File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Tax Avoidance

The tax which is collected by the government is one of the important sources of its revenue. It is spent for the administration of the governmentand for public welfare. It is in this view, tax is of great value and when it is not paid by the taxpayer, it affects the government revenue which consequently, affect public welfare.

Although tax is made compulsory to 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

Tax avoidance is a such an arrangement by which a person acting within the letter of law, reduces his true tax liability but it does not follow the spirit of law. People take undue benefit of lacunae and loopholes of law. It covers a host of behavioral responses to the tax code that falls within the letter of law.

There are such behavior which are tax avoidance which are indeed not socially harmful and in fact quite often, the purpose of the legislature is to induce such behavior. For example, tax avoidance can also be used to describe the behavior

of a person who buys tax-exempted municipal bond. However it is not the simple form of tax avoidance which violates the spirit of the law. When people begin to make extraordinary use of complicated tax law to minimize their tax, the tax avoidance can violate the spirit if not the letter of the law.

Characteristics of Tax Avoidance:

  1. Tax avoidance involves the legal exploitation of the tax laws to one's advantage.
  2. Every attempt by legal means Prevent or reduce tax liability which would otherwise be incurred by taking advantage of some provisions in the statute of the country.
  3. An arrangement entered into solely by or primarily for the purpose of obtaining tax advantage.

Methods Used For Avoiding Tax

There may be many methods to avoid tax but the big business houses in india who avoid large some of tax use many strategies to avoid tax in which there is huge role of tax havens and subsidiaries. Movement of assets, shares, deals and money from India to these tax havens through subsidiary is the most favored and advantageous strategy amongst big business houses in India.

Instances Of Tax Avoidance: Case Analysis

Vodafone international holding v. Union of India, SC, 2012

In febuary 2007 the Dutch company Vodafone International Holding acquired 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 organization. With this acquisition Vodafone acquired control of CGP and its subsidiaries including Hutchingson Essar Limited.

In September 2007, Indian tax authority imposed tax on Hutchingson Telecommunication International Limited. the Tax department states the CGP transfer transactionn triggers the transfer or transfers of indirect assests in India.

The Supreme Court of India pronounced the landmark judgement in this case, The court quashed the order of Bombay High Court of demand of 12000 crore as capital gain tax and absolved Vodafone Holding and Hutchingson Telecommunication Limited (non-resident for tax purpose).

The court held that inn Indian revenue authority do not have jurisdiction to impose tax on an offshore transaction between a non-resident company wherein controlling interest in a (Indian) resident company is acquired by the non-resident company in transaction. This is a clear case of tax avoidance.

Commissioner Of Income Tax v/s Provident Investment Co. Ltd, 1954

  • The assessee company, a private limited co. was the managing agent of Malhowji Dharamsi Manufacturing Company ltd.
  • The company entered into an agreement with Dalmia company that on consideration of Rs 1 crore as compensation it will resign from the managing agency.
  • On tendering resignation as managing agent, the company got Rs 1 crore. The question was whether the compensation given to company for relinquishing managing agency is capital gain. Under section 12B of The Income Tax Act which says that 'the tax shall be payable by an assessee under the head "Capital Gain" in respect of any profit or gain arising from sale exchange or transfer of capital assets.

The court said if the company had transferred through sale, then it attracts the liability, but it has relinquished agency for consideration the relinquishment does not mean transfer within Section 12B and hence exemption from tax is legal though immoral.

Steps To Prevent Tax Avoidance

Tax avoidance strategies used by big business houses around the world cause a great deal of loss to the revenue of many governments across the world, including India. It can only be prevented through correcting loopholes in tax laws. Indian government framed certain rules and guidelines in order to regulate and restrain tax avoidance through Income tax act 1961 and Finance Act 2015.

General Anti-avoidance rule (GAAR) was included in Chapter X-A of Income tax Act 1961. The sole purpose of introducing GAAR was to curb tax avoidance strategies through a provision, Section 96 of the Act gives for "Impermissible Avoidance arrangement" which says that arrangement or deals in order to obtain tax benefit were impermissible.

Amendment of section 6(3) of Finance act,2015 was done in order to replace a new test of corporate residence which provides that if effective management is found situated in India, then foreign company will be tax resident of India.

Even though many steps are taken by the government still Tax Avoidance is a persistent issue.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly