In a study titled “The State of Tax Justice 2020” by Tax Justice Network, it has been reported that various countries around the globe are losing billions of dollars due to international corporate tax abuse and private tax-evasive practices. These accusations do not stop at multinational corporations and companies – in fact, they extend well into the private wealth hoarding sector. And as a subset of this expensive crime, India loses over USD 10.3 billion (equivalent to INR 70,000 crore) due to such malpractices; this number, however, is only a small percentage of global numbers being reported, as an estimated USD 427 billion is lost every year on a global scale.
Despite only USD 182 billion being attributed to private tax evasion (and USD 245 billion to corporate tax abuse), both practices have been equally put to shame, and various companies are now under serious scrutiny. The data obtained by the researchers for the study were self-reported statistics that were provided by various multinational companies under the Base Erosion and Profit Shifting project (or BEPS), which is spearheaded by the Organization for Economic Co-operation and Development.
While various questions and conflicting statements may be raised by the public on the arrival of such news, it is important to understand and define the basics thoroughly before attempting to grasp at the straw of tax fraud loss. So, what is tax fraud?
According to Investopedia, a leading finance website, tax fraud “involves the deliberate misrepresentation or omission of data on a tax return.” In various countries, taxpayers are legally bound to consider tax return filing a duty and pay the right amount of taxes pertaining to their income, employment status, sales and trading, and excises. Failure to comply to these legal rules by falsifying and/or withholding vital financial information that may manipulate the amount to tax that you are required to pay to the government constitutes as tax fraud.
Tax fraud is a serious and punishable offence.
In a nutshell:
- Tax fraud costs the government millions of dollars a year.
- Tax fraud is a different issue than tax avoidance or negligence.
- Failing to report and pay payroll taxes is an example of business tax fraud.
So how is tax fraud different from tax avoidance/tax negligence?
The boundary between fraud and negligence, albeit not clearly defined, it not as blurry so as to be able to take advantage of it at a criminal level. For example, claiming a tax deduction from the government due to a non-existent reason or purpose is an obvious fraud, whereas non-intentional mistakes that can be attributed to various dependencies can be classified as negligible. While tax negligence is not left unpunished, the consequences are generally less severe in comparison to tax fraud.
Tax avoidance, on the other hand, is more of an ethical and moral issue than legal. While tax fraud and negligence come along with penalties, tax avoidance is an issue that is simply frowned upon. It is the practice of utilizing legal loopholes in order to reduce tax expenses, be it personal or corporate. It is not considered a direct violation of the law, hence is not punishable by the law either. Tax authorities often frown upon this practice and fear that such steps may lead to the overall spirit of the tax laws being devalued and, eventually, demeaned.
With respect to India, there are various countries that contribute directly to the nation’s vulnerability. Of the USD 10.3 billion loss that India suffers, a minor chunk of it (approximately USD 202.15 million) is attributed to offshore private tax evasion.
In the study, the authors had introduced a brand-new metric, with which various channels via which tax evasion occur to be identified with relative ease. This new measure, with regards to India, has been termed Outward Foreign Direct Investments (or OFDI). According to the World Bank, “there is growing evidence that outward foreign direct investment (OFDI) can increase a country’s investment competitiveness, crucial for long-term, sustainable growth. Some countries are thus using OFDI as a channel for new development and a catch-up strategy to acquire knowledge and technology, upgrade production processes, boost competitiveness, augment managerial skills, and access distribution networks.”
Currently, India stands with a vulnerability score of sixty-six percent with respect to tax evasion via the OFDI metric.
Wealthy countries with high income – usually first-world – are deemed as major contributors towards global tax losses, while poorer, lesser-developed countries account for approximately two percent of total global tax losses. For India, the major countries that contribute to tax vulnerability are Mauritius, Singapore, and the Netherlands. On a global scale, over twenty five percent of global tax losses have been attributed to various countries that belong to the G20 – an international forum for the governments and central bank governors of the respective countries.
While the report states such stark reports and conclusions, it also provides various solutions to tackle the problem of tax fraud. Some of those, on a superficial level, include the taxation of excess profits made by companies; despite the COVID-19 pandemic, various organizations have managed to far exceed their previous targets. According to the Deccan, the report also suggested “punitive wealth tax measures for opaquely-owned offshore assets”.