How the government budget suffers from imbalance due to the tax evasion of people?
INTRODUCTION
In ancient times the taxes were supposed to be regressive in nature, which means despite the nature or source of income every citizen was bound to pay taxes of equal amount which led to degradation of law income earners even though they were trying to pass that income bracket where they were considered poor by the society. But with the time societies change so did the laws which govern them, making the tax laws all around the world less regressive in nature. As soon as the laws changed people started finding the loopholes in the laws making safe space for malpractices such as tax evasion and tax avoidance, accumulation of black money etc.
Tax evasion
Tax evasion is the illegal act of deliberately underreporting income, inflating deductions, or hiding financial assets to reduce one’s tax liability. It is a criminal offense in most countries and can result in penalties, fines, and even imprisonment. Tax evasion differs from tax avoidance, which involves legally minimizing tax liability through legitimate means. Tax authorities actively pursue and prosecute cases of tax evasion to ensure a fair and equitable tax system.
Tax avoidance
Tax avoidance is the lawful practice of minimizing tax liability by using legal means such as deductions, credits, and legitimate loopholes within the existing tax laws. It involves structuring financial affairs to pay the least amount of taxes possible while staying in compliance with the tax regulations. Unlike tax evasion, which is illegal, tax avoidance is an accepted and common practice that allows individuals and businesses to reduce their tax burden, and it is often a subject of debate regarding fairness in the tax system.
Impact of Tax Evasion on Government Budget
Tax evasion has numerous substantial effects on a government’s budget:
1. Reduced income: Tax evasion results in a loss of tax income for the government. When individuals and corporations underreport their income, conceal assets, or participate in illicit tax operations, the government is unable to collect the taxes owing. This decrease in revenue can put a pressure on government finances and lead to a shortage of cash for critical public services and programmes.
2. Increased Budget Deficits: A drop in tax collection owing to evasion can lead to budget deficits. Budget deficits arise when a government spends more than it earns in income, which can result in higher borrowing, interest payments, and long-term financial instability.
3. Pressure on Tax Rates: To compensate for revenue lost from Tax Rates Under Pressure: To make up for lost revenue from tax evasion, governments may be obliged to raise tax rates on law-abiding persons and enterprises. This may impose an additional financial strain on individuals who pay their taxes in a timely manner.
4. Public Service Cuts: Inadequate tax collection because of evasion can lead to cuts in public services such as education, healthcare, infrastructure, and social welfare programmes. Reduced financing for these programmes can have a detrimental influence on people’ quality of life.
5. Economic Inefficiency: Excessive tax evasion can erode economic efficiency. When taxes are not collected as planned, governments may be forced to develop more complicated and severe tax systems, raising compliance costs for both taxpayers and the government.
To mitigate the impact of tax evasion on the government budget, tax authorities often employ various strategies, including improving tax enforcement, increasing transparency, closing loopholes, and implementing international cooperation to address offshore tax evasion. Reducing tax evasion helps ensure that governments have the necessary funds to provide essential public services and maintain fiscal responsibility.
Author:- Varshita kushwaha (4th year B.COM LLB (Taxation law) student in University of Petroleum and Energy Studies)
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