AMITY UNIVERSITY CHHATTISGARh

AMITY LAW SCHOOL

taxation

TOPIC- tax avoidance and tax evasion

SUBMITTED TO:
Mr. Siddharth deoras
SUBMITTED BY:
YUKTA KAUSHIK
B.A.LLB(H.) 8th SEMESTER

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 ACKNOWLEDGEMENT

After completing this Research paper, I would like to express my gratitude to many people as
without their respective help and co-operation; the success of this entire research project
work would not have been completed. It gives me a great sense of pleasure to extend my
sincere gratitude to my teacher and guide, who gave me the opportunity to work on this
topic.I am also grateful to all my friends and colleagues for being helpful and for their
constant support.I express my deepest gratitude to my parents who have been the real driving
force for this work and who always helped me even in the most demanding of situations.

Yukta Kaushik

BALLB 8TH SEMESTER

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 TABLE OF CONTENTS

• Acknowdgement..........................................................................................................2

• Introduction..................................................................................................................3

• Research methodology.................................................................................................7

• Tax Avoidance v. Tax Evasion....................................................................................9

• The measures to curb tax evasion and tax avoidance.................................................15

• Further reform suggested regarding the tax avoidance and tax evasion in
India............................................................................................................................18

• Tax avoidance by multinational companies...............................................................20

• Law commission and other official government report on tax avoidance and tax
evasion........................................................................................................................23

• Conclusion..................................................................................................................24

• Bibliography...............................................................................................................26

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 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 of the 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.

In the due course of time this has developed as a great system and gradually different kind of
activities were brought under the purview of this taxation. Today in almost all the countries
collection of tax from its citizens have become the main source of revenue. Significant
growth has led to creation of several developments to handle theses aspects. as it involves lot
of public money , there felt the need of regulation of the system of collection and
administration of the same which has resulted in several enactment and statutes to monitors
the system. Tax can be broadly classified into two types as directs taxes and indirect taxes.
The direct taxes are the taxes where the liability to pay the tax is directly on the affected
person. For example income tax, wealth tax etc. Indirect taxes are the taxes, where the
liability for payment is not directly of the affected person. For example exercise tax, customs
tax, service tax etc. when we talk about tax or revenue collection we generally come across
terms namely tax evasion. The tax evasion is an act on the part of the taxpayer to minimize
the tax liability but breaking the law, i.e., by adapting illegal means. The concept of tax
avoidance is difficult to distinguish from other two. Because tax avoidance is not a clear
concept. It has the component of both tax planning and tax evasion. So, tax avoidance means
planning ones activity in such a way that it should tax burden by taking advantages of the
loopholes in the act. It become problematic issue to determine whether the transaction entered
into by the taxpayer is a tax planning tax avoidance or tax evasion. This is more so because
these terms have not been defined by legislature in precise words and in practice. These is a
very thin different between theses terms and it may not be possible to determine the intention
of the person who is transaction.

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In the early days of the operation of tax system the rates of taxes were comparatively low and
the temptation to conceal income was therefore limited. However, increased in the rates of
taxes on one side and strict punishment for evading the tax on the other side had made the
taxpayer to think about way out by which they can minimize the tax liability but still shall not
caught by law this process has led to a new avoidance. Dealing with issue of avoidance and
evasion of taxes is a challenging one for judiciary because it involves the interest of both the
parties that is taxpayer and tax collector. The former has a right to arrange his activity in such
a way to attract less tax liability and the later has been given power to collect tax as from the
taxpayer provided both are performing their activity within law. Striking the balance between
the two has been a great task for judiciary through out of the world.

Countries like Australia, Canada, Germany, France, South Africa and china have GAAR
provision; India also needs to introduce such provisions to tackle tax avoidance practices.
However for proper implementation of GAAR, there is a need to study closely the
experiences of other countries. In depth discussions are required for distinguishing between
the tax Evasion and on the one hand and abusive tax avoidance practices on the other.

With regards to the double tax avoidance agreement DTAAs), the inclusive of appropriate
limitation of benefits (LoB) causes between India and other countries needs to be considered.
However, if General Anti Avoidance Rules (GAAR) has an overriding power over LoB
clauses, then appropriate application of GAAR in tax avoidance practices assumes a crucial
role. The role and functioning of the dispute resolution panel would also be vital in this
regards.

In the Era of globalisation and liberalisation, competition among multinational corporations

has increased tremendously as result; there may be a natural tendency for such companies to
try to reduce their tax costs by any affordable means. The challenge lies in framing
appropriate legal provision to tackle such practices in an unambiguous manner. The General
Anti Avoidance Rules (GAAR) is crucial in this regards and a policy option for India is to
learn from other countries experiences (those which have adopted and are practicing GAAR)

Proposes introduce General Anti-Avoidance Rule (GAAR), which would erase the thin line
between tax avoidance and tax evasion. India is not isolated in enacting GAAR in its taxing
legislation. It is an established trend among countries to legislate on GAAR to deny tax
benefits for any arrangement structured with the sole objective of tax avoidance. In India, the
law is settled that tax avoidance is legal and evasion is not. A taxpayer may create a device to

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arrange his commercial affairs to minimise his tax liability and its acceptance is based on
operation of law.A company may choose to avoid taxes by establishing their company or
subsidiaries in an offshore jurisdiction. Tax avoidance reduces government revenue and
brings the tax system into disrepute, so governments need to prevent tax avoidance or keep it
within limits. In the judiciary, different judges have taken different attitudes. As a
generalisation, for example, judges in the United Kingdom before the 1970s regarded tax
avoidance with neutrality; but nowadays they may regard aggressive tax avoidance with
increasing hostility.

RESEARCH METHODOLOGY

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Aims and Objective of the Study:
The objectives of this study are stated -

• To ascertain the causes of tax evasion in India.

• To ascertain the causes of tax avoidance in India.
• To ascertain the tax avoidance by the multinational companies
• To ascertain the various measures to curb tax evasion and tax avoidance in India.

Research Question:

• How tax avoidance and tax evasion are different each other?
• What are the various onshore and offshore methods of tax evasion and tax avoidance?
• What have been the measures to curb tax evasion that have been introduced so for?
• What further reform required regarding the tax avoidance and tax evasion in India?

Scope and Limitation of the Study:

Tax evasion and avoidance are problems faced by every tax system. Hence one cannot
possibly undertake a study on tax evasion and avoidance concerning every Tax system. This
researchwiltherefore be restricted to why people evade and avoid taxes in India. This
restriction is due to time, finance manpower and logistics. These are constraints outside the
control of the researcher. The study is also limited to the necessary data available on demand
from the office of the State Board of Internal Revenue.

Hypothesis of the study:

• Taxation, besides being a major source of revenue to the government. It is therefore a
major tool used by government to promote economic growth and development.
However, these have been greatly impaired due to the menace of tax evasion and
avoidance

Research Methodology:
The researcher has used descriptive methodology of research for analyzing the various
provisions relating to tax avoidance and tax evasion in India. The researcher will going
through Act, Article, Journals and web search for the purpose of analyzing the various
provisions.

Sources of data:

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In this research the researcher will rely upon the primary sources which includes the bare act
of income tax. The researcher will also rely upon the secondary sources which includes book
available in the library and article from various journals and also internet sources.

CHAPTER 1

Tax Avoidance v. Tax Evasion:

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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 establishing 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" such as not
paying a percentage of tax equal to the defence budget. In either case, they typically do not
take the position that the tax laws are themselves illegal or do not apply to them (as tax
protesters do) and they are more concerned with not paying for what they oppose than they
are motivated by the desire to keep more of their money (as tax evaders typically are). Some
have suggested the term tax aversion for people who adopt the techniques of tax avoidance in
the service of tax resistance, thereby doing tax resistance legally.

Judicial doctrines, relying on a purposive construction of tax legislation, are being evolved to
prevent tax avoidance involving circular, self-cancelling transactions or where steps with no
commercial purpose other than the avoidance of tax are inserted into a transaction.
Controversially, in the 2004 Budget, it was announced that 'promoters' and users of certain
tax avoidance schemes would be required to disclose details of the schemes to the Inland
Revenue.

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Tax avoidance is the legitimate minimizing of taxes, using methods approved by the IRS.
Businesses avoid taxes by taking all legitimate deductions and by sheltering income from
taxes by setting up employee retirement plans and other means, all legal and under the
Internal Revenue Code or state tax codes. Tax evasion, on the other hand, is the illegal
practice of not paying taxes, by not reporting income, reporting expenses not legally allowed,
or by not paying taxes owed. Tax evasion is most commonly thought of in relation to income
taxes, but tax evasion can be practiced by businesses on state sales taxes and on employment
taxes. In fact, tax evasion can be practiced on all the taxes a business owes.

‘Tax avoidance’ and ‘tax evasion’ are terms so frequently referred to in economic and
business relationships today that they constitute part of our conversational language and
people in general use these terms even without knowing their exact meaning and difference.
Whereas tax avoidance implies a situation in which the taxpayer reduces his tax liability by
taking advantage of the loop-holes and ambiguities in the legal provisions, in the case of tax
evasion, facts are deliberately misinterpreted and the tax liability is understated. Thus, while
tax avoidance is perfectly legal and is, at times, referred to as ‘tax planning’, tax evasion is
illegal and, therefore, carries with it the risk of penalties and prosecutions under the tax laws.
As such, the black economy comprises the sum total of all the various methods of
tax evasion but does not include tax avoidance. Accordingly, whereas the consequences of the
two phenomena are different for the taxpayers, both reduce the revenue of the Exchequer and
consequently need to be checked to the greatest extent possible.

If a serviceman earns Rs.10.0 Lakhs per year, he has very limited scope to avoid tax payment.
He can at best save some money in tax saving schemes and reduce tax liability by at most 20
to 30 thousand rupees. He will have to pay Income tax to the tune of rupees one to two lakhs
as income tax per year. They cannot avoid tax payment but they can if they like, earn bribe up
to any extent to compensate they lose in tax payment. But a manufacturing company earning
profit of more than one corer per year can avoid tax payment completely by using various
tools of tax avoidance suggested by tax officials, tax consultants and Chartered Accountants.

Penalties for Income Tax Evasion in India

Tax evasion has always been a criminal offence in India. There are a number of
provisions relating to prosecution under Chapter XXII of the Income-tax Act, 1961.

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 Failure to file timely return of income, false statement and verification, wilful
attempt to evade tax, fabrication of accounts and documents and failure to deposit
tax deducted or collected at source attract minimum rigorous imprisonment of three/
six months. Removal, concealment, transfer or delivery of property to thwart tax
recovery or failure to afford necessary facilities for the officers during search
operations are some more offences liable for rigid sentences. Abetment of false
return, where it is proved, would land not only the accused in trouble but those who
help him, including those rendering professional assistance, providing for a rigorous
imprisonment for a minimum period of three/ six months and a fine. Where the
offence is rendered by a firm or company partners and the officers, including
directors of the company, may be responsible, unless they are able to prove that the
offence was committed without their knowledge in spite of due diligence on their
part. For the offence of the Hindu Undivided Family (HUF), the karta himself,
besides all members, is deemed to be guilty, unless such members are able to prove
that the offence was committed without their consent or connivance.

Enforcement of law is also made easier for prosecution by statutory presumptions of

culpable mental state placing the responsibility of proving innocence on the
accused. Probation of Offenders Act, 1958, is not applicable for economic offences
under the income-tax law, except for persons below 18 years of age.

The law in India treats tax offences not only as a criminal offence but also has
strengthened the same by statutory presumptions and minimum rigorous
imprisonment subject to a maximum period of seven years. There are number of
prosecutions launched year after year.

Income tax evasion is an crime and can attract severe penalties in India. With advancement
in technology, the compliance with respect to income tax payment is being tracked more
accurately by the Income Tax Department. Further, penalties for non-compliance has also
been increased to widen the tax base and increase tax revenue. Hence, income tax compliance
must be taken seriously by all individuals and entrepreneurs. In this article, we will throw
light on the different penalties tax payer will have to pay under the income-tax act.

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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

If a demand notice is sent to the tax payer asking for payment of tax then the tax payer has to
pay that amount in 30 days to the department and the person mentioned in the notice. Failure
to make the payment will incur further penal provisions as well as the taxpayer will be
treated as a default assesses for defaulting in the payment of tax.

Concealing Income to Evade Tax

There have been several cases wherein the taxpayer has tried to conceal the original earnings
or income. The penalty for concealment of income will be 100% to 300% of the tax evaded
as per section 271(C).

If income tax authorities feel the necessity to raid a premise to discover the undisclosed
income of the tax payer in such case the penalty levied will be under section 271 AAB. The
penalty varies under different scenarios:

• If the tax payer admits the undisclosed income then only 10% of the previous
year’s undisclosed amount along with interest will be required to be paid. OF
course all the undisclosed income will invariably have to be declared.

• If the tax payer does not disclose the undisclosed amount but does so in the
return of income furnished in the previous year- in such case the penalty
would be 20% of the undisclosed amount along with interest.

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 • If the amount is undisclosed for the previous year then minimum 30% and
maximum 90% penalty can be levied.

Penalty for Not Filing Income Tax Return

If the return of income is not furnished as required under section 139, sub section (1) then the
assessing officer can penalize the tax payer with a penalty of Rs 5000/-.

Penalty for NOT Getting Accounts Audited

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.

If any documents are not furnished or attached under section 92(D) 3 then a penalty of 2% of
the value of the transaction (international or domestic) will be imposed.

Failure to Comply with Income Tax Notice

If the tax payer fails to comply with the notice issued under section 142(1) or 143(2) then the
assessing officer can issue a notice to the tax payer asking (a) to file the return of income (b)
ask the tax payer to furnish in writing all the details of assets and liabilities.

Failure to Comply with TDS Regulations

Every person who deducts tax at source or collects tax at source is also required to collect the
tax deduction account number or the tax collection account number (TAN). The failure to
obtain this tax deduction or collection number calls for a penalty of Rs 10,000. Failure to
obtain the numbers could also mean quoting incorrect tax deduction or collection number.

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If tax is not collected at source then the penalty levied would be the amount equal to the tax
that was not deducted or paid. If the tax payer fails to file TDS/TCS returns before the due
date then the taxpayer is liable to pay taxes for each day till the date the payment is made.
Late filing fees for delay in TDS/TCS returns can be avoided by filing TDS/TCS returns
before the prescribed due date. The penalty imposed for not filing TDS/TCS returns before
the due dates can start from Rs 10,000 and go up to Rs 1, 00,000. Late filing fees and interest
will have to be paid to the credit of the government.

Failure to Pay Dividend Distribution Tax

As per section 115-O, if a company fails to pay dividend distribution tax on the dividends it
has shared then the penalty incurred would be the amount equal to the tax that was not
deducted or paid.

Failure to Retain Information & Documents as per Income Tax Act

Failure to retain appropriate information, documentation and more pertaining to international

or domestic transaction will attract 2% penalty which is a sum equal to the value of each
international or domestic transaction. The transaction details have to be entered by the tax
payer. Each transaction copy has to be maintained for an eight year period. When demanded
by the Income tax authorities the documents should be presented to the officer within 30 day
period. Failure to do so will attract penalty.

Failure to Furnish Accurate Information

If a tax payer does not furnish accurate information or finds out about inaccuracy of the
furnished details after submission but does not get it corrected within ten days of submission
or knows about the inaccuracy during submission but does not inform the income tax
authority then the penalty could be a payment of Rs 50,000/-. Penalty revisions are being
done to make rules stringent for inaccurate detail submissions and will soon be notified.

There are also relaxations on penalties for genuine and deserving cases. The commissioner of
income tax has the power to completely forego or reduce the penalty if all the facts are
clearly presented.

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CHAPTER 2

THE MEASURES TO CURB THE TAX EVASION:

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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 (GAAR), 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:

• 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’

• 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. To put in simple words GAAR is basically an attempt
to strike down avoidance of taxes that was not understood a probable method of tax evasion

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at the time of drafting any taxation statute. The difficulty with having such a broad scheme
has been heavily debated in various countries as and when they grappled with the thought of
introducing GAAR.

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. 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 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’.Even the
underlying principle of treaty shopping can come under the purview of absence of good-
faith. The main problem with treaty shopping is that it breaches the reciprocity of a Tax
treaty entered into between two sovereign nations and instead it extends the Treaty benefits
meant for residents of Treaty partner countries to those of a third parties which is not
signatory to the Treaty and may not reciprocate corresponding benefits. Hence the
importance of GAAR to protect the revenue interest of a nation is unquestionable.

Creating certainty in Indian tax regime

Canadian tax laws contain GAAR provisions since 1988 is intended to prevent abusive tax
avoidance transactions or arrangements but at the same time is not intended to interfere
with legitimate commercial and family transactions.

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 Consequently, the new rule establishes a reasonable balance between the protection of the
tax base and the need for certainty for taxpayers in planning their affairs....” Hence the
GAAR, under the Finance Act, 2012 aimed to create a certainty in taxation laws aftermath
the decision of the Vodafone case. But it also needs further re-consideration before
practical implementation.

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.

CHAPTER 3

FURTHER REFORM SUGGESTED REGARDING TAX EVASION AND TAX

AVOIDANCE IN INDIA-

In a globalising environment, tax reforms can serve a multitude of needs. They can help
enhance revenue productivity, reduce economic distortions, and help create a stable and

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predictable market environment. Given the growing mobility of capital and skilled labour
which raises new tax issues continual reforms also serve, simply, to keep the country up-to-
date with changing conditions. Furthermore, tax reforms can help address equity concerns.
However, unlike in the past, equity in tax policy should not involve reducing the incomes of
the rich, but raising those of the poor. Hence, there needs to be a paradigm shift, away from a
socialistic focus on vertical equity (i.e. the unequal treatment of unequal’s) and towards
horizontal equity (or the equal tax treatment of equals). Until very recently, this
preoccupation with vertical equity in the Indian tax system created enormous incentives for
tax avoidance. While this is starting to change, many reforms remain unfinished. In response
to its changing developmental strategy, India’s tax system, too, has been undergoing profound
changes. Within the framework of a closed and heavily planned economy, the tax system was
based on multiple objectives.

While this system may have been sustainable within a closed economy in today’s globalising
world, it is more critical than ever to put in place an efficient tax system. A competitive tax
environment means that a country’s tax policy must be calibrated on three levels:
architecture, engineering, and management. Paradoxically, an open economy presents bigger
challenges in setting tax rates - since there are fewer ‘degrees of freedom’ available to
policymakers. In such an environment, not only do tax rates impact foreign investment, but
they can also shift the incidence of taxation in unexpected ways. (For instance, studies find
that, in a small open economy, a tax on capital can effectively become a tax on labour.)
Hence, being a large and complex economy, India needs to learn from worldwide best
practices, but apply them judiciously to meet its specific needs. In an increasingly-open
economy such as India’s, there is a need to focus on the efficiency aspect of the tax system
more than ever before. This means minimising three different costs: the cost of collecting
taxes; the compliance costs to taxpayers; and the distortion costs to the economy at large.
(One such distortion, in India’s case, is an excessive reliance on tax revenues from the
(largely State-controlled) petroleum sector - which has a cascading impact on other areas of
the economy.) Given that distortions tend to increase with higher marginal tax rates, a simpler
system with lower tax rates is desirable.

Finally, three additional points must be kept in mind while tracking the progress of tax
reforms in India. First, legal reforms are just as important as tax reforms in driving changes in
this area. Second, as the experience of VAT demonstrates, it is critical to have coordinated
reforms, across States, especially in the area of indirect taxation. Third, it will require great

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political will to ensure that the existing, discretionary policy and administrative framework is
not further perpetuated. Having seen the influence of the tax mix and tax policy on capital
formation, it is necessary to ensure that these policies promote growth with equity. The
various recommendations of the Chelliah Committee, which were implemented in India
during the 1990s, were targeted at removing loopholes in the direct tax system and providing
horizontal equity. However, there are still difficulties with the present income tax system and
the current tax policies do not adequately address issues relating to vertical equity There is a
dilemma as to whether to consider personal income or expenditure on personal consumption
as the base of direct taxation. Taking expenditure as the tax base poses a lesser problem since
it taxes what people take out of the economic production system rather than what they put
into it. Moreover, a progressive expenditure tax falls more heavily on the rich who are using
capital resources to finance their consumption expenditure and, at the same time, it provides
greater opportunity than progressive income tax to finance the development of private
enterprises out of private savings. As the economy moves from the take off stage to the stage
of high mass consumption, it is better to levy tax on personal consumption expenditure, since
it promotes vertical equity.

CHAPTER 4

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

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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.

A natural solution is to have an international agreement by all countries to tax the profits of
multinational firms collectively and divide the revenues based on the amount of business
done by these companies in various territories. American states have long operated a system
known as “apportionment”. It may sound difficult but in the long run and in the wake of very
widespread tax avoidance by MNCs, this sort of arrangement is perhaps the only viable
solution. In the era of globalization and liberalization, competition among multinational
corporations has increased tremendously. As a result, there may be a natural tendency for
such companies to try to reduce their 'tax costs' by any affordable means. The challenge lies
in framing appropriate legal provisions to tackle such practices in an unambiguous manner.
The General Anti Avoidance Rule (GAAR) is crucial in this regard, and a policy option for
India is to learn from other countries' experiences (those which have adopted and are
practicing GAAR). India today said the stand taken by the G20 nations that profits of
multinational companies should be taxed where economic activities deriving the profits are
performed and where value is created is an "important landmark" and it validates the
country's position.

Multinational companies operating in India will have to pay more tax on royalty they
earn from their Indian subsidiary, as the government has announced an increase in
the tax on royalty and fee payments made by Indian subsidiaries to foreign parent

from 10 to 25 per cent. One of the main ways tax evasion occurs is through ‘transfer
pricing’. This is when goods and services are sold between subsidiaries of the same parent
company. These goods and services also include things like intellectual property rights,

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management services, branding and insurance. The sales take place within the same
multinational company.

As long as the subsidiaries of the company charge each other a fair market price – known as
an ‘arms length’ price – such transactions are perfectly legitimate. Tax is paid where it should
be, in the place where the business is actually taking place. However, by artificially altering
the price, the company can increase its costs in a location with high taxes and transfer
revenue to a location with low taxes (often a tax haven). This is known as ‘transfer
mispricing’, and in many countries (including Australia) it is illegal.

The methods of tax avoidance by MNCs in developed countries are well documented,
although there is a lack of reliable and consistent data, whereas those for developing
countries are less well understood. The method revolves around shifting income from higher-
tax to lower- or no-tax countries.

Profit shifting strategy

This is achieved by limiting operational activities (and related income) in the higher tax state,
by moving them to a subsidiary located in a lower-tax state.
Transfer pricing-

This is the setting of prices for transactions between companies that are part of the same
MNC. In the past this mainly concerned physical goods but now involves the rights to use
intangible goods, and use of services such as headquarters' support. Over half of international
transactions are inter-company transactions, and are therefore not at "arms-length" prices, i.e.
as if purchased from an unrelated third party. Where the price is inflated, "abusive transfer
pricing" is said to occur. This is one way to move profits where a subsidiary in a medium or
higher-tax jurisdiction buys products from another group company in a lower-tax country. It
is often not obvious how arms-length prices should be determined. The UK tax authority has
around 65 experts in transfer pricing,

Corporate debt-equity

Inter-company loans given from entities in lower-tax states to subsidiary companies in

higher-tax countries pass interest income to the lower-tax state, reducing the taxable profit in

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the higher-tax country. This profit is further reduced the higher the interest rate or level of
debt. Luxembourg has beneficial tax treatment of interest income.

Payments for intangibles

The pricing should reflect the value of the technology, i.e. how important the technology is in
the creation of the profits An MNC can have a company owning its IPR in a country where
no taxes are payable on licence fees, and then charge its affiliates around the world for their
use.

Shell holding companies

These are found mostly in jurisdictions with an extensive tax-treaty network and offering low
tax rates on dividends and capital gains e.g. Belgium, Ireland, the Netherlands and
Switzerland. The holding company may be a shell company (no real trading, production or
distribution activities) or may have centralised financing, licensing and other management
activities. Shell holding companies are used in multiple ways for tax planning activities.
Hybrid entities-

These revolve around obtaining a deduction of the same cost, such as loan interest, from two
different countries based on the company’s affiliates’ structures Ireland, for example, has
companies that are legally based in Ireland and another country – typically a tax haven, such
as Bermuda.
The many previous attempts to structure business taxes "fairly and uniformly" have not
brought a solution.

CHAPTER 5

LAW COMISSION AND GOVERNMENT REPORT REGARDING THE TAX

EVASION AND TAX AVOIDANCE IN INDIA-
The Indian tax authorities, meanwhile, chose not to make any tax demands on the basis of
the retrospective taxation provisions. After Mukherjee resigned in July 2012, the prime
minister constituted another committee to rework the GAAR guidelines. This committee

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recently recommended in its draft report that (i) the implementation of the GAAR provisions
be deferred until April 1, 2016, (ii) GAAR treaty override provisions not apply in respect of a
tax treaty that includes anti-avoidance provisions in the form of a limitation of benefits
provision (e.g., the Singapore-India treaty), (iii) GAAR provisions not be invoked to examine
whether an entity is a genuine resident of Mauritius when such entity has been issued a tax
residency certificate by the Mauritius Revenue Authority ("MRA") and (iv) capital gains on
listed securities be abolished.

The committee's recommendation that a tax residency certificate issued in Mauritius should
be conclusive proof of residence in Mauritius echoes the law on this point as laid down by the
Supreme Court of India in the Azadi Bachao Andolan case [263 ITR 706 (SC)]. The
Authority for Advance Rulings (a governmental body that provides binding advance rulings
on tax questions brought before it) recently relied on the Azadi Bachao Andolan case to
confirm that a fund incorporated in Mauritius, being the holder of a valid tax residency
certificate issued by the MRA, would be eligible for treaty benefits under the India-Mauritius
DTAA. The Authority rejected the Indian tax authorities' arguments that the fund was
controlled and managed in India since the majority of the fund's board of directors were from
India and that routing investments through Mauritius constituted a scheme to evade capital
gains tax [Dynamic India Fund, AAR No. 1016 of 2012, decision dated July 18, 2012].

The new finance minister, P. Chidambaram, also directed this committee to review the
retrospective tax provisions, promising that such provisions would not be "rashly"
implemented by tax authorities. The committee recently issued a draft report on this subject,
recommending, inter alia, that (i) the retrospective tax provisions be applied prospectively,
(ii) a transaction involving the sale of shares of an overseas company that derive their value,
directly or indirectly, from Indian assets be taxable in India only where such assets constitute
more than 50% of the global assets of the Indian company and (iii) transfers of minority
shareholdings (defined as less than 26%) and interests in registered foreign institutional
investors ("FIIs") not be taxed. The committee also noted that retrospective application of tax
law should occur only in "exceptional" cases and after due consultation with those affected

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CONCLUSION

Given the growing magnitudes of public revenue loss because of tax dodging, governments
of different countries are reviewing some of their tax laws, for instance transfer pricing laws,
to minimise tax avoidance practices. The distinction between tax evasion, tax avoidance and
tax planning remains contentious and needs serious scrutiny. both tax evasion and tax
avoidance) is a serious global issue. While taevasion is relatively straightforward to
understand, the nature of tax avoidance is now increasingly complete requires greater

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examination. There is a need for raising awareness around tax issues, promoting a culture of
tax compliance, increasing tax transparency among multinational companies, and increasing
international cooperation between governments on tax matters. Also, capacity enhancement
of tax administration systems of different countries is required to check diverse and complex
tax dodging practices. Coordination between countries with regard to tax laws is essential; as
variations in tax laws in different jurisdictions might enhance ambiguities, providing scope
for further tax dodging. Global accountability and cooperation of countries with respect to
policies like Tax Information Exchange Agreements (TIEAs) and end of banking secrecy has
become crucial in this regard as well as exchange of essential information regarding national
interests. Modification of tax laws of 'tax haven' countries is an important issue. There are a
number of 'tax havens', which may be used to avoid paying taxes by a number of companies,
which emerges as an external factor beyond the scope of Income Tax Authorities. Unless
global pressure is created on 'tax haven' countries to amend their tax laws to impose certain
taxes on offshore transactions and broaden tax bases on such transactions, it is difficult to
tackle tax avoidance practices. There is a need for clear legal guidelines distinguishing tax
evasion, tax avoidance and tax planning, and those indicating what type of strategies under
what circumstances would be taxable or subject to penalty. On the other hand, there is also a
concern that tax laws should not harass honest taxpayers. In the era of globalization and
liberalization, competition among multinational corporations has increased tremendously. As
a result, there may be a natural tendency for such companies to try to reduce their 'tax costs'
by any affordable means. The challenge lies in framing appropriate legal provisions to tackle
such practices in an unambiguous manner. The General Anti Avoidance Rule (GAAR) is
crucial in this regard, and a policy option for India is to learn from other countries'
experiences (those which have adopted and are practicing GAAR). Countries like Australia,
Canada, Germany, France, South Africa and China have GAAR provisions; India also needs
to introduce such provisions to tackle tax avoidance practices. However, for proper
implementation of GAAR, there is a need to study closely the experiences of other countries.
In-depth discussions are required for distinguishing between 'acceptable' tax avoidance/tax
planning practices on the one hand and abusive tax avoidance practices on the other. With
regard to the Double Tax Avoidance Agreements (DTAAs), the inclusion of appropriate
Limitation of Benefit (LoB) clauses between India and other countries needs to be

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considered. However, if General Anti Avoidance Rule (GAAR) has an overriding power over
LoB clauses, then appropriate application of GAAR in tax avoidance practices assumes a
crucial role. The role and functioning of the Dispute Resolution Panel (DRP) would also be
vital in this regard.

BIBLIOGRAPHY:
PRIMARY SOURCES-
Statue-
1) The Income Tax Act, 1961.

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SECONDRY SOURCES-
Books-
1 jain.Anil Kumar (1987). Tax Avoidance and Tax Evasion: The Indian Case” Modern Asian
Studies, 21, pp 233-255. Doi: 10.1017/S0026749X00013792
2. Acharya, Shankar and Associates, Aspects of the Black Economy in India, National
Institute of Public Finance and Policy, New Delhi, 1985.
3. Gandhi, V.P., Some Aspects of India’s Tax Structure- An Economic Analysis, Vora & Co.
Publishers, Bombay, 1970.

WEBSITES-
1. http://www.cbgaindia.org/files/recent_publications/Tax%20Dodging.pdf
2.http://articles.economictimes.indiatimes.com/2009-08-19/news/27662841_1_tax-evasion-
tax-liability-general-anti-avoidance-rule
3.http://en.wikipedia.org/wiki/Tax_avoidance
4.http://albinet.com/articles/offshore-company/taxes

5.http://biztaxlaw.about.com/od/businesstaxes/f/taxavoidevade.htm

6.http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA
== HYPERLINK "http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA==&Mode=HTML&Locale=english-
skin-custom"& HYPERLINK "http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA==&Mode=HTML&Locale=english-
skin-custom"Mode= HYPERLINK "http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA==&Mode=HTML&Locale=english-
skin-custom"HTML HYPERLINK "http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA==&Mode=HTML&Locale=english-
skin-custom"& HYPERLINK "http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA==&Mode=HTML&Locale=english-
skin-custom"Locale HYPERLINK "http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA==&Mode=HTML&Locale=english-
skin-custom"= HYPERLINK "http://epaper.timesofindia.com/Repository/ml.asp?
Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA==&Mode=HTML&Locale=english-
skin-custom"english HYPERLINK "http://epaper.timesofindia.com/Repository/ml.asp?

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Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA==&Mode=HTML&Locale=english-
skin-custom"-skin-custom.
7.http://www.hm treasury.gov.uk/press_130_11.htm.

8.http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2013/130574/
LDM_BRI(2013)130574_REV1_EN.pdf
9.http://www.mondaq.com/india/x/202402/Export+controls+Trade+Investment+Sanctions/
Recent+Developments+In+India+Aim+To+Encourage+Foreign+Investment

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