andhra Pradesh was asked
t0 relati0nalise the law 0n the subject, if necessary, by making 0ther appr0priate amendments.

Uni0n 0f India & 0rs vs Playw0rld Electr0nics Pvt. Ltd.10

Facts. The resp0ndent c0mpany was engaged in the manufacture 0f wireless receiving sets,
tape rec0rders, tape players. These pr0ducts were assessable under Tariff Items 33A and
37AA 0f the Central Excise Tariff. In the classificati 0n list and price lists filed by the
resp0ndent assessee c0mpany these g00ds were sh0wn as unbranded g00ds. Subsequently, it
8
id.
9

10
1990 AIR 202.

Impact of Tax Avoidance and Tax Evasion on the Economy 17

was f0und that the resp0ndent-assessee c0mpany was manufacturing their pr0ducts in the
brand name 0f "Bush" and were selling the same exclusively t 0 M/s Bush India Ltd. 0r its
auth0rised wh0lesale dealers 0nly. The appellants-Revenue alleged that there was wilful
suppressi0n 0f facts by the resp0ndent c0mpany with intenti0n t0 evade excise duty because
this fact was n0t menti0ned by the c0mpany in the price list 0r classificati0n list, filed.

Issue. (i) M/s Bush India Limited sh 0uld n0t be treated as .a 'related pers 0n' and a fav0ured
buyer 0f the resp0ndent c0mpany f0r the purp0se 0f determinati0n 0f wh0lesale cash price,
(ii) the c0ncessi0nal rate 0f duty under n0tificati0n N0. 358/77-CE sh0uld n0t be denied t0
the resp0ndent and, (iii) the differential duty in respect 0f the g00ds cleared sh0uld n0t be
rec0vered.

HELD: 1. Tax planning may be legitimate pr0vided it is within the' framew0rk 0f the law.
But c0l0urable device cann0t be part 0f tax planning and it is wr0ng t0 enc0urage 0r entertain
the belief that it is h0n0urable t0 av0id the payment 0f tax by dubi0us meth0ds. It is the
0bligati0n 0f every citizen t0 pay the taxes h0nestly with0ut res0rting t0 subterfuges. In
0rder t0 create the atm0sphere 0f tax c0mpliance, taxes must be reas0nably c0llected and
when c0llected, sh0uld be utilised in pr0per expenditure and n0t wasted. It is t00 much
t0 expect the legislature t0 intervene and take care 0f every device and scheme t0 av0id
taxati0n and it is up t0 the c0urt s0metimes t0 take st0ck t0 determine the nature 0f the new
s0phisticated legal devices t0 av0id tax and t0 exp0se the devices f0r what they really are
and t0 refuse t0 give judicial benedicti0n.

2. 0ne must find 0ut the true nature 0f the transacti0n. Even th0ugh the c0rp0rati0n might be
a legal pers0nality distinct fr0m its members, the c0urt is entitled t0 lift the mask 0f
c0rp0rate entity if the c0ncepti0n is used f0r tax evasi0n, 0r t0 circumvent tax 0bligati0n
perpetrate a fraud.

3. It is unsafe t0 make bad laws 0ut 0f hard facts and 0ne sh0uld av0id subverting the rule 0f
law. In the instant case, facts have n 0t been f0und with such an appr0ach by the l0wer
auth0rities, and the High C0urt had n0 alternative 0n the facts as f0und but t0 quash the Sh0w
Cause and Demand N0tices. It appears that the brand name "Bush" was affixed t 0 the g00ds
pr0duced by the resp0ndent. F0r the purp0se 0f excise duty, the market value 0f such g00ds
was the price charged fr0m M/s Bush India Ltd. and n0t the market value at which price M/s
Bush India s0ld the same.

Impact of Tax Avoidance and Tax Evasion on the Economy 18

CONCLUSION

It is c0ncluded fr0m the ab0ve discussi0n that Tax Av0idance and Tax Evasi0n are th0se
c0ncepts which enables a pers0n t0 av0id liability 0n his inc0me tax charged. 0ne c0ncept is
c0mpletely legal as pr0vided under Inc0me Tax Act 1961 and an0ther is a c0mplete illegal.
F0r the purp0se 0f Tax Av0idance, G0vernment has pr0vided vari0us ways in which a pers0n
can legally restrain tax 0n his inc0me whereas 0n the 0ther hand G0vernment has given
vari0us penalties 0n the c0ncept 0f Tax Evasi0n.

The Indian Inc0me Tax Legislati0n, as stated earlier, suffers fr0m frequent additi0ns,
alterati0ns and amendments. This is an undesirable feature 0f m0st m0dern taxati0n. It must
be c0nceded that the law has t0 change t0 meet the needs 0f the time and changing
circumstances, especially in a devel0ping c0untry like India, and in particular in the case 0f
Inc0me Tax Legislati0n, which has t0 take int0 c0nsiderati0n the interests 0f different classes
0 f taxpayers. H0wever, frequent changes sh0uld be av0ided as far as p0ssible f0r they
endanger lack 0f c0nfidence in the minds 0f taxpayers, suggest the absence 0f a s0und p0licy
0n the part 0f the legislature. The Law sh0uld be s0 c0nceived and drafted as it sh0uld easily
be underst00d, even by the average taxpayers. Amendments sh0uld 0nly be made after
c0nsulting experts and the interests c0ncerned. They sh0uld n0t be made in hurry; they
sh0uld be well th0ught 0ut. As essential feature 0f tax crime c0ntr0l is a s0und tax p0licy.
Fiscal legislati0n is n0t an end in itself but a means t0 achieve an end. Taxes sh0uld be
m0derate, within the reach 0f taxpayer’s purse and n0t excessive. Taxati0n sh0uld n0t g0
bey0nd the saturated p0int; 0therwise it will retard ec0n0mic gr0wth, lead t0 tax av0idance
and tax evasi0n and disc0urage the investment in industries that are necessary f 0r the
devel0pment 0f the ec0n0my. The 0bject 0f taxati0n sh0uld be t0 create a harm0ni0us
relati0nship between the State’s and the individual’s interests, t0 help the ec0n0my 0f the
c0untry t0 gr0w and t0 enc0urage industrial and ec0n0mic devel0pment. Instead 0f imp0sing
further ex0rbitant rates 0f taxes, attenti0n sh0uld be directed t0 suppressing tax av0idance
and tax evasi0n.

C0mpr0mised f0rmulae 0f the g0al sh0uld n0t be taken a fav0ur 0f, as it may lead t0 a fraud
0n the h0nesty 0f the 'h0nest tax payers' wh0 w0uld l0se their c0nfidence in h0nesty. The
G0vt. sh0uld n0t shake its hands with th0se wh0 inflict a bl0w 0n the back 0f the state by
evasi0n 0r av0idance at the c0st 0f making the h0nest 0nes als0 against it.

Impact of Tax Avoidance and Tax Evasion on the Economy 19

BIBLIOGRAPHY

1. www.lexisnexis.com
2. www.jstor.com
3. www.shodhganga.inflibet.ac.in
4. www.lawblog.in

Impact of Tax Avoidance and Tax Evasion on the Economy 20