This article is written by Ritik Chaurasiya,College – LC-1 ( 1st Year ) Course – LLB ,during his internship with Le Droit India.
ABSTRACT
Every citizen of a country, who earns, has the responsibility to pay a part of his income to the government so that the government can perform its basic functions i.e. providing security to the citizens and doing welfare activities in the country. But sometimes, a person may feel that government is taking his hard earn money, by imposing certain types of tax like GST. In order to escape the tax liability, people either opt for Tax Avoidance or Tax Evasion. The two terms may sound very similar to each other, but in reality both the terms are completely different. The former one does not invite criminal liability, whereas the latter one invites it. There are many differences between the two, in this article, the author has tried to explain the two concepts in detail by using various case laws.
KEY WORDS
Tax Avoidance, Tax Evasion, GST, Unfair means and Penal provisions
TAX AVOIDENCE
Tax avoidance can be understood in a layman’s language, as a legal or acceptable way to either reduce the tax liability or to avoid the liability completely of an individual who is bound to pay certain tax to the government of the nation. In other words, it can be said that it is a way by which an individual uses the loopholes available in the law to escape his tax liability. Tax avoidance is not illegal in India. There are many firms which helps individuals in reducing their tax liability. Tax avoidance is performed by manipulating the accounts of an individual that no breach of tax rules happen.
Though, tax avoidance is legal, but no government wants their citizens to avoid tax. As the tax money is the main source of income for the government. The money collected by the way of tax is used in various welfare activity by the government. Hence, to perform its basic duty, the government needs contribution of citizens in the form of tax. Therefore, the governments make various efforts to curb the loopholes available in the law, so that the citizens can be restricted from tax avoidance.
Characteristics of tax avoidance:
1) Manipulating the available laws for once own benefit.
2) Enjoying absence of specific provision and escaping the tax liability.
3) An arrangement for getting tax advantage
Judicial Interpretation of tax avoidance:
There are Nemours cases in the concept of tax avoidance but the landmark judgment was propounded by Justice Chinnapa Reddy in the famous McDowell’s case. In this particular case, the concept of tax avoidance was explained by the court as, “the art of dogging tax without breaking the tax law”. The concept of tax avoidance can be rooted back to the glass shattering judgment of IRC VS Duke of Westminister, in the case the apex court opined that “Every Man has the right to conduct his affairs so the tax charged in the act would be the least. If he succeeds in ordering them so as to secure this result, then, however ungrateful the commissioners of tax department may be of his ingenuity, the individual cannot be compelled to pay higher tax.”
TAX EVASION
Tax Evasion means using unfair ways to avoid paying taxes. It is a criminal act which is punishable by the law, in which a business entity or an individual keeps their part of income secret for the main purpose of saving an additional amount of tax. This method is not legal/illegal all around the world and it is punishable as well. In layman’s language, it is non-payment of taxes simply by not reporting them to the income tax authorities or by using the deductions which are not legal.
Tax Evasion is very harmful for the growth of any country. As it directly promotes the black money, which is an unreported money that is out of circulation because of the reason that the person in charge of the black money has kept that out of market in order to hide it from the government authorities.
The governments of the various countries are taking measures to curb the tax evasion as it is against the national interest.
Judicial Interpretation of Tax Evasion:
There are various cases with respect to the concept of Tax Evasion. In the matter of Union of India v. Play world Electronics Pvt. Ltd the court stated that “It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges”. In another case of Calcutta Cromotyoe Ltd. V. Collector of C. Ex, Calcutta, The Hon’ble SC observed that “Colourable devices cannot be a part of calculating tax in the country. There are doubtful methods resorting to trick the authority by avoiding payment of taxes cannot be categorised and applauded in this society. Such acts would be considered as criminal in nature.”
Difference between Tax Avoidance and Tax Evasion
The terms Tax Evasion and Tax Avoidance are frequently used interchangeably. These both methods fulfil a similar purpose, which is to reduce the tax liabilities.
The core differences which can be determined from these two methods of cutting taxes are as follows:
- In Tax Avoidance, the payment of taxes dodged by complying with the provisions of tax laws but the ultimate intention of the law is defeated. On the other hand, when the payment of tax is avoided using illegal means such as fraud.
- In Tax avoidance, the advantage is taken from the loop holes in the law and in Tax Evasion, the unfair means is undertaken to evade taxes.
- The Tax avoidance is not performed through sinister intentions but by lawfully complying with the provision of law but in Tax Evasion is further performed through the unlawful and an illegal way of paying taxes and the nonpayer shall get punished.
Indian Government’s Efforts to Reduce Tax Evasion
The Indian government has taken the following efforts to combat tax evasion. Tax evasion is considered a crime in India. The government imposes prosecution and penalties under several Acts. The Income Tax Department has implemented an income tax reward scheme that compensates informants on tax evasion. Recently, India and the United States reached an agreement to prevent Americans from evading taxes through Indian financial institutions. The Special Bearer Bond Scheme (Immunities and Exemptions Act, 1981) allows those who have black money to invest in special bonds. Another was the Voluntary Compliance Scheme (Amnesty Scheme).
The government raised the tax bracket, lowered the deduction rate, and expanded lawful tax evasion techniques. Recently, the government established the Tax Administration Reform Commission to make fundamental changes to tax affairs in order to simplify and streamline tax operations. Previously, India established various committees such as the Taxation Enquiry Committee, the Indian Tax Reforms Committee, and the Direct Taxes Enquiry Committees, among others. The Finance Bill included a provision for auditing concealed transactions in order to combat tax evasion.
CONCLUSION
Tax avoidance and Tax Evasion are two fundamentally different terms. The earlier one is a legal way of reducing once tax liabilities by using the existing loophole in laws into our own use and the latter one is an illegal way of hiding income or net worth from the eyes of the government so that the government can not take away any part of that money in the form of tax. Both the ways of escaping tax liabilities harm the government as it reduces the income of any government. hence, the government always tries to make amendments in the existing laws in order to curb both the practices.
