TAXATION AVOIDENCE AND TAX

EVASION

SAGAR Y DHANAK
FROM BBA LLB
31207020
 INTRODUCTION

In a society where people are living together as a group or community

sharing some common interest have come together and formed a system
which has regulated their activities and protected the common interest ofthe
society.

Collecting the contribution from the member to run the regulatory system,
which in turn spend such money on the welfare activities of such society
or for the overall public good is in practice in one or the other from since
time immemorial. In ancient days the subject used to pay tax to the monarch
and monarch in turn used to take the responsibility of the protection of life
and property of his subject. This has developed as a system of public finance
and collection of contribution from the public for the common public good is
the base line of the tax system all over the world.
 TAX VOIDATION VS.TAX EVASION

Tax avoidance and tax evasion are two expressions, which find no definition either in the Indian
Companies Act 1956 or the Income Tax Act 1961.  Tax avoidance is generally the legal exploitation
of the tax regime to one's own advantage, to attempt to reduce the amount of tax that is payable by
means that are within the law whilst making a full disclosure of the material information to the tax
authorities.  Examples of tax avoidance involve using tax deductions, changing one's business
structure through incorporation or considering an offshore company in a tax haven.  By contrast tax
evasion is the general term for efforts by individuals, firms, trusts and other entities to evade the
payment of taxes by illegal means. 

Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of
their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest
tax reporting (such as under declaring income, profits or gains; or overstating deductions).  Tax
avoidance may be considered as either the amoral dodging of one's duties to society, part of a
strategy of not supporting violent government activities or just the right of every citizen to find all
the legal ways to avoid paying too much tax.  Tax evasion, on the other hand, is a crime in almost all
countries and subjects the guilty party to fines or even imprisonment.  Tax resistance is the refusal to
pay the tax for conscientious reasons (because they do not want to support the government or some
of its activities), sometimes breaking the law to do so.  Some donate their unpaid taxes to charity,
while others take creative "deductions"
Failure to Pay Tax as per Self

Assessment As per section 140 A ( 1 ) if the tax payer fails to pay either wholly or
partly self - assessment tax or interest then the tax payer will be treated as a default
person . If the assesse is declared as a default person then as per section 221 ( 1 ) a
penalty amount will be imposed by the assessing officer . The criterion for penalty
is that it cannot exceed the arrear amount . Therefore the penalty imposed on not
making payment of self - assessment tax is solely at the discretion of the assessing
officer . If the tax payer is able to provide justified reasons for the delay in paying
the tax then the assessing officer can even exempt the assesse from paying penalty .
Failure to Pay Tax as per Demand Notice
Failure to Pay Tax as per Self -
Assessment As per section 140 A ( 1 ) if the tax payer fails to pay either wholly or partly self -
assessment tax or interest then the tax payer will be treated as a default person . If the assesse is
declared as a default person then as per section 221 ( 1 ) a penalty amount will be imposed by the
assessing officer . The criterion for penalty is that it cannot exceed the arrear amount . Therefore
the penalty imposed on not making payment of self - assessment tax is solely at the discretion of
the assessing officer . If the tax payer is able to provide justified reasons for the delay in paying
the tax then the assessing officer can even exempt the assesse from paying penalty . Failure to
Pay Tax as per Demand Notice

Penalty for Not Filing Income Tax Return

If the taxpayer fails to get the account audited or furnish a report of audit required under section
44AB then the penalty incurred will be one half percent of total sales , turnover of the gross
receipts or Rs 1,50,000 . If the tax payer fails to present a report from an accountant as required
under section 92E then the penalty incurred will be Rs 1,00,000 or more . It is imperative that the
tax payer documents every domestic or international transaction and gets a report from a
chartered accountant in India on or before the requested date to avoid the penalty .
 THE MEASURES TO CURB THE
TAX EVASION
There are three kinds of measures to curb the tax evasion in India which are as fallows
• Legislative Anti - Avoidance Measures
• Judicial Anti- Avoidance Measure
Administrative Anti - Avoidance Measures In India
, the proposed Direct Tax Code , 2010 ( DTC , 2010 ) seeks to address miscellaneous
issues , concerned tax evasion and tax avoidance ; by bringing in General Anti -
Avoidance Rules ( AAR ) , in addition to various transaction - specific Special Anti -
Avoidance provision . The concept of GAAR is not new to India since India already
has a Judicial Anti - Avoidance Rule , similar to some other jurisdictions . The concept
of Anti avoidance rule can better be understood by classifying the method ( s ) of its
implementation into three categories namely :
( i ) measured based upon principles of law interpreted by the judiciary ;
( ii ) General Anti Avoidance Rule and lastly
( iii ) Specific Anti - Avoidance Rule . Discussing each classification herein under
1. Measure based upon principles of law interpreted by the Judiciary Over
the years the Hon'ble Supreme Court has tried to save the interests of Tax
Authorities and the Assesses by interpreting the law according to the
principles laid down by various National as well as Foreign judgments . This
includes range of philosophies and debates regarding “ substance over ' form
' and " abuse of law '
2. General Anti - Avoidance Rule GAAR , as its name suggests , is a set of
general anti - avoidance rules which usually take the form of a legislative
instrument ; better to consider it as a ' catch - all ' for tax avoidance . The
main triggering incident of attracting GAAR lies in the fact that the tax
avoidance schemes are becoming increasingly complex , therefore , it is
getting tougher for the Tax authorities to determine the path for tax
avoidance . 
 GAAR ; A NECESSITY

There are multifarious issues regarding GAAR . Several countries have

codified GAAR in their tax statutes so as to check tax evasion by the assesses
. GAAR has been a part of the tax code of Canada since 1988 , Australia
since 1981 , South Africa from 2006 and China from 2008 10. The merits of
introducing GAAR with regard to Indian perspective are as follows :
Checking abuse of Double Taxation Avoidance Agreement and in turn
protecting the revenue interest of India

India entered into Tax treaties with over ni 70 countries to ensure that the
income taxed in one country is not taxed again in the other . " Mauritius and
Singapore are the most preferred jurisdiction for structuring investments into
India in view of liberal business environment offered by Mauritius and the
benefits available to the assesses under the India - Mauritius Tax Treaty .
 ROLE OF GAAR;

GAAR will provide in those instances a statutory right to the tax

authorities to question any transaction which is not made in ‘ good -
faith ” . Tax treaties are usually governed by the Vienna Convention " .
The provisions of the Vienna Convention clearly emphasise that a
treaty should be interpreted and must be performed by parties to it in '
good faith ? ! 4 . Even the underlying principle of treaty shopping can
come under the purview of absence of good - faith.15 The main
problem with treaty shopping is that it breaches
THE VARIOUS ONSHORE AND OFFSHORE METHOD OF TAX
EVASION

Onshore is in no way synonymous with transparency ; and by contrast some

supposedly offshore places are considering opening up . There are numerous ways to
evade / avoid tax and it is difficult to throw light on all such practices nevertheless
some conventional practices of tax evasion / avoidance can be classified as fallows :
• Money laundering Hawala
• Tax Havens
• Transfer pricing
• Trade mispricing

These process are used to evade / avoid both direct as well as indirect taxes . Whereas
money laundering hawala and trade mispricing are more prone to evasion tax heaven
and transfer pricing are typically used as tax avoidance practices nevertheless the
processes are often interrelated and difficult to distinguish in practices
 TAX AVOIDANCE BY
MULTINATIONAL COMPANIES
It is now a well - accepted fact that the multinational companies have developed an
unprecedented know - how for minimizing their worldwide tax pressure , multinational
companies doing huge business in a country and virtually not paying any corporation
tax has provoked some concern in the respective governments that something needs to
be done . In this era of liberalized cross border trade and free capital flows , MNCs
find themselves in considerable freedom to choose where they pay tax on profits .
There are corporations such as Google whose commercial value is derived from a
piece of intellectual property such as a search engine algorithm or a drug patent and
they are thus able to register their profits in tax havens . his is how it works A MNC
registers its intellectual property in a subsidiary company based in a tax haven like
Bermuda or Mauritius . This subsidiary then charges another subsidiary operating in a
big country like UK or India a massive fee for the right to use their intellectual
property . Any trading surplus in these countries is thus offset by the cost of the fee
while profits keep accumulating in tax haven the group company . National
Governments are trying to stop this egregious profit shifting on their own but is
proving to be a herculean task in the light of very complex global tax loopholes .
 Conclusion
Tax Avoidance and Tax Evasion both are meant to reduce the tax liability ultimately, but what
makes the difference is that the former is justified in the eyes of law as it does not make any
offence or breaks any law.
However it is biased as the honest tax payers are not fools, but they can also make arrangements
for postponing unnecessary tax. If we talk about the latter, it is completely unjustified because it
is a fraudulent activity, because it involves the acts which are forbidden by law and hence it is
punishable.
Having been aware of the ill effects of tax evasion, it becomes each one of our responsibility to
support the government by complying with the tax procedures and pay taxes promptly.

As it is rightly said that every drop of water makes an ocean, it can also be said that our small
contribution makes a huge difference in the growth of the
economy. Instead of expecting for change to happen, let us be the change agents who can bring in
a drastic development by just fulfilling our responsibilities promptly.
If each one of us speaks the same language, then there will be least or no scope for us to be
exploited by any institution or authority. So let us fulfil our duties first and claim our rights next.