Causes of Tax Evasion:
The following are the causes of Tax Evasion.
(1) High Rates of Taxation- The prevailing high rates of taxation are one of the main causes of evasion. The high tax rates in the top income brackets are said to be tolerated only because considerable evasion takes place there. The Direct Taxes Administration Enquiry Committee also agreed to it and said, “While it cannot be denoted that the higher the rate of tax, the greater will be the temptation for evasion and avoidance. The tax rates by themselves are not to be blamed for the larger extent of the evasion in the country. However, even if the rates are reduced, evasion will still continue, because it exists at all levels of income.
(2) Complexity in Tax Laws- The complicated provisions of the Direct Taxes Acts, not all of which are easily intelligible, were also stated to be responsible, to some extent, for tax avoidance and evasion. The average tax-payers has inevitably to seek the assistance of tax experts, and their advice is not always disinterested but to help the tax-payers for evasion and avoidance.
(3) Inadequacy of Powers- The inadequacy of the powers vested in the personnel of the department is yet another cause for tax evasion. The facts relating to income, wealth, expenditure, etc., are known only to the taxpayer and if he does not disclose all of them to the assessing officer, the task of the latter in determining the correct tax liability becomes very difficult. However, whatever powers are vested in the assessing officers, that are also not used freely by an honest officer, because of the fear that no harassment is caused to the honest tax-payer. An honest man only respects honesty.
(4) Shortage of Experienced Personnel- Another reason for evasion is said to be the death of experienced personnel in the Department. It is, therefore, necessary to have in the Department sufficient numbers of trained and experienced personnel to cope with the current as well as arrear load of assessment and investigation work. Simultaneously, the organization and procedures of the Department should be improved so as to bring it the highest pitch of efficiency.
(5) Absence of Deterrent Punishment- One important reason for the prevalence of evasion is stated to be that in actual practice no deterrent punishment like imprisonment is being meted out to tax evaders when they are caught. It is, therefore, recommended by the Direct Taxes Enquiry Committee that unless it is brought home to the potential tax evader that attempts at concealment will not pay but also actually send him to jail, there could be no effective check against tax evasion. The non-resort to prosecution and non-levy of detriment punishment has undoubtedly encouraged the growth of tax evasion.
(6) Lack of Publicity- Another reason for widespread evasion is said to be the secret provisions of the direct taxes Acts. At present, the department is statutorily prohibited from disclosing any information relating to a person’s return or assessment, except to specified authorities like Central and State Governments authorities, Courts of law, and Reserve Bank for the limited purpose mentioned in the Acts themselves. Thus even if a tax evader is caught and penalized for concealment, he can keep it a secret from everyone and escape the odium. The pressure of public opinion is a major deterrent against any offense, and if the secret provision of the Direct Taxes Acts is relaxed even to a limited extent, they will go a long way towards checking tax evasion.
(7) Moral and Psychological Factors- Certain moral and psychological factors have also been pointed out as responsible for tax evasion in the country. Unfortunately, all citizens do not realize their duties to the State and the necessity of paying the correct amount of taxes and paying them on time. Onle a reformed moral outlook and the development of better civic conscience can improve matters in this respect.
(8) Attitude of Income-Tax Department- It should also be agreed that the Income Tax Department is no less responsible for the present state of affairs. It has been said and not unjustifiably, that even when the assessee’s returns are correct in respect of income, wealth, etc., and produce evidence in support, the assessing officers do not always accept them. Because, of this attitude of the department, it is said that assessee, sometimes, understates their income and wealth, etc., in returns. This mutual distrust between the assessing officers and the tax-payers also encourages, to some extent, tax evasion, which should be broken. For this purpose, the administration has to take the initiative and trust the assessees, and conduct itself with a high sense of justice and fair play.
(9) Officers of the Department should be men of Integrity- It has also been said that the lack of integrity in some of the officers of the department is partly responsible for tax evasion. The Direct Taxes Administration Enquiry Committee under the chairmanship of Shri Mahavir Tyagi also laid stress on the point and said that “Not only should the departmental officials be honest but they must also be above suspicion and they should so conduct themselves in their private as well as official life that no wrong motives could be attributed to any of their actions.
Observations of the Wanchoo Committee:
The Direct Taxes Enquiry Committee, popularly known as Wanchoo Committee, pointed out the following causes of tax evasion in the Indian economy:
(1) High rate of taxation under direct tax laws.
(2) Economy of shortage and consequent controls and licenses.
(3) Donations to political parties.
(4) Corrupt business practices.
(5) Ceiling on, and disallowances of business expenses.
(6) High rates of Sales tax and other levies.
(7) Ineffective enforcement of tax laws.
(8) Deterioration in moral standards.