What is fiscal deficit and how tax fraud causes fiscal deficit

December 19, 2014

Before knowing the Causes of Fiscal Deficit first we need to understand its definition and the concept given below.

Fiscal Deficit

In India taxation system acts as a major source of revenue for Govt. The revenue received in a financial year is utilised in budgetary allocation in the next fiscal. That means we pay tax to Govt and in exchange Govt usesthis money in various public welfare schemes, health care projects etc to ensure our well being. Thats great as we are benefited from the taxes we paid. Technically it sounds good. Because we have not taken fiscal deficit into count yet. Fiscal deficit arises when the ‘expenditure revenue’ becomes higher than the ‘revenue received’.
Now let us imagine a situation taking fiscal deficit into consideration. Suppose in a certain financial year revenue received is Rs12,000. In the same fiscal it plans to introduce X,Y & Z schemes for public. Let the estimate amounts be Rs. 5000 for X, Rs 2000 for Y & Rs 7000 for Z. If this much amounts to be allocated then fiscal deficit becomes (14000-12000=) Rs 2000. Result? Govt has to stall one of its 3 major programs or carry the fiscal burden to the next year. In the 1st case our benefit becomes limited. Where as in the later case either debt burden(in international market) rises (there by causing rupee depreciation) or govt may hike tax rates. However the combined effect of the two cannot be avoided. In both cases taxpayer suffers and there is a maximum chances of inflation. Thus, technially we saw fiscal deficit is not a good sign for both govt and public. For better understanding technical approach is given as an example here.

How Tax fraud is responsible for fiscal defict?

You must be thinking, if fiscal deficit reduced zero then there would be stability in the economy. But does it happen in reality? The answer is no. In actual practice reducing fiscal deficit to zero cannot be achieved. Why? Because there are several factors that affects a country’s economy like global market crash,war,inflation,oil price hike,political upset,market volatility,corruption etc. Since all countries are connected by economical ties with eachother, disruption caused in one nation ripples to other countries too. So, global market is always dynamic. Therefore there will always be a fiscal deficit in a govt and ideal situation of zero fiscal deficit is not attainable. Among all the reasons mentioned above that causes fiscal deficit only corruption can be checked. In a populously dense country like India corruption is rampant. While understanding fiscal deficit we had assumed all tax payers pay their taxes sincerely. But actually there are people who adopt illegal means to escape the liability of tax.

Let us look at various categories of tax frauds. There are 4 methods.
i) Tax evasion :- Here liability to tax is kept hidden. Tax payer pays less than he is obligated to pay. Ex- by showing false account statement or wrong information on income.
ii) Tax avoidance :- Tax payer takes the advantage of some loopholes of tax laws. Here tax payer doesn’t hide his income, but tries to reduce tax liability by legal arrangement against the intent of the law i.e the areas where the existing law fails to address are exposed.
iii) Tax mitigation :- Tax payer takes the advantage of fiscal incentives afforded by him by submitting to economical conditions.
Ex- a company sets up his business in an under developed area, carries out manufacturing activity and claims tax deduction on sale of sale/production.
iv) Tax planning :- Arrangement of person’s business inorder to minimize tax liabilities.

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