Tax Evasion By Corporate Sector
It is common knowledge that corporate companies evade taxes in numerous ways. The business men of India have very capably unearthed chinks in the armor of the income tax department. So much so that the income tax department has no possible way of determining or proving the evasion. All the unaccounted money becomes what is famously called ‘black money’. In this era of capitalism, it becomes impractical for a business to carry out its operations ethically, because in that way it will lose its competitive edge over its competitors. These methods are practiced by every business and will be passed on to every new prospective business. It therefore becomes essential for the government to fix the gaps in the laws or heavily crack down on the transgressors, thereby discouraging this contagious behavior.
The methods I illustrate below are particularly the ones adopted by manufacturing companies, though quite a number of them still remain valid for other companies.
- Over-billing of Purchase of raw material: For instance if they need x units of raw material to manufacture y units of finished product, they actually purchase x units only but arrange for false invoices amounting to x+p units of raw material. By doing this they benefit in the following ways:
- Increment in purchase value results in decline in profits thereby reducing their income tax amount payable.
- They claim the excise duties on the additional 'p' units thus resulting in the excise duty amt payable. By over-billing the purchase of raw material, the company can claim to have paid excise/service/sales tax and VAT on x+p units rather than on x units, and thus depict a decline in profits. The income tax department has no way of determining whether x or x+p units of raw material were used.
- Under-billing/Non billing of Sale : If the sale figure reduces the profit from the unit proportionally decreases. Further they avoid taxes like excise duty and VAT/CST( for manufacturing concern) and Service Tax(for service industries) on the sale. Excise duty, Service/Sales tax are taxes which the government charges from the business but which the business passes on to the consumer. Hence these are called indirect taxes. So by under-billing of sale, companies charge the customer sales/service tax and VAT but do not pay the same to the government.
- Dummy salary entries are created which reduce the profit/Income Tax.
- False petty expense entries like bills for meals and other expenses not related to the business which reduce the profits and Income Tax. For example, if the business owner visited a hotel with his family he would club that bill as an expense to his business.
For a business to grow, it would require an inflow of money. Suppose a business owner wants to infuse money into his business, he cannot just deposit the black money or unaccounted money into the bank account, as in case of an income tax raid he would have to provide for its source. So the business owner has to, in some way convert the black money into white money. The following are the ways he does it:
- ·With the help of Chartered Accountant, he creates a dummy person with a bank account, deposits the black money of the business owner into that account. He then creates documents which claim that the dummy person has loaned (generally unsecured) the money to the business on the interest. This benefits in two ways: firstly the black money has been converted to white, secondly the business has to pay an interest to the dummy person which in turn reduces the gross profit and thus the income tax.
- This point is for private limited companies in particular. A private limited company is one in which the shares of the company are held by a private group. So assume that a business owner wants to infuse one crore of black money into his business. His CA creates ten dummy persons with accounts, and puts 10 lakhs Rs (from the business owner) in each of those accounts. These 10 dummy persons buy 10 lakhs worth of shares in that company. So the business has been infused with 1 crore Rs. The business owner then buys back the shares from the dummy persons who sell him at a loss. The money transferred to them is checked out and given back to the business owner. The CA takes a commission of about 3% for this.
I have often heard the saying “employees pay the government first and then themselves, business owners pay themselves first and then the government”. It just elucidates the favorable conditions set up by the government to bolster and encourage business activity.
References
1. Self Experience