Abstract
The practice of tax avoidance and tax evasion are two ways to minimize tax liability. Both tax avoidance and tax evasion are related to the strategies used mostly by people and businesses to minimize their tax burden. Tax avoidance is the legal practice of organizing one’s financial arrangements in a way that minimizes the amount of tax owed. Avoiding tax is a legal practice that involves using lawful methods to lower taxes. These are accomplished by taking advantage of legal tax deductions, credits, and exemptions. For example, a company may take advantage of tax breaks for investing in particular places or industries, or a person may make charitable contributions to receive a tax break. On the other hand, tax evasion is an unlawful practice that involves non-payment of taxes intentionally.
Nevertheless, the edge between tax avoidance and tax evasion can be fragmented, and many instances of tax avoidance may cross the limit to such an extent that leads to tax evasion. The objective of this study is to look at the distinctions between tax evasion and tax avoidance, scrutinize some remarkable cases of tax avoidance and tax evasion, and discuss the legal repercussions of these strategies.
Keywords: Tax evasion, Tax avoidance, Tax shelter, offshore tax, Deductions, Exemptions.
Introduction
Tax planning is vital for both companies and people who want to effectively handle their tax obligations and increase their financial assets. Planning for taxes involves using legitimate tax planning techniques that minimize the burden of taxes while staying within the limits of the law. Tax strategy, on the contrary hand, may at times cross the line into avoidance of taxes or even tax evasion, both of which can have severe ethical and legal penalties.
As society has become more conscious of the avoidance of corporate taxes and the use of offshore-level tax havens, ethical considerations of tax preparation have grown more important over the past few years. While avoidance of taxes is legally permissible, it is frequently seen as morally questionable, resulting in greater review from tax officials, media outlets, and people in general.
Research Methodology
The research methodology for this project is descriptive and secondary data has been used. The data has been collected from various sources such online database of legal services, Scc online, Manupatra, and various legal articles blogs, academic journals, and reports. The research involves extensive analysis of the instances of tax evasion and avoidance in India which hamper the Indian economy. A thorough analysis of the recent cases has been made.
Review of Literature
The research paper throws light on the complex and ethical issues surrounding the system of tax planning and which contributes to the ongoing discussion on how to promote fair and responsible tax practices. With the advent of escaping the tax and humans intent to surround themselves with as much money as they can, it limits the government’s source of revenue gathered from tax. The following reviews of literature from an array of sources include:
- “The Economics of Tax Avoidance and Evasion” by Dhammika Dharmapala, Julius Kreeger Professor of Law, University of Chicago Law School, US
In this article, the author has portrayed the necessity of tax compliance in today’s generation with the growth of tax evasion and tax avoidance by people and businesses.
- History of Tax Evasion, avoidance, and Resistance edited by Korinna Schonharl, Gisela Hurlimann, and Dorothea Rohde
This book throws light on the history of tax evasion and how it has been used as a resourceful means to evade taxes by wealthy individuals.
Understanding the concept of Tax
A tax is a monetary charge levied by the government on individuals, business owners, as well as other entities on their revenue, property, transactions, or other factors. The prime objective of tax contributions is to create government revenue to generate funds for public goods and to provide services such as healthcare, education, infrastructure, defense, and welfare programs. The liability of tax that an individual or entity has upon themselves is determined by an array of government-established rules and regulations, such as taxation rates, deductions, exemptions, and credits. Despite the government making huge tax provisions to reduce the tax burden by way of providing exemptions, deductions and so, there has been seen that people and company owners escape tax liability by either avoiding it or by evasion through the filing of incorrect data.[1]
Taxation is a complex and ever-changing field, with various countries, states, and regions having their tax laws and systems. As a result, tax planning and compliance can be difficult for individuals and businesses, necessitating careful examination of financial transactions, investments, and assets to ensure compliance with applicable tax laws and regulations.
Direct and Indirect tax structure
Governments impose two types of taxes on individual people, business owners, and other entities: direct and indirect taxes.
Direct taxes are those paid directly by individuals or entities on their income or assets. These taxes are imposed on the taxpayer’s source of income, wealth, or profits. Direct taxes are called progressive because the total tax paid increases in proportion to the taxpayer’s income or wealth. Income tax[2], corporate tax, capital gains tax[3], wealth tax, and property tax are all instances of direct taxes. The government collects direct taxes directly from the taxpayer.
Indirect taxes, on the contrary side, are imposed on items and services that are bought by individuals or entities. These taxes are borne indirectly by consumers when they purchase products or services. Indirect taxes are regarded as regressive because they impact lower-income groups far beyond higher-income groups. Sales tax[4], value-added tax (VAT)[5], customs duty[6], Goods and Service Tax (GST)[7], and excise tax[8] are examples of indirect taxes. Businesses collect indirect taxes and disburse them to the government. The main difference between direct and indirect taxes is that direct taxes are paid by individuals or entities on the premise of their income or wealth, whilst indirect taxes are borne by customers as a result of their consumption of goods and services. Direct taxes tend to be largely progressive. Direct taxes are commonly considered a way to redistribute wealth and decrease inequality in income because they adversely impact higher-income groups. However, they can be regarded as a burden to taxpayers, particularly those with high incomes. Indirect taxes, on the contrary hand, can be considered a means for the government to earn income while extending the tax liability more uniformly across the population. They can, however, be considered to be unfairly targeting low-income groups, who must spend a larger proportion of their income on basic goods and services.
To conclude, both indirect and direct taxes are two distinct types of taxes for use by governments to generate revenue. Individuals or entities pay direct taxes on their earnings or assets, whereas customers pay indirect taxes on the products and services that they consume. Both kinds of taxes have benefits as well as drawbacks, and the choice depends on the government’s economic, social, and political goals.
Methods used in escaping tax liability
TAX EVASION
Tax evasion is a severe issue throughout India, which is identified as the intentional under-reporting of earnings, exaggerating of deductions, or attempt to hide income to evade taxes that are legitimately due. Under Indian law, it is a criminal offense punishable by hefty fines and imprisonment. The principal reason for evading taxes in India is the country’s growing informal economic system and the widespread practice of misreporting income. The government has taken several steps to reduce tax evasion, including increasing tax rates, introducing stiffer punishments, and instituting technology-driven measures to detect and deter tax evaders.[9]
In India, the Income Tax Department is in charge of identifying and trying to prosecute instances of evading taxes. Regular audits and investigations are performed by the department to find people and companies who really are underreporting one‘s revenue or grossly exaggerating their deductions. Those who also file which contains and then use data analytics to figure out tax evasion patterns. The government has additionally taken several steps to encourage taxpayer compliance, such as the implementation of the Goods and Services Tax (GST) regime, which has streamlined the taxation system and made it simpler for business owners to comply with tax regulations. Incentives and schemes are additionally introduced by the government to enable taxpayers to file their tax returns on time and precisely disclose their income.
TAX AVOIDANCE
Tax avoidance is the legal practice of limiting tax liability through lawful methods such as tax planning, and investment plans, and trying to take advantage of government tax deductions. This is not the same as tax evasion, which refers to the illegal act of purposefully concealing, for avoiding paying taxes. Tax evasion is a standard procedure among companies and individuals in India since tax laws are challenging as well as innumerable possibilities for lowering tax liability through legitimate means[10]. Taking advantage of financial incentives, such as deductions for investments in certain sectors or donations to certain social benefit programs, are instances of avoiding tax in India.
The Indian government has taken several steps to curb tax avoidance, including increasing tax rates, introducing stricter tax laws, and implementing technology-driven measures to detect and deter tax avoidance. The Income Tax Department in India is responsible for monitoring and enforcing tax laws and regulations, and they regularly conduct audits and investigations to detect cases of tax avoidance.
Major Causes of Tax Avoidance and Evasion
- High rates of taxation:It can sometimes potentially boost participation in tax evasion or avoidance. When tax rates are extremely high, taxpayers may feel unfairly overloaded, and people are therefore more inclined to look for methods for lowering their tax burden.
- Multifaceted tax laws: Numerous countries’ tax laws are complex, which can result in possibilities for tax planning and avoidance. Taxpayers may have difficulty comprehending and conforming to tax laws, culminating in errors or deliberate tax preparation that could be construed as tax avoidance.
- Violation of law and ethics: Tax avoidance may serve as a legally permissible means of minimizing tax liability, but it can raise moral considerations about equality and fairness in society. Tax evasion is a criminal offense that infringes both the law and standards of ethics.
- Economic impact: Tax evasion and avoidance can also have massive financial effects on society. Tax revenue is critical for funding government programs and services, and when taxpayers avoid or evade taxes; this can lead to a shortfall in government revenue, impacting economic growth, welfare systems, and investments in infrastructure.
- Human tendency:It is said that the human instinct is to avoid paying taxes. As a consequence, they actively sought loopholes in the tax code to avoid paying taxes. Dual taxation policy and concealment of true information for deductions and exemptions.
Methods used in evading taxes:
- False reporting of Income: To evade paying taxes on the entire value of one‘s income, taxpayers may avoid reporting it. It may be achieved by not reporting income from additional sources, like money transfers or offshore bank accounts.
- Exaggerating deductions: Taxpayers may exaggerate their deductions in hopes of lowering their tax liability. This can be achieved by increasing expenditures or asserting deductions for costs that are not truly taxable.
- Not paying the unpaid taxes: Taxpayers may purposefully avoid paying taxes that are legally required to pay.
- Using offshore bank accounts: Taxpayers may be using offshore bank accounts to hide payments to the government and avoid having to pay taxes on the earnings.
Methods used in Tax Avoidance:
- Using tax incentives: Taxpayers might use tax credits to reduce their tax liability. This can be achieved by making an investment in particular industries or making charitable contributions.
- Revenue transferring: Taxpayers can transfer their income to a lower rate of taxation or a purview with a lower rate of taxation.
- Tax shelters: Taxpayers can use tax shelters to delay or minimize their tax liability. This may be accomplished by making investments in particular kinds of investments aimed at lowering taxes.
- Taking full advantage of loopholes in the law: Taxpayers may take full advantage of loopholes in the law to lower their tax liability. It may be accomplished by taking benefits from certain tax deductions or exemptions allowed by law. It is essential to keep in mind that tax avoidance is not ethically wrong when done safely. However, evasion of tax is illegal.
Legal Penalties:
- Underpayment includes charging the interest of taxes.
- Audit and inquiry
- Litigation or Court trails
- Criminal charges, fines, and imprisonment
- Civil liability.
Cases that changed the dynamic of tax avoidance and tax evasion in India
Vodafone International holding v Union of India[11] :
The Vodafone-Hutchison tax case, also known as the Vodafone tax case, is a pivotal event in Indian tax law, encompassing the taxation of a cross-border merger or acquisition payment. Vodafone, a British telecoms company, paid $11 billion for Hutchison Essar, an Indian telecommunications company, in 2007. Vodafone bought the shares of a Cayman Islands-based business that controlled Hutchison Essar in an offshore purchase.[12]
The Indian tax department asserted that the payment was subject to Indian capital gains tax because Hutchison Essar’s underlying assets were located in India. The Indian tax authority determined that Vodafone’s acquisition of a stake in HEL qualified for tax deductions at the source under the Income Tax Act of 1961.[13] Vodafone, on the opposite hand, claimed that the payment was organized to conform to Indian tax laws and did not include the exchange of any assets located in India. In 2012, the Indian government reformed tax laws retrospectively to affirm its right to tax the payment, notwithstanding the offshore nature.
The government argued that Vodafone owed $2 billion in capital gains tax as a consequence of the deal. Vodafone, on the other hand, retained that the government had no authority to tax the transaction because it was conducted between two foreign companies and engaged no assets in India. In 2012, the Supreme Court ruled that it wasn’t a case of evading taxes and reassured Vodafone of its tax liability because the sale of the shares in issue did not amount to the transmission of capital assets within the meaning of Section 2(14) of the Indian Tax Act.[14] The Supreme Court also stated that the transaction implicated the transfer of CGP Investment (Holdings) Ltd, a company incorporated in the Cayman Islands and that Indian Tax Authorities would have no Territorial tax jurisdiction over it.
Nirav Modi PNB Scam:
Nirav Modi, an Indian businessman, and his associates were accused in 2018 of defrauding Punjab National Bank of over Rs 14,000 crore by using fraudulent letters of credit. Modi was additionally accused of tax evasion by understating his earnings and wealth. He was apprehended in London in 2019 and is now imprisoned in India awaiting extradition. The scam, also known as the Punjab National Bank (PNB) scam, is a high-profile financial fraud case that surfaced in early 2018 in India. Modi and his associates are accused of defrauding PNB, one of India’s largest public sector banks, of over Rs 14,000 crore (approximately $1.8 billion) in the case. The fraud was found after PNB submitted a complaint with the CBI alleging that two of its staff members had granted fraudulent letters of credit to Modi’s businesses without obeying correct protocols. Modi’s companies have used letters of credit to access loans from many other banks that were subsequently not paid back. Modi used a complicated web of companies and financial fraud to siphon off funds from PNB, based on the inquiry. The funds were supposedly used to buy assets and real estate in India as well as overseas. Modi and his associates were additionally accused of evading taxes by understating their income and assets.
The case rattled India’s financial and banking sectors, and also the political establishment. It raised questions about India’s banking rules and the responsibility of its banks in the public sector. The case furthermore highlighted the importance of improved visibility and monitoring and supervision in the financial and banking sectors.[15]
HSBC Swiss bank accounts case:
The HSBC Swiss bank accounts case, further known as the HSBC Swiss Leaks, is a hefty tax evasion controversy involving HSBC Private Bank (Suisse) SA, a division of HSBC, a British multinational financial services and banking company. An HSBC Private Bank employee disclosed data on thousands of HSBC’s Swiss bank accounts to the French government in 2008. The records contained information on HSBC’s clients and their transactions, and it disclosed that a lot of them were using the bank’s Swiss accounts to evade taxes in their native countries. The leaked data was later disclosed to other government agencies, including India, the United States, and the United Kingdom, and interrogations were initiated in all of these countries to find out the scope of HSBC’s clients’ tax evasion.
Following the investigations, HSBC aided tax evasion by its clients through a wide range of offerings such as secret accounts, offshore companies, and tax havens. It was additionally disclosed that HSBC had already been advising its customers on how to prevent tax authorities’ identification and covering up the real nature of their transaction data.HSBC consented to pay substantial fines and penalties in all of the countries involved as a result of the investigations, including a record $1.9 billion fine in the United States. In addition, the bank accepted to enhance its anti-money laundering and tax evasion sensing processes.
The Google tax case,[16]
Known as the Google Ireland Holdings case, is a tax conflict between Google and the Indian government regarding the company’s Indian tax obligation.
In 2012, the Indian tax authorities started to investigate whether Google had a fixed place of business in India and if the company’s revenue from Indian advertising companies was subject to taxation. Google had been taking account of its Indian revenue through its Irish subsidiary, Google Ireland Holdings, which was subject to a lower rate of taxation than India.
The Indian tax department issued a demand for Rs 7,900 crore (approximately $1.1 billion) in back penalties and taxes from Google in 2016, claiming that the company had a fixed place of business in India and that its income from Indian advertising companies was subject to taxation. Google confronted the requirement in Indian courts, asserting that it did not have a fixed place of business in India and that the revenue from Indian advertising companies was not taxable in India. The case has been litigated across several phases, even before the Indian Tax Tribunal and the Delhi High Court. The Indian Supreme Court decided on Google’s pursuit in 2021, declaring that the company did not possess a permanent establishment in India and that income generated by Indian marketers was not taxable in India. The court additionally noted that Google had paid any taxes in Ireland, in which its subsidiary was located, and also that India and Ireland had a double taxation contract.
Suggestions
Taxpayers can be educated and directed regarding their tax responsibilities, the significance of conformity, and the repercussions of avoidance or evasion of taxes via campaigns of awareness and education. Streamlining the laws governing taxes can help individuals adhere to the regulations while reducing the lure for the avoidance of taxes and evasion. Increasing enforcement efforts may discourage avoidance and evasion of taxes by additionally sending an obvious signal to taxpayers that failure to comply is not going to be allowed. Openness in tax matters, such as showing the names of the beneficial owners of companies and estates, may help in avoiding instances of tax avoidance and evasion. By expressing knowledge and collaborating to combat tax fraud and avoidance, global collaboration may assist to prohibit avoidance and tax evasion across international borders.
Conclusion
Finally, compliance with taxes, evasion, and avoidance are intricate problems that require an integrated strategy. While paying taxes is essential for an equitable and working society as a whole tax evasion and avoidance are visible important moral and financial obstacles. To encourage legal tax customs, an appropriate equilibrium must be arrived at between urging compliance and preventing breaches through education, simplifying regulation, openness, and cooperation across borders. Governments, businesses, and individuals all stand to gain from equitable and ethical tax practices whenever they operate with one another.
Author: Shuily Biswas.
JECRC University, Rajasthan, India.
[1] Chitrakshi Gupta, ‘Impact of Tax Evasion and Tax Avoidance on Indian Economy’ (2021) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4158909 > ( Last accessed on 29 April, 2023)
[2] Income Tax Act, 1961
[3] Income Tax Act 1961, sec 80C
[4] Central Sales Tax Act, 1956
[5] Value Added Tax Act, 2005
[6] Customs Act, 1962
[7] Goods and Services Tax Act, 2017
[8] Excise Act, 1958
[9] G. Tarun and K.S. Shoba Jasmin, A Study on Tax Evasion in India, 17 INTERNATIONAL JOURNAL OF PURE AND APPLIED MATHEMATICS ,220 , 219-225 (2018).
[10] Daniel Deak, Legal consideration of tax evasion and tax avoidance, Society and Economy(Vol 26, no1, pp 41-85, p50) https://www.jstor.org/stable/41471989 ( Last accessed on 29 April, 2023)
[11] Vodafone international holding v Union of India, (2009) (4) Bom CR 258
[12] Udita Prakash,‘Vodafone Case Analysis’, Legal services India E- journal, https://www.legalserviceindia.com/legal/article-5222-vodafone-case-analysis.html . (Last accessed on 11 April, 2023 at 7: 32 p.m.)
[13] Income Tax Act,1961, s 195 A, Acts of Parliament, 1961 (India)
[14] Income Tax Act, 1961, s 2 (14), Acts of Parliament, 1961 ( India)
[15] Satyaki Deb, ‘All you need to know about the Nirav Modi scam, ipleaders (May 12, 2022), https://blog.ipleaders.in/all-you-need-to-know-about-the-nirav-modi-scam/ . (Last accessed on 11 April, 2023 at 6:12 p.m.)
[16] ‘India vs Google India Private Limited, Income Tax Appellate Tribunal, tpcases.com (19 October, 2022), https://tpcases.com/india-vs-google-india-private-limited-oct-2022-income-tax-appellate-tribunal/(Last accessed on 11 April, 2023 at 7:39 p.m.)