Uncovering the Shadows: A high level view of literature on tax evasion in India

Introduction

Taxes are the primary source of revenue for the government that comes as mandatory financial contributions made by individuals and organizations, to fund essential public services, programs, and operations. However, tax collection becomes a challenging job for the government, as the person or an entity may unlawfully and intentionally avoid paying their fair share of taxes (Slemrod, 2007). Tax evasion involves the illegal act of avoiding tax obligations. This can happen through various means such as not reporting income, claiming expenses that are not permitted by law, or failing to pay taxes that are owed. It has numerous implications for any economy, including decreased government revenue, increased income inequality, and distorted incentives for economic growth. Thus, the amount of tax evaded, which could have been used for economic and social development, is used for anti-social activities and creates black money in the country.

Tax evasion is a widespread practice in both developed and developing nations, with its prevalence increasing significantly after World War II (Shubhang, 2013; Slemrod, 2007). It involves various illegal methods, including misrepresentation of income and profits, false statements of fact, fabrication of financial records, or outright fraud, to avoid payment of tax. The complexity of tax laws and the burden they place on taxpayers further exacerbate the problem (Nugent, 2013). Some other causes of tax evasion include higher tax rates, lack of integrity on the part of the citizens, the existence of tax havens, etc. Evading taxes is a crime in all major nations, with penalties for offenders including fines and confinement. Income tax, goods and services tax, import-export tax, state border tax, etc., are some mandatory taxes in India. However, some people try to evade paying taxes despite the rules and regulations surrounding these taxes. This article aims to provide a comprehensive analysis of the literature on tax evasion in India and its multifaceted impact on the economy and society. By identifying the factors driving tax evasion and its consequences, this study seeks to inform policy interventions and enforcement measures to address this crucial issue in the Indian context.

Objectives

This article aims to scan the literature from the Scopus database in the field of tax evasion in India. The objectives of the paper are:

RO- To evaluate the importance and impact of the articles that have been published with the title Tax Evasion in India since 2004-2024.

RO1: Literature Analysis

The paper by Benno Torgler published in 2004 titled \"Tax Morale in Asian Countries\" with 100 citations was focused on taxpayer\'s willingness to pay taxes, also known as tax morale, in various Asian countries including India. The paper elaborates that for India, tax morale is positively influenced by trust in the government, democratic values, national pride and the legal system, which collectively shape the tax morale of the people of the country. And the tax morale is higher in India as compared to the OECD countries. The paper also touches on the issue of significant variation within the Asian countries, indicating that the Philippines has a low level of tax morale, while Japan, China, India, and Bangladesh show a higher willingness to pay taxes. The study is well cited but it is dated 2004 and since then the tax regimes in India and other countries have changed significantly and may give a very different picture in today\'s time. Researchers in this field can adopt the methodology used in the paper, which involves conducting survey analyses in a uniform format across different countries, enabling comparative analysis. (Benno Torgler, 2004)

Chandan Sharma\'s (2015) paper titled \"Corruption, Governance and Firm Performance: Evidence from Indian Enterprises\" contributes to understanding the complex relationship between corruption, firm behavior, and economic development, particularly touching on how bribery is related to tax evasion. The paper, which has 76 citations, uses self-reported data on bribery (which may not be entirely accurate) to establish a relationship between corruption and firm behavior. The study does not fully indulge in finding the facts of tax evasion but does conclude that firms that are more likely to evade taxes are also more likely to pay bribes to government officials. The implication is clear that bribery may be viewed as a route to avoid detection or consequences of tax evasion. However, the paper does not discuss the ways used by the firms for tax evasion and whether bribes mitigate the consequence of tax evasion. The limitation of the study can be taken as a cue for further research, where the gap is that tax evasion is only considered and studied as a contributing factor of bribery wherein the focus remains on bribery. An alternative approach should be adopted to explore the contributing factors in cases of tax evasion, leading to a more comprehensive understanding of tax evasion in India. (Sharma, 2015)

The research paper \"Cash and the Economy: Evidence from India\'s Demonetization\" by Gabriel Chodorow-Reich, Gita Gopinath, Prachi Mishra, and Abhinav Narayanan in 2020 discusses demonetization. The Indian government abruptly removed big denomination banknotes\' legal tender status in 2016. The aim of demonetization was to target black money, corruption, and counterfeit money resulting in reducing tax evasion. The study creates a model to examine the impact of demonetization on economic activity. The model identifies two main reasons why households keep cash in hand: to make trades and to evade taxes.

The paper \"Tax Evasion and Optimal Environmental Taxes\" by Antung Anthony published in 2013 is the fifth most cited paper with 53 citations. The paper is an interesting take on how environmental tax can benefit in terms of serving as a cost-effective way to reduce both environmental damage and tax evasion. The discussion revolves around the fact that traditional taxes (income or labor taxes) are easier to evade than environmental taxes (carbon taxes, gasoline taxes). Green tax is tough to evade due to the fact that it is normally a part of the price of goods and services. This would also favor the environmental concerns, and also it benefits in both saving the environment and reducing tax evasion. The paper subscribes to the idea of a \"Green tax swap\" which might be profitable due to improved tax system efficiency in nations with high rates of pre-existing tax evasion.

The paper \"The BRICs and International Tax Governance: The Case of Automatic Exchange of Information\" by Dries Lesage et al. (2019) discusses the practice of international tax evasion. The study highlights the role of CRS (Common Reporting Standard) for the purpose of the Automatic Exchange of Information. It further examines the role of \'Automatic Exchange of Information (AEol) by G20 and the Organization for Economic Cooperation and Development (OECD) as a major breakthrough in the global fight against tax evasion\'. The study insists that because of the underreporting of company profits, capital outflows resulting from trade misinvoicing also constitute forms of tax evasion. In addressing tax evasion by affluent individuals, the paper scans the role played by the BRIC nations in the establishment of the multilateral AEol framework, with a focus on the OECD\'s efforts.

The paper by Kushwah et al. (2021), titled \"Impact of Tax Knowledge, Tax Penalties, and E-Filing on Tax Compliance in India\", is one of the frequently cited works in this field. The paper does not discuss tax evasion directly, it talks about the opposite of it, i.e., tax compliance. It is very difficult to get information on tax evasion through surveys or questionnaires since tax evasion is a criminal activity and would not be self-reported by companies or individuals, and hence the factors contributing to tax compliance can be considered to study what might make people evade the tax. The finding that heavy penalties increase tax compliance implies that some firms refrain from tax evasion because they fear facing penalties. E-filing eases tax compliance and in turn, makes tax evasion difficult. The paper is an indirect take on how tax compliance factors may result in deterring tax evasion.

The study makes another very important contribution with regard to the role of the business environment in tax evasion. The correlation between voluntary audits and tax evasion is not as strong in jurisdictions with superior business environments (as determined by the ease of doing business). This implies that, even in the presence of external audits, a more open and effective business environment may deter tax evasion activities. For further research in the field, public organizations could be taken into consideration.

Wadhwa and Pal (2012), in their paper \"Tax Evasion in India: Causes and Remedies\", is a detailed paper on factors contributing to tax evasion in India and proposes potential solutions to address this issue. The paper lays down the apparent causes of tax evasion including high tax rates in India; complexities of tax laws; widespread corruption; inefficient and time-consuming tax collection process and lack of tax literacy. The authors propose a multi-pronged approach to address the issue of tax evasion. This can be done by simplifying the tax system, improving tax administration including the collection of tax, reducing tax burdens, and promoting tax awareness, the authors believe India can create a more efficient and equitable tax environment.

Das-Gupta et al. (2004), in their paper \"Tax Administration Reform and Taxpayer Compliance in India\" (2004), do not directly investigate tax evasion but make a valuable contribution to the topic of research. The focus of the paper is on the behavioral response of taxpayers to tax administration practices, and that can be interpreted as indirectly shedding light on how certain policies might influence the incentives for tax evasion.

The research paper investigates the counterintuitive idea that assigning high-income taxpayers to special assessment units within the Indian income tax administration might encourage tax evasion. This approach could lead businesses to become less transparent about their income and may lead to \"spillover effect\", i.e., if higher-income taxpayers have higher chances of being held to scrutiny or audit, it might discourage people from complying and increase the efforts of tax evasion.

The paper, \"Determinants of Behavior of Payers of Personal Income Tax: An Empirical Study from Indian Context\" by Sanjeeb Kumar Dey, Shradhanjali Panda and Debabrata Sharma published in 2023, focuses on the factors influencing tax compliance behavior among individual taxpayers in India. The study mainly focuses on the factors that motivate individuals to pay their personal income taxes accurately and timely. This is done by employing an empirical approach, likely using surveys or questionnaires distributed to a sample of taxpayers in India. Tax evasion is a topic that cannot be effectively studied through surveys because it is an illegal activity, leading individuals to be reluctant to share truthful information. If the tax system is considered unfair, tax evasion would be higher. The efficiency and transparency of tax administration, the ease of filing procedures, and the perceived risk of penalties for non-compliance, also impact tax compliance and tax evasion. The social factors around tax compliance, trust in government institutions, and the influence of family and friends would lead to either tax compliance or tax evasion.

The research findings can inform policymakers on how to design tax policies and improve tax administration practices to promote greater tax compliance among individuals. It also focuses on aspects like simplifying tax filing procedures, increasing transparency, and potentially adjusting tax rates based on economic considerations could lead to a more compliant taxpayer base. The study conducted by Dey and colleagues offers a significant understanding of the elements that encourage people to adhere to personal income tax laws in India. The results may be utilized to create plans for raising government income and enhancing tax compliance.

Overall, these research papers offer diverse perspectives on tax evasion in India, highlighting its drivers, potential solutions, and consequences. While some explore the issue directly, others provide insights through related concepts like tax compliance and bribery.

Conclusion

The key takeaway of this study is that combating tax evasion can be a useful strategy for raising tax revenue from the wealthy, enhancing the tax system\'s progressivity, and ultimately lowering inequality. Also, enhanced tax enforcement by way of simplified tax procedures, transparency, and adjustable rates of tax will promote tax compliance. The studies discussed also reveal that tax evasion through the lens of tax compliance will give another dimension to the issue of tax evasion. Adoption of technology can be a possible solution to crack upon tax evasion. \"Changes driven by the transformation of information into digital formats for use by computers seem likely to affect tax evasion in the years ahead\" (Alm, 2021)