Table of Contents
INTRODUCTION
Any person who is able to avoid taxes is considered to be a wise guy. It is believed Tax Avoidance is a term that signifies a situation in which a taxpayer reduces his tax liabilities by taking advantage of the loopholes and ambiguities in the legal provisions. although Tax evasion is an illegal activity in which a person or entity deliberately avoids paying a true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. To willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax code
The government’s tax is one of the essential sources of revenue. It is spent for the administration of the government and for public welfare. tax is made compulsory for every citizen according to their capability. Many try to escape from their liability or to minimize it. For this they adopt various means like avoiding tax by taking benefit of loopholes of tax law, evading tax by misstatement of their income, or through tax planning by availing the various exceptions applicable to citizens.
Tax Avoidance is not illegal, tax avoidance is some sort of a legally allowable way to reduce the tax burden. It is not completely defined under Income Tax Act 1961.
Characteristics of Tax Avoidance:
Tax Avoidance is a way of reducing taxes through the medium provided by the government but before moving towards those ways, it is important to analyze tax avoidance in depth. Here are the following features for tax avoidance:
- Tax avoidance involves the legal exploitation of tax laws to one’s advantage.
- Every attempt by legal means to Prevent or reduce tax liability that would otherwise be incurred by taking advantage of some provisions in the statute of the country.
- An arrangement entered into solely by or primarily for the purpose of obtaining a tax advantage.
Tax Evasion
Tax evasion is a crime in which an individual or a business entity intentionally underpays or hides a certain amount of income in order to save more amount of taxes. This method is certainly illegal in all countries. Tax Evasion is basically non-payment of taxes by means of not reporting all taxable income, or by taking not allowed deductions. It originated in England between 1920 -1925
Common Methods of Tax Evasion
There are two aspects of not paying taxes when they are due. The first is tax avoidance and the other is tax evasion. The difference between the two is that tax avoidance is basically finding a loophole that exempts you from paying taxes and is not strictly illegal, while evasion is not paying the taxes when they are actually due, which is absolutely illegal. These are some of the ways in which people may avoid/evade taxes.
- Failing to pay the due: This is the simplest way in which someone may evade taxes. They simply won’t pay it to the government, not even when the dues are called for. A person engaged in this sort of tax evasion won’t, willingly or unwillingly, pay the tax before or after the due date.
- Smuggling: When certain goods move from one location to another, across international or state borders, a tax or charge may be payable in order to move the goods. However, some individuals may move these goods in surreptitious ways in order to avoid paying those taxes that evading the tax altogether.
- Submitting false tax returns: In some cases, when an individual files taxes, they may submit false or incorrect information in order to either lessen the tax that they are supposed to pay or not pay it at all. This is also tax evasion since the complete information is not provided and they may actually be paying less than they should.
- Inaccurate financial statements: The taxes that are payable by an individual or an organization may be decided on the financial dealing that have taken place during the assessment year. If false financial documents or accounts books are submitted, ones that show incomes less than what was actually earned, the tax may come down.
- Using fake documents to claim exemption: The government may have provided certain exemptions and privileges to certain strata or members of society in order to ensure they have a bit more financial freedom to progress. In some cases, members who actually don’t qualify for such privileges will get documents created to support their claim of being a part of that group thus claiming exemptions where they are not suited.
- Not reporting income: It could be said that this is one of the most common methods of tax evasion. In this case, individuals just won’t report any income that they receive during a financial year. Not having reported any income, they don’t pay any tax thus successfully evading tax altogether. The simplest example of this would be a landlord who has kept tenants but has not informed the authorities that he has rented the house and is actually receiving an income from it
- Bribery: There may be a situation where there a certain amount due in taxes that the individual may not be willing to pay. In such a case he or she may actually offer a bribe to officials to not make them pay the tax and to make it ‘disappear’.
- Storing wealth outside the country: We have all heard tales of Swiss bank accounts. Offshore accounts are accounts maintained outside the country and information about the dealing in these accounts is not disclosed to the income tax department thereby evading any and all taxes due on that wealth.
Activities relating to Tax Evasion
1. Under reporting income.
2. Inflating deductions or expenses.
3. Hiding Money.
4. Hiding interest in offshore accounts
Difference between Tax Avoidance and Tax Evasion
| Sr. No | Tax Avoidance | Tax Evasion |
| 1 | Payment of tax is avoided though by complying with the provisions of the law but defeating the intention of the law | Payment of tax is avoided through illegal means or fraud. |
| 2 | It is undertaken by taking advantage of loopholes in the law | It is undertaken by employing unfair means. |
| 3 | It is not performed through malafide intention but by complying with the provision of law. | It is performed through the unlawful way of paying taxes and the defaulter may get punishment |
Instances Of Tax Avoidance: Case Analysis
Vodafone international holding v. Union of India, SC, 2012
In February 2007 the Dutch company Vodafone International Holding acquired a 100% stake in CGP Investment (Holding)Ltd, a Cayman Island company for $11 billion from Hutchingson Telecommunications International Limited. CGP manages 67% of the Indian company Hutchingson Essar Limited (“HEL”) through various conversion/practice law organizations. With this acquisition, Vodafone acquired control of CGP and its subsidiaries including Hutchingson Essar Limited.
In September 2007, the Indian tax authority imposed a tax on Hutchingson Telecommunication International Limited. the Tax department states the CGP transfer transaction triggers the transfer or transfers of indirect assets in India.
Judgment:
The Supreme Court of India pronounced the landmark judgment in this case, The court quashed the order of the Bombay High Court of demand of 12000 crores as capital gain tax and absolved Vodafone Holding and Hutchingson Telecommunication Limited (non-resident for tax purposes).
The court held that in Indian revenue authority does not have jurisdiction to impose a tax on an offshore transaction between a non-resident company wherein controlling interest in an (Indian) resident company is acquired by the non-resident company in the transaction. This is a clear case of tax avoidance.
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