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 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
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
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:
- Tax avoidance involves the legal exploitation of the tax laws to one's
- 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.
- 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
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
- 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
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
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
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