Tax evasion and its implications

Written by Adhil Shetty | AdhilShetty | Updated: Mar 31 2012, 06:39am hrs CEO Adhil Shetty explains the difference between tax avoidance and tax evasion

Individuals have the freedom to self assess income and pay taxes. That doesnt mean that if you do not declare a particular stream of income to evade taxes, you will go scot free!

Tax evasion is an illegal activity which entails not filing income tax returns altogether or misrepresenting the tax payable amount. It is different from tax avoidance, which is a legal activity because tax laws are used to reduce the tax amount payable. Income tax returns are scrutinised only if income tax authorities feel that there is tax evasion. If they conclude that you have deliberately concealed income to reduce tax liability, you will be penalised.

What does scrutiny of income mean

Scrutiny essentially means evaluating the income tax return for its authenticity i.e. the income tax assessing officer will go through the returns filed and various other documents such as bank statement, Form 16 among other things to check if there is any mismatch in tax liability assessed by the individual and the actual tax liability. The income tax officer will request all bank account statements, credit card statements, details of all family members, Form 16 and other relevant documents as part of the scrutiny process.

In most cases, if a return is picked up for scrutiny, a scrutiny notice will be served within a period of one year from the month in which returns have been filed. So if you file your returns on 30th July, 2012, then you may get a scrutiny notice anytime on or before 29th July, 2013. The notice is in a standard format and it will contain relevant details of the tax payer and also will contain a date on which the tax payer needs to appear before the concerned income tax officer. The tax payer need not attend this meeting in person. He can send across a representative to plead his case, which in most cases will be the chartered accountant of the tax payer.

How is an income tax return picked up for scrutiny

There are various guidelines/ thresholds in place to determine the selection of income tax return for scrutiny, such as:

* All assessments pertaining to search and seizure cases

* All returns where deduction claimed under chapter VI-A of the Income tax act is R25 lakhs or above

* All returns where refund claimed is R5 lakh and above

* Withdrawal of less than R50,000 per annum will be picked up for scrutiny. The logic being that you may have access to black money which you may be using for your daily expenses and hence withdrawals from the bank account are minuscule.

* In addition, cases will be picked through a Computer Assisted Scrutiny System (CASS) by giving specific instructions.

What are the implications

If the income tax officer figures that you have concealed income, a penalty will be levied which can be anywhere up to 3 times the amount of income concealed. So if the tax evaded amount is R10,000, you can be charged a penalty of anywhere between R10,000 to R30,000.

What should you do to avoid such a situation

Many salaried individuals believe that since tax is deducted at source for salary and for other streams of income, their tax liability is nil. That may not necessarily be the case. There are several other streams of income, where tax may not be deducted at source. For e.g. Post office saving deposit interest, interest on bank savings account, rent received from property among other things. Also if you have switched jobs, it is likely that if you havent declared that your old organisation has taken into consideration deductions under Section 80 while calculating TDS, the amount of TDS charged by the new organization may be lower as they would consider the full quantum deductible under Section 80, resulting in you paying lower tax.

Therefore, while filing returns make sure you consider all these factors. It is better to take precautions while filing returns because if your return is picked up for scrutiny because of some anomaly, apart from the financial impact, you will witness a lot of mental stress.