Gourav Asati, author of this article is a fourth-year student at Institute of Law, Nirma University, Ahmedabad. His main interests lie in IPR and Criminal law.
“The Art of dodging tax without breaking the law is the shortest definition of tax avoidance that I have come across”
~ J. Chinnappa Reddy
INTRODUCTION: The massive threads of globalisation bring benefit to the substantial interest of multinational corporations it leads to change in policies by other private companies to cope up with the bigger establishments each entity is trying at its core level to reap the benefits of the global market. Consumers across the world have easy access to products available in the local market of another country and the services provided by companies are just a call away to reach. While trying to maximize the profit most of the companies have inducted innovative investment policies and methods to reduce tax liability which is also known as tax avoidance.[1]
The mechanism of tax avoidance has gradually obtained wide attention of private entities because with the expansion of businesses methods of tax planning also increased. It is an intentional arrangement to minimize the recurring tax liability of a person, its mechanism can be stringently legal but in contradiction to will and policy of the law.[2] Section 2 (31) of the Income Tax Act provides a wide definition of the term person which includes an individual, Hindu undivided family, company, firm, association of person, local authority, and artificial judicial person.[3]
In the case of Mc Dowell & Co. Ltd. v. CTO the apex court stated that tax planning can be legal if it falls with the domain of law, a colourable device cannot be acknowledged as structuring the tax liability, there is no good in encouraging the honour to avoid payment of tax using suspicious tactics.[4] Citizen has to discharge the tax obligations without resorting to deceptions because it might result in shifting of the burden of tax load on the shoulders of citizens not involved in such practices to reduce tax.[5]
AVOIDANCE, MITIGATION AND EVASION: - The flickering movement of tax saving and planning changed into tax evasion because earlier the companies were trying to save tax legally as per provisions of taxation law, but now it has adopted certain methods which are illegal or prohibited by law in its entirety.[6] It must be noted that tax avoidance is not the same as tax evasion because the former is strictly illegal these two phrases must not be construed as a singular phenomenon.
“Tax evasion is generally the result of illegality, suppression, misrepresentation and fraud. Tax avoidance is the result of actions taken by the assessee, none of which or no combination of which is illegal or forbidden by the law itself. The GAAR provisions do not deal with cases of tax evasion. Tax evasion is distinct from tax avoidance and is already prohibited under the current provisions of the Income-tax Act.”[7]
The Income Tax Department also clarified the between tax avoidance and tax mitigation, here the taxpayer is allowed to take benefits specifically offered by the law. Tax to a certain extent can be dodged by claiming a specific exemption and deduction which are already available under Section 80 (c) of the statute, further intentionally directing investment into some areas or categories such as the purchase of municipal bond can save tax liability of a person.
“Tax mitigation is a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails. An example of tax mitigation is the setting up of a business undertaking by a taxpayer in a specified area such as a Special Economic Zone (SEZ). In such a case the taxpayer is taking advantage of a fiscal incentive offered to him by submitting to the conditions and economic consequences of the SEZ provisions in the Income-tax Act.”[8]
GENERAL ANTI AVOIDANCE REGULATION: - To prevent hostile operations to avoid tax through systematic planning globally the administrations introduced general anti-avoidance regulation (GAAR), the Indian government introduced GAAR during the financial year 2012-13.[9] The regulation of GAAR was framed by the Department of Revenue under the Ministry of Finance initially the framework was proposed solely for Direct Tax Code, 2009 (also inducted under 2010 and 2013 Code) to reduce engagements leading to tax avoidance. It took almost five years to bring the regulation into effect from April 01, 2017, the Direct Tax Code was abrogated so the regulation was brought under the scheme of Income Tax Act, 1961.[10] One of the provisions of this regulation introduced a levy of tax on previously held overseas transaction containing local assets, the retrospective imposition of duty was highly criticised.[11]
The Commissioner of Income Tax was vested with the authority to declare any arrangement or transaction by a taxpayer as the impermissible wherein the ultimate object of such an arrangement was to obtain an unlawful tax benefit.[12] The Finance Bill, 2012-13 provided four tests to quantify ‘impermissible avoidance arrangements’, only one of the below mentioned:[13]
i- If the arrangement involves unenforceable rights and duties which do not form ordinarily.
ii- If the arrangement leads to violation of laws, by-laws or rules of taxation.
iii- If the arrangement is not made with bonafide intention to save taxes.
iv- If the arrangement does not follow any commercial substance.
In the landmark case of CIT v. A. Raman and Co a person used ‘device or contrivance’ to divide his income with Hindu Undivided Family (HUF) to prevent payment of tax, the Income Tax Department claimed the entire income as personal income.[14] The Supreme Court of India observed that a taxpayer can utilize to any device to divert the income before it accrues or arises, it is not subject to consideration of morality unless it bypasses the scheme and reasons of Income Tax Act, in essence, while planning to reduce the tax liability an individual must not violate the provisions of law.[15]
As of now, the investments are done by foreign investors before August 2010 would not be counted under the general anti-avoidance regulation and it applies only to those arrangements where the net tax benefits of the establishment go beyond Rs. 30 million. In general, the regulation has empowered the tax authorities to deny tax benefits if tax avoidance is suspected, the burden of proof lies with the investor to prove that participatory note was not framed with an intention to avoid payment of tax.[16]
In the case of Union of India v. Azadi Bachao Andolan issue related to avoidance of double taxation was dealt by the court wherein it reiterated that a person has to pay tax in one of the countries to discharge the liability of participatory note, avoiding double taxation does not imply a situation when the individual does not pay tax at all in any of the countries.[17] Further referring to McDowell & Company v CTO[18] court stated that the officer in charge shall uplift the corporate veil to if assess real intention behind the cover was to avoid the tax obligation or not.[19]
CONCLUSION: - Tax is the ultimate source of revenue for governments, it is necessary to provide better infrastructure and education, it is crucial in raising the overall standard of living and securing borders of a nation. When it comes to payment of taxes the procedure must lucid and its collection charges must not exceed total collection, still there remains loophole which must be resorted with adequate legislation or policy of executives. Tax avoidance is one such arena where it is to bye-pass the law to evade onus of tax, individuals use certain legal devices adjusting the liability which makes difficult to identify avoidance. The governments must strictly apply laws to cater to tax avoidance like GAAR and SAAR, these regulations delegate great powers into the hands of an official to take necessary action or pass any order.
[1] Anil Kumar Jain, Tax Avoidance and Tax Evasion: The Indian Case, Modern Asian Studies, Vol. 21, No. 2 (1987), pp. 233-255, https://www.jstor.org/stable/312646.
Published By: Cambridge University Press
[2] OECD, Glossary of Tax Terms, http://www.oecd.org/document/29/0,3343,en_2649_34897_33933853_1_1_1_1,00&&en-USS_01DBC.html.
[3] The Income Tax Act, 1961, Section 2 (31).
[4] McDowell & Co. Ltd. v. CTO, (1985) 154 ITR 148 (SC).
[5] McDowell & Co. Ltd. v. CTO, (1985) 154 ITR 148 (SC).
[6] Anil Kumar Jain, Tax Avoidance and Tax Evasion: The Indian Case, Modern Asian Studies, Vol. 21, No. 2 (1987), pp. 233-255, https://www.jstor.org/stable/312646.
[7] Draft Guidelines Regarding Implementation of General Anti Avoidance Rules (GAAR) in Terms of Section 101 of the Income Tax Act, 1961.
[8] Draft Guidelines Regarding Implementation of General Anti Avoidance Rules (GAAR) in Terms of Section 101 of the Income Tax Act, 1961.
[9] Taxsutra, www.taxsutra.com.
[10] Tax Laws & Rules, Income-tax Act, 1961, www.incometaxindia.gov.in.
[11] The Hindu, https://www.thehindu.com/business/Economy/Anti-avoidance-tax-rule-to-kick-in-from-April-2017/article17008388.ece.
[12] The PRS Blog, GAAR, https://www.prsindia.org/theprsblog/general-anti-avoidance-rule-gaar.
[13] Draft Guidelines Regarding Implementation of General Anti Avoidance Rules (GAAR) in Terms of Section 101 of the Income Tax Act, 1961.
[14] CIT v. A. Raman and Co., [1968] 67 ITR 11 (SC).
[15] CIT v. A. Raman and Co., [1968] 67 ITR 11 (SC).
[16] Draft Guidelines Regarding Implementation of General Anti Avoidance Rules (GAAR) in Terms of Section 101 of the Income Tax Act, 1961.
[17] Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) at p 133.
[18] McDowell & Co. Ltd. v. CTO, (1985) 154 ITR 148 (SC).
[19] Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) at p 133.
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