TAX EVASION new 1 (2)

8/11/2019 TAX EVASION new 1 (2)

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TAX EVASION

INTRODUCTION

Tax Evasionentails the efforts that are made by trusts, individuals, firms, and

various other entities to avoid paying taxes by illegal and unfair means. The

Evasion of Tax usually takes place when taxpayers deliberately hide their

incomes from the tax authorities in order to reduce their liability of tax.

Evasion Tax takes place when the people report dishonest tax that includes

declaring less gains, profits, or income than what has been actually earned andthey even go for overstating deductions. The Evasion of Tax level depends oncertain factors such as fiscal equation which means that people's tendency to

pay less tax declines when the payment due from taxes becomes obvious. Thelevel of Tax Evasion is also dependent on the tax administration's efficiencyand corruption levels.

The level of Evasion Tax also depends on the chartered accountants and taxlawyers who help companies, firms, and individuals evade paying taxes. TaxEvasion is a crime in all major countries and the guilty parties are subjected toimprisonment and fines. The various methods of Tax Evasion are:

1.Smuggling

2.

Customs duty evasion

3.

Value added tax evasion

4.

I ll egal income tax evasion

1. Smugglingis a method of Tax Evasion, following which people export or

import foreign goods through routes that are unauthorized. People resort to

smuggling for they want to avoid paying total customs duties that arechargeable and also when they want to import items that are contraband.


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2.

Customs duty evasionis another method of Tax Evasion under which the

importers evade paying customs duty by false declarations of the description of

the product and quantity. The importers in order to evade paying customs duty

also resort to under-invoicing.

3. Another method of Tax Evasion is value added tax evasionunder which the

producers who collect from the consumers the value added tax evade paying

taxes by showing less sales amount.

4.Many people earn money by means that are illegal such as theft, gambling, and

drug trafficking and so they do not pay tax on this amount and thus this is

another method of Tax Evasion that is called il legal income tax evasion.

Tax Evasion resul ts in the loss of revenue for the government and so ideally,

no one should be indulging in i t and the Indian government must also take

steps in order to stop Evasion of Tax by the people.


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TAX EVASION PENALTIES

Under the Income - Tax Act, 1961, currently in force, the fine for concealingparticulars of income or furnishing inaccurate information ranges between oneand three times the amount sought to be evaded.

A person shall be liable to apenalty if he has under reported the tax bases forany financial year. The penalty shall be a sum, which shall not be less than, butwhich shall not exceed two times the amount of tax payable in respect of theamount of tax bases under reported for the financial year, the code states.

So, if the tax due on an under-reported amount is Rs 100, then the maximumpenalty proposed to be levied is Rs 200 instead of a maximum of Rs 300 at present.

Under Direct Taxes Code (DTC), the tax department, however, intends to armitself with more sweeping powers to impose a penalty.

Under the I-T Act, a penalty is imposed for concealment of particulars ofincome. It is now proposed to levy a penalty on under-reporting the tax base.

Tax experts said at present, if you are able to convince the government that yourintent was not to evade tax, you will be let off without a penalty. But under thenew legislation, even if there is a minor mistake in the calculation of taxableincome or tax liability, the government can impose a penalty for under-reporting.

A finance ministry official, however, said that though a maximum penalty ofthree times the tax sought to be evaded was allowed under the I-T Act, in

practice it was never levied. The official said the penalty is proposed to bereduced under DTC, as the actual penalty imposed was 100-200 per cent in

most cases.

100 per cent penalty, whi ch is the lower limi t, is general ly imposed in practice.

300 per cent penal ty is imposed only in very ser ious cases.


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For willful falsification of books of accounts or documents, DTC has proposedto lower the penalty. It has proposed a penalty ranging between Rs 25,000 andRs 300,000, apart from rigorous imprisonment.

At present, the penalty is at the discretion of the assessing officer. A similarprovision has also been made in case a person willfully attempts to evade tax.

Here, a penal ty of Rs 50,000 to Rs 500,000 is proposed to be imposed i f

the amount sought to be evaded is more than Rs 100,000, along with

imprisonment.

CONTROL OF EVASION

In the past, for checking evasion, stress had mostly been on legislative measures,forgetting that equal importance is to be given to administrative aspects.

In the discussion to follow, some suggestions for checking evasion, through

legislation, and for improving compliance to tax laws are being mentioned. As

indicated earlier, the problems need to be tackled in two ways -- by legislation and

taking effective administrative measures.

A number of countries have incorporated provisions in their tax laws to check

unintended use of tax laws to avoid payment of legitimate taxes.

Laws of countries like Argentina and Australia contain provisions to check tax

avoidance through transfer pricing and cross-border transactions, which are not

arms length deals

In Malaysia, legislation permits the revenue authority to disregard or verify a

transaction that is believed to have the effect of tax avoidance. Some countries

follow 'group' taxation system to avoid tax pilferage.

The German income tax law has anti-abuse rules, which provide for ignoring

unjustified reduction brought about in withholding taxes under a treaty or directive

shopping.

In Hong Kong, wholly artificial or fictitious motivated transactions, including

cross-border big ticket leasing can be disregarded. Similar provisions can be

incorporated in our tax laws too to plug revenue leakage caused through crafty

manoeuvres.


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CASE STUDIES

CASE STUDY ON KINGFISHER- KINGFISHERACCUSED OF EVADING 35 CRORES TAX IN

PLANE DEAL


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Kingfisher Airlines, owned by liquor baron and Rajya Sabha MP Vijay Mallya,

has come under the scanner of the state commercial tax department for tax evasion.

In an order, dated February 11, 2011, the department has asked Mallya to cough up

tax and interest amounting to Rs 35 crore on sale transaction of an Airbus A 319

133 CJ, a plush aircraft the MP has allegedly used personally.Challenging the tax evasion notice, Mallyas firm moved the High Court of

Karnataka. When the case came up for hearing on April 4, Justice H G Ramesh

asked the commercial tax department to look into the matter afresh. He neither

upheld the tax evasion notice nor quashed it.

They (Kingfisher Airlines) have evaded tax on sale transaction of an Airbus

plane, KM Shivayogi Swami, advocate for the commercial tax department, told

Bangalore Mirror. The department has ordered the airline to pay tax for thetransaction carried out in the state.

The commercial tax department maintains that the sale transaction between

Mallyas firm and another company, identified as C J Leasing (Cayman) Limited,

took place in Bangalore, and the sale agreement was registered at a sub-registrars

office in the city. But Kingfisher Airlines, in its petition to the high court, has

stated that the transaction took place in Germany, and so it is not liable to pay any

tax to the state.

Case history

Kingfisher Airlines placed its order for the aircraft with Airbus Industries,

Hamburg, Germany, in 2006. The price of the aircraft was $61,093,550its

standard equipment costing $33,321,040 and customised equipment $27,772,510.

An invoice, dated November 20, 2006, states that the airline bought the aircraft

with both standard and customised equipment. However, the aircraft remained inthe custody of the manufacturer until it was delivered to the airline on November

28, 2006.


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In the intervening period, Kingfisher entered into a sale and lease-back

arrangement with C J Leasing for the standard equipment. Accordingly, the

equipment was sold to C J Leasing (Cayman) Limited on November 23, 2006, and

subsequently to C J Leasing (Ireland) Limited. Later, the airline took back the

standard equipment by entering into a lease agreement with the latter.

Thus, the airline actually owned only the customised equipment of the aircraft. To

bring the aircraft to India, Mallyas firm obtained a certificate of airworthiness

from the German authorities on November 28, 2006. To induct the aircraft in the

Kingfisher fleet, it was necessary to register it with the DGCA. That was done on

November 29, 2006, and the aircraft got its registration marking VT-VJM the same

day.

Bone of contention

According to Kingfisher, the aircraft was not in India on November 23, 2006, but

the commercial tax department is claiming that it has records and bills to show that

the aircraft was imported to India on November 20, 2006, in the name of M/s

Kingfisher Airlines Pvt Limited, Bangalore.

The commercial tax department in its order has charged Kingfisher Airlines for not

paying tax on the sale transaction of Air Bus A 319133 CJ conducted in the city

on November 23, 2006. The department has levied a total amount of

Rs.35,65,70,204 on the airline. It includes an interest of Rs 14,45,55,488, a penalty

of Rs 1,92,74,065 and valueadded tax (VAT) of Rs 19,27,40,651.

The sale and purchase agreement between Kingfisher and C J Leasing (Cayman)

Limited, dated November 23, 2006 and registered in the office of sub-registrar,Shivajinagar, is the ground for the commercial tax departments stand. The place

of entering the agreement is Bangalore, Swami said. Our contention is based on

the 20th Century Corporation Limited vs state of Maharashtra and others case. The

Supreme Court of India has held that the place of agreement is the place of sale


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irrespective of the location of goods.

The denial

Kingfisher Airlines has filed a writ petition in the high court, denying the charges

and seeking that the tax departments order be quashed. Their stand is different,

Swami said. They are claiming that the state commercial tax department cant

levy tax as the transaction took place in international space.

The high court, after taking into account both Kingfisher Airlines petition and

commercial tax departments objections, has directed the latter to pass an order

after a fresh inquiry. Commercial tax sleuths, however, are confident of that thecompany would be asked to pay up.

When contacted, Prakash Mirpuri, chief of corporate communications, UB Group-

Kingfisher, said he would respond only if Bangalore Mirror posed its queries in

writing via e-mail. Accordingly, a mail was sent to him on Wednesday evening,

but it got no reply till it went to print on Thursday night.


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2ndCase Study - HASAN MOHAMMAD ALI

Rs 35,000 crores is the estimated size of what could be the biggest income taxevasion scam in this country, reports CNBC-TV18. A six-storeyed building inPune's Koregaon Park area belongs to Hasan Mohammed Ali - an affluent businessman having interest in horse breeding, exports, and of course horse racing. But acasual raid by the Income Tax department has opened up a can of worms on hislife style.

The IT Department smelled a rat and raided Ali's offices in Pune, Mumbai,Hyderabad and Kolkata between 5th and 7th of January this year where they cameacross Ali's computer. The hard disc contained details of transactions totalling toRs 35,000 crores in 10 Swiss bank accounts.


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"We can't confirm or deny anything right now," says DV Dharmik, Chief ITCommissioner, Hyderabad. The Finance Ministry was informed immeditely andthey handed over the case to the Enforcement Directorate. Accordingly, a team offour senior officers was sent to Switzerland between January 15-19. Details ofseven out of the 10 accounts were found matching and the Government of Indiaasked for the accounts to be frozen.

Ali has been questioned in this respect on various ocassions but has not beenarrested so far due to lack of evidence. The IT department, meanwhile, is beingtight lipped about the matter.Sources say Hasan Ali may be charged with a penalty of nearly Rs 40000 crores.

What started as a random scrutiny is turning out to be the biggest case in thehistory of income tax investigations. The Enforcement Directorate is now waiting

for details from the Swiss bank to finally nail Hassan Ali. But the real question is -where did this huge amount of Rs 35,000 crore come from and who are the other

bigger players.


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3.Tax evasion case: Rs 50cr notice on

Delhi Tivoli Garden Resort.

The Tax department of Delhi government slapped a notice of Rs 50 crore on aprivate resort in a tax evasion case in which city Lokayukta had recommendedsacking of PWD minister Raj Kumar Chauhan for trying to protect it.

Top officials said the notice has been served on Tivoli Garden Resort hotel askingto pay the amount in the tax evasion case which has been pursued by the ValueAdded Tax department of the government for the past 10 months.

"They have been served a demand notice of Rs 50 crore" a top Tax departmentofficial told PTI.

The notice has been slapped for evading tax by the resort from the year 2006 to2010.

When contacted, a Tivoli Garden official said they had not received any noticefrom the government. In an unprecedented order, Delhi Lokayukta last month hadrecommended sacking of Rajkumar Chauhan from Delhi Cabinet for trying to

protect the resort in the tax evasion case, holding him guilty of "misconduct ofgrave nature".


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TAX AVOIDANCE

Tax Avoidancemeans the tax regime's legal use for one's own personaladvantage so as to lessen the tax amount that is payable to the government byways that are legal. The Avoidance of Tax is usually done by the people whodesire to keep their money with themselves and not give it to the government.

Avoidance Tax includes situations when people eliminate or reduce tax byfollowing a transaction or many transactions that are legal. The income taxdepartment provides many provisions through which the people can go for TaxAvoidance such as refunds, credits, benefits, and many other kinds ofentitlements. The various methods of Tax Avoidance are:

1.

Legal enti ties2.Country of r esidence

3.

Double taxation

1. Legal entitiesare a method that people follow when they want to go for TaxAvoidance. Under this method of Avoidance Tax, people legally defer paying

personal taxes by creating a legal separate entity to which they donate theirproperty. The legal separate entity that is set up is often a foundation, company,or trust. The properties are transferred to the trust or company, as a result ofwhich the income that is earned belongs to this entity and not by the owner.

Usually, people are taxed personally on earnings and property that they ownand thus by transferring property to a legal separate entity, individuals canavoid personal taxation although certain taxes such as corporate taxes are stillapplicable. In order to go for Tax Avoidance, the foundation, company, or trustcan also avoid corporate taxes if the entity is set up in a jurisdiction thatconsidered offshore.

2.

Countr y of residenceis another method that people adopt when they go forAvoidance of Tax. Under this method of Tax Avoidance, the company or

person changes the tax residence to a place that is a tax haven in order to lowerthe amount of taxes that they pay. Under this method, the person may alsobecome a regular traveler so that taxation can be avoided.


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3.

Double taxationmeans that many countries charge taxes on the income that hasbeen earned inside that country without taking into consideration, the residentcountry of the firm or person. So that people do not have to pay double taxes,once in the country where the income has been earned and then again in theresident country, many countries have gone for bilateral treaties of doubletaxation with other countries. This helps tax-payers as they are able to avoid

paying double taxes. We will study about it in detail.

Tax Avoidance reduces the revenue of the government and also bri ngs into

disrepute, the tax system. I deall y, Avoidance of Tax should not be encouraged

and the government should also take measures in order to prevent it.


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Double taxation

Double taxation occurs when an individual is required to pay two or more taxes forthe same income, asset, or financial transaction in different countries.Doubletaxationoccurs mainly due to overlapping tax laws and regulations of thecountries where an individual operates his business.

When an Indian businessman makes a profit or some other type of taxable gain inanother country, he may be in a situation where he will be required to pay a tax onthat income in India, as well as in the country in which the income was made! To

protect Indian tax payers from this unfair practice, the Indian government hasentered into tax treaties, known as Double Taxation Avoidance Agreement

(DTAA)with 65 countries, including U.S.A, Canada, U.K, Japan, Germany,Australia, Singapore, U.A.E, and Switzerland. DTAA ensures that India's trade andservices with other countries, as well the movement of capital are not adverselyaffected.

Capital gain tax rates

Under Section 90 and 91 of the Income Tax Act, relief against double taxationisprovided in two ways:

Unilateral Relief

Under Section 91, the Indian government can relieve an individual fromdoubletaxationirrespective of whether there is a DTAAbetween India and the othercountry concerned. Unilateral relief may be offered to a tax payer if:

1. The person or company has been a resident of India in the previous year.2. The same income must be accrued to and received by the tax payer outside

India in the previous year.3. The income should have been taxed in India and in another country withwhich there is no tax treaty.

4. The person or company has paid tax under the laws of the foreign country inquestion.


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Bilateral Relief

Under Section 90, the Indian government offers protection against doubletaxationby entering into a DTAA with another country, based on mutually

acceptable terms. Such relief may be offered under two methods:

1.

Exemption method

2.

Tax credit method

Exemption Method:This method is for the residence country to exclude foreignincome from its tax base and the exclusive right to tax such incomes goes to thesource country. This is known as complete exemption method and is sometimes

followed in respect of profits attributable to foreign permanent establishments orincome from immovable property. Indian tax treaties with Denmark, Norway andSweden are of this nature with respect to certain incomes.

Credit Method: It reflects the underline concept that the resident remains liable inthe country of residence on its global income, however as far the quantum of taxliabilities is concerned credit for tax paid in the source country is given by theresidence country against its domestic tax as if the foreign tax were paid to the

country of residence itself.


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Tax EVASION and Tax AVOIDANCE

DIFFERENCEsTax 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.

1.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 thetax liability is understated.

2.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.

3. As such, the black economy comprises the sum total of all the various methods

of tax evasionbut does not include tax avoidance. This means that Tax Evasion is

a part of Black Money Economy but Tax Avoidance is not.

4.Tax avoidance is good. In contrast to tax avoidance, which is recommended and

is a dignified good-sense business, tax evasion is cheating and often referred to as a

crime.

SIMILARITY

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.


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TAX PLANNING

What is Tax Planning ?

Tax planning is an essential part of your financial planning. Efficient tax planning

enables you to reduce your tax liability to the minimum. This is done by

legitimately taking advantage of all tax exemptions, deductions rebates and

allowances while ensuring that your investments are in line with your long term

goals.

What tax planning is not...

Tax Planning is NOT tax evasion. It involves sensible planning of your

income sources and investments. It is not tax evasion which is illegal under

Indian laws.

Tax Planning is NOT just putting your money blindly into any 80C

investments.

Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by

everyone and with a very little time commitment as long as one is organized

with their finances.

Salaried individuals in India are not fully aware of the tax planning exercise whichis why they rush at the end of the tax-planning season and make investments toreduce their tax liability. This has negative effect on tax payable by them and theyeventually end up paying more taxes than they are required to.


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3.

Assert tax advantages on house rent paid-If HRA is not included in the salarystructure then the salaried individuals can asset rent paid by them for residentiallodging. This reduction is accessible under Section 80GG and is smallestamount of the following:

25% of the total earnings or,2,000 every month or,Surplus of housing charge paid over 10% of total salary.

4. Reorganize the salary- Reorganizing the salary and incorporating certainapparatus can help in the long run in minimizing the tax liability. In order toassert tax benefits salary reform is a more competent measure. The followingcan be included in an individual's salary structure:

Food coupons can release up to `60,000 per year from tax.Medical expenses which are compensated by the employer spare upto `15,000 per year.House Rent Allowance (HRA) should be incorporated in the salaries ofindividuals who stay in rented housesTransport allowance discharge upto `800 per month.

5. Go for a combined home loan-The primary reimbursement on a home loan is

entitled for a reduction of up to 100,000 pa and the interest rewarded is entitled

for a reduction of up to 150,000 pa. When a home loan is for a considerable

amount then the interest and chief reimbursement surpass the allotted limit. A

salaried individual can go for a combined joint home loan with his parent,

spouse or sibling, to guarantee the best utilization of tax advantages.

In this way both the owners can assert tax reductions in the percentage of their

stake holding in the loan.


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CONCLUSION

There is nothing which hurts more than payment of taxes. One question that goesthrough every taxpayers mind is how can I reduce my tax liability?

Reducing tax liability is not always a bad or illegal exercise. There are legitimate

ways to reduce taxes through proper tax planning and such methods are always

encouraged. But unfortunately, there is also a tendency to reduce tax through

illegal methods. They are not accepted practice and can invite problems.

After making the project, this is what we have understood as the meaning of all the

three concepts explained in detail earlier :-1. Tax Evasion- Dishonest taxpayers try to reduce their taxes by concealing

income, inflation of expenses, falsification of accounts and willful violation of

the provisions of the Income-tax Act. Such unethical practices often create

problems for the tax evaders. Tax department not only imposes huge penalties

but also initiates prosecution in such cases.

2.

Tax Avoidance- Tax avoidance is minimizing the incidence of tax by adjusting

the affairs in such a manner that although it is within the four corners of thelaws, it is done with a purpose to defraud the revenue. It is the act of dodging

without directly breaking the law. For example if A gives gift to his wife, the

income from the asset gifted will be clubbed in the hand of A. But to avoid this

clubbing provision A decides to give gift to Bswife and B reciprocates it by

giving gift to As wife. This is not tax planning but tax avoidance.

3.Tax Planni ng- Tax planning is arrangement of financial activities in such a

way that maximum tax benefits, as provided in the income-tax act are availedof. It envisages use of certain exemption, deductions, rebates and

reliefs provided in the act.


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TAX EVASION new 1 (2)

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