Tax evasion and tax avoidance have a deep-rooted impact on the Indian economy in terms of overall Government revenues and how they trickle down to all sections of the population. Here’s looking at the same in this article.
The Biggest Ways in Which Tax Evasion Affects Our Economy
Tax evasion and tax avoidance create the following roadblocks for the Indian economy:
- Loss of Government revenues- These practices naturally reduce the tax collections of the Government. This may impact the budgets across various departments, along with reducing funding for various public services, including infrastructure, healthcare, education, social welfare, and so on.
- Higher budgetary deficit- Tax revenue losses due to evasion may lead to a bigger government budget deficit. This may also spark higher government borrowings, increased public debt, and possible economic fluctuations or instability.
- Social inequality-Tax evasion and avoidance aggravate unfairness and income inequality within the societal framework. Those engaging in such activities mostly pay lower effective rates of taxes than those who cannot exploit any loopholes.
- Market economy impact- In most cases, those avoiding taxes usually gain competitive and financial advantages over business rivals who operate legally. This may lead to unfair competition and hinder the operations and efficiency of markets.
- Lower investor confidence levels- Widespread avoidance and evasion may dent investor confidence in any country’s economic system and growth prospects. This is especially true for foreign investors, who may perceive it as an indicator of poor financial and legal stability.
- Increased tax burden for honest citizens- Honest taxpayers and businesses will eventually have to bear a larger burden in terms of funding public expenses. This happens when the Government is forced to reduce tax incentives or raise tax rates owing to widespread evasion.
- Black money generation and inflation- Tax evasion may lead to the creation of black money, which circulates across the market. It may also lead to higher inflation in the long run.
Some Facts and Figures on Tax Evasion and Tax Avoidance
A few pertinent facts will help you understand the impact of the issue in a broader light.
- Black money has been estimated by reports as standing at Rs. 9,958-11,870 crore between 1975-76 and Rs. 20,362-23,678 crore between 1980-81. It was also estimated at Rs. 31,854-36,786 crore in 1983-84.
- Some estimates have highlighted how tax evasion costs the country around Rs. 14 trillion every year.
- The extent of evasion in the country can be gauged by how more than Rs. 15,000 million in concealed wealth and income was revealed under the Voluntary Disclosure Scheme.
- Other reports in 2020 indicated that India was losing US$10.3 billion in taxes annually (roughly Rs. 75,000 crores at the time), which represented 0.41% of the country’s GDP.
Concluding Notes
Thus, tax avoidance and evasion have a multi-pronged negative impact on the Indian economy. The income tax department and Government need to take proactive measures to curtail evasion. Some encouraging steps have already been taken in this regard, with more expected to follow in the near future.