The Impact of Tax Evasion on Economic Growth: A Critical Review

ABSTRACT

Tax evasion and tax avoidance are two practices that significantly impact Indias economy. Tax evasion refers to illegal activities used to avoid paying the amount of taxes owed. In contrast, tax avoidance involves using legal methods to reduce tax liability by taking advantage of loopholes or grey areas in the law. While tax evasion is clearly against the law, tax avoidance, though legal, still results in less revenue for the government, which can limit its ability to spend on vital services like infrastructure, social welfare, and public development. Both practices also contribute to growing income inequality, as those who evade or avoid taxes often have more wealth to begin with, making it harder for the government to address disparities. Additionally, these activities damage public trust in the tax system, as people may feel that the system is unfair or that some individuals and businesses are not paying their fair share. In the past, the combination of a large informal economy, poor tax enforcement, and complex tax laws allowed tax evaders to prosper, leading to significant revenue losses. These losses made it difficult for the government to fund essential public services. However, the Indian government has taken steps to reduce tax evasion and avoidance. These measures include making tax laws simpler, improving tax administration, and using technology to increase transparency and compliance. Key reforms like demonetization, the introduction of the Goods and Services Tax (GST), and the proposed Direct Tax Code are part of efforts to create a more fair and effective tax system. This paper explores how the Indian government’s laws, policies, and measures to prevent tax evasion and avoidance have affected the economy and public trust in the tax system. It also looks at how the judiciary interprets these issues, aiming to ensure a more equitable approach to taxation.

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