INTRODUCTION
Tax is a compulsory contribution levied by the government on income owners without direct benefit but for public benefit. Government levies on individuals or entities primarily serve as a means for governments to raise revenue to cover their expenditures. Taxation has been around for a long time and serves purposes such as providing public services and promoting income equality. Taxation is also used to reduce the redistribution of income and wealth in societies, particularly in the private sector. It also plays an important role in economic development by stabilising income. Taxation helps to solve economic problems like unemployment, inflation, and depression.
Every individual and company uses various ways to lower their tax bills, with the main goal being to minimize their tax liability. To achieve that, three connected ideas in tax management are tax planning, tax avoidance, and tax evasion. These concepts are distinct in their characteristics within tax management. Tax planning helps arrange financial activities to minimize tax legally. Tax evasion means not following tax rules, such as hiding money or lying on tax forms, which is illegal. Tax avoidance is legal but involves finding ways to pay less tax, such as using certain loopholes.
TAX PLANNING
Tax planning is an essential tool for managing your financial situation to lessen your tax liability legally. It encompasses taxpayers using tax exemptions, deductions, and credits to minimize the tax burden. Good tax planning significantly minimizes your tax bill and provides more disposable income for other financial goals, such as retirement, education, etc.[1]
For successful tax planning, it is important to understand tax laws and stay aware of any changes. This helps you legally reduce taxes and optimize your money effectively. With effective tax planning, we can avoid issues like tax evasion or aggressive tax avoidance. Proper tax planning is essential for effective financial management.[2]
OBJECTIVE OF TAX PLANNING
The main objective of tax planning is to reduce tax liability. Along with this, it also has other primary objectives, which are as follows:
- Insure economic stability
- Achieving financial goal
- Productive investment
- Minimise litigation
- Growth of economy[3]
TYPES OF TAX PLANNING
Tax planning can be divided into various types based on different criteria. Here are some common types:
- Short-term tax planning: It focuses on reducing taxes within the current year by adjusting income and deductions.
- Long-term tax planning: It involves reducing taxes over years with strategies like retirement, estate, or investment planning.
- Permissive tax planning: Working within the framework of the law, it utilises government incentives such as deductions and credits to lower taxes.
- Purposive tax planning: It involves planning taxes with a specific objective and structuring financial transactions to lower taxes using legal loopholes or tax shelters.[4]
TAX PLANNING STRATEGIES FOR SAVING TAXES IN INDIA
In India, individuals can save on income tax through various tax planning strategies. Here are some strategies that individuals can use to reduce their tax liability:
- Invest in Tax-Reducing Financial Instruments: In India, taxpayers can reduce their tax liability through exemptions and deductions available from Sections 80C to 80U of the Income Tax Act. Section 80C offers deductions for investments in ELSS, NSC, PPF, and tax-saving FDs. Section 80D covers health insurance premiums, while Section 80E allows deductions for education loan interest.[5]
- Tax-exempt allowances: Under House Rent Allowance (HRA), taxpayers can claim exemptions for rental expenses with receipts[6]. Other allowances like Leave Travel Allowance (LTA) and conveyance allowance are also tax-exempt, given appropriate proof is submitted.
- Maximize saving: Individuals can save money by claiming deductions for expenses such as home loan interest, medical expenses, tuition fees, etc. Provisions related to deductions are given under various sections of the Income Tax Act.[7]
- Splitting income: Individuals can minimize their tax liability by splitting their income with family members, such as spouses or children, who are in lower tax brackets. This can be achieved by making investments in their names and by naming them as nominees in investments, etc.[8]
TAX AVOIDANCE
Tax avoidance means minimizing tax liability legally by taking advantage of legislative ambiguities and loopholes. Some methods include structuring transactions, using tax credits and deductions aggressively, or rearranging financial affairs for tax advantages. Tax avoidance can go against the spirit of the law and reduce public revenue, affecting government spending and services. Tax avoidance is seen as immoral because it’s about dodging taxes and delaying payment. It can be identified as an activity performed to avoid taxes while complying with all tax laws and without any illegal intention, falling under Tax Avoidance.[9]
SCOPE OF TAX AVOIDANCE IN INDIA
In India, individuals and companies use tax avoidance strategies, including complex investments for high-net-worth individuals and multinational companies routing investments through Mauritius due to its favourable double taxation avoidance agreement with India.[10]
- Multinational Corporations and Transfer Pricing: Multinational companies engage in transfer pricing manipulation for tax avoidance. Transfer pricing involves pricing goods and services between international branches. They can shift profits to countries with lower taxes, causing significant tax losses in India.[11]
- Tax Treaty Strategies: A common strategy is directing investments through countries with favourable tax treaties with India, known as tax havens, and utilizing Double Taxation Avoidance Agreements (DTAAs). This leverages their tax treaties with India to reduce taxes on capital gains.[12]
- Advanced Tax Planning Strategies for HNIs: High net-worth individuals in India use advanced tax planning techniques, such as setting up family trusts, investing in tax-beneficial insurance products, and utilizing loan-back schemes, to minimize taxes by reducing income visibility and deferring tax obligations[13].
- Real Estate: In real estate, tax avoidance often means saying the property is worth less than it is and claiming more expenses for capital gains. This is done to avoid paying stamp duties and capital gains tax, which is common in many parts of India.[14]
IMPACT AND MEASURES: GOVERNMENT ACTIONS TO COMBAT TAX AVOIDANCE AND STRENGTHEN INDIA’S TAX FRAMEWORK
Tax avoidance in India leads to revenue loss, limiting funds for essential services like healthcare and education. This burden falls disproportionately on lower-income individuals through higher indirect taxes, worsening economic inequality, and slowing national progress.[15]
The government implements measures to prevent tax avoidance. Transfer Pricing ensures fair pricing in international transactions. Place of Effective Management determines tax residency for foreign companies. GAAR, enacted in 2017, aims to curb tax avoidance. These strengthen India’s tax framework, ensuring fair taxation, preventing profit shifting, and enhancing revenue collection.[16]
TAX EVASION
Tax evasion is utilized by individuals and companies to reduce their tax liability through illegal methods, such as hiding income, inflating deductions, and not reporting cash transactions. Tax evasion is a criminal offence punishable by imprisonment and penalties. tax evasion diverts funds from economic and social growth, impacting the country’s income.[17]
COMMON METHODS OF TAX EVASION
- Reporting incorrect information in ITR: Filing Income Tax Returns is a moral responsibility and mandatory under Indian law. Some individuals and companies try to evade tax payments by reporting inaccurate details about their income, investments, or eligible deductions in their returns.[18]
- Offshore Bank Accounts: Some individuals may maintain bank accounts abroad to store their money. Offshore accounts are located outside the country and do not disclose their usage to the income tax department. This allows taxpayers to evade taxes on their income and funds held in overseas bank accounts.[19]
- Smuggling: When certain items are moved from one place to another, either across international or state borders, without paying the required tax or charge. Individuals engage in this illegal activity to evade taxes or altogether avoid paying them.[20]
- Bribery: There may be a situation where a particular amount of taxes is owed and the individual refuses to pay, they may bribe officials to make the tax disappear and avoid payment.[21]
- Forged Documents: Taxpayers conceal taxes by presenting forged documents, like fake receipts for raw material purchases, to inflate expenses and decrease taxable net profit. Similar tactics include using fake documents to claim deductions for charitable donations.[22]
PENALTIES FOR TAX EVASION
- Misreporting Income: Under Section 271(C) of the Income Tax Act 1961, penalties for hiding or understating income can vary from 10% to 300% of the tax liability, contingent on factors such as disclosure and intent.[23]
- Failing to file the ITR: Every taxpayer must file their Income Tax Return (ITR) within the due date for the financial year as per Section 139 of the Income Tax Act, 1961. Failure to do so incurs a late fee, set at ₹5000 from 2020-21, with potential revisions by the assessing officer.[24]
- Failing to get audited: Section 44AB requires taxpayers to audit accounts or provide an audit report. Failure results in a penalty of 0.5% of total sales or ₹1,50,000, whichever is higher. Under Section 92E, non-submission incurs ₹1,00,000 penalty.[25]
- PAN number or not furnishing PAN card number: Providing incorrect PAN in ITR incurs a ₹10,000 penalty. Failure to provide PAN leads to higher TDS deductions, such as 20% instead of 10%. Accurate PAN details are crucial for tax compliance and avoiding penalties.[26]
- Failure to comply with TDS regulations: Failure to obtain TAN incurs ₹10,000 penalty. Late filing of TDS/TCS results in ₹200/day penalty, capped at the TDS amount. Penalties for incorrect or non-filing range from ₹10,000 to ₹1,00,000 as per tax authority discretion.[27]
DISTINCTION BETWEEN TAX PLANNING, TAX AVOIDANCE AND TAX EVASION
Tax planning involves minimizing tax liability by utilizing legal provisions such as deductions, credits, rebates, and exemptions. It is considered both legal and ethical as it operates within the law. Common examples include investing in tax-saving instruments like mutual funds or fixed deposits, and claiming allowances such as House Rent Allowance (HRA) or Leave Travel Allowance (LTA). It aims to minimize tax liability within the boundaries of the law.[28]
Reducing tax liability within the limits of the law but in an unacceptable manner to the government is legal but often perceived as unethical. Practices like not declaring all income, falsifying tax returns, or hiding assets fall under this category. It also aims to minimize tax liability within the boundaries of the law.[29]
Tax evasion involves deliberately and illegally reducing taxes, which is both illegal and unethical. It entails actions such as not reporting all income, falsifying tax returns, or hiding relevant documents or assets. It can lead to severe consequences, including criminal prosecution, fines, and imprisonment. It aims to avoid payment of taxes altogether.[30]
Author(s) Name: Ankush Dhoti (Savitribai Phule University, Pune (DES’s Shri Navalmal Firodia Law College Pune))
Reference(s):
[1] ‘Tax Planning – Definition & Advantages of Tax Planning’ (bankbazaar.com) <https://www.bankbazaar.com/tax/tax-planning.html> accessed 20 April 2024
[2] Ibid
[3] Ibid
[4] CA Abhishek Soni, ‘Tax Planning: Meaning, Objectives & How It Works’(Tax2win, 17 Feb 2021)<https://tax2win.in/guide/what-is-tax-planning> accessed 21 April 2024
[5] ‘TAX PLANNING’ (Franklin Templeton)<https://www.franklintempletonindia.com/investor-education/smart-tax-planning/article/tax-planning/tax-planning> accessed 21 April 2024
[6] Ibid
[7] (Soni n4)
[8] Ibid
[9] ‘Tax evasion & Avoidance in India’(india law offices LLP, 01 April 2023)<https://www.indialawoffices.com/legal-articles/tax-evasion-and-avoidance-in-india> accessed 21 April 2024
[10] Deepti Thakur, ‘Tax Aoidance and Inequality: Connecting the Dots in India’(tax guru,19 April 2024)<https://taxguru.in/income-tax/tax-avoidance-inequality-connecting-dots-india.html> accessed 21 April 2024
[11] Ibid
[12] Ibid
[13] Ibid
[14] Ibid
[15] Ibid
[16] ‘Tax evasion & Avoidance in India’(india law offices LLP, 01 April 2023)<https://www.indialawoffices.com/legal-articles/tax-evasion-and-avoidance-in-india> accessed 21 April 2024
[17]Sunil Kumar D, ‘Tax Evasion- Indian economy notes’(prepp.in , 19 April 2024 )<https://prepp.in/news/e-492-tax-evasion-indian-economy-notes> accessed 21 April 2024
[18] ‘What is Tax Evasion, and What are the Tax Evasion Penalties in India?’(tata aia, 7 December 2022)<https://www.tataaia.com/blogs/tax-savings/what-are-the-tax-evasion-penalties-in-india.html> accessed 21 April 2024
[19]Anjana Dhand, ‘Tax Evasion’(scripbox, 24 october 2023)<https://scripbox.com/tax/tax-evasion> accessed 21 April 2024
[20]‘Tax Evasion in India’(bankbazaar)<https://www.bankbazaar.com/tax/tax-evasion.html> accessed 21 April 2024
[21] Ibid
[22] ( Dhand n19)
[23]‘What is Tax Evasion, and What are the Tax Evasion Penalties in India?’(tata aia, 7 December 2022)<https://www.tataaia.com/blogs/tax-savings/what-are-the-tax-evasion-penalties-in-india.html> accessed 21 April 2024
[24] Ibid
[25] Ibid
[26] Mayashree Acharya, ‘Understanding Tax Evasion and Penalties in India’(cleartax,25 January 2025)<https://cleartax.in/s/tax-evasion-and-penalties-in-india> accessed 21 April 2024
[27] Ibid
[28] Ibid
[29] Ibid
[30] Ibid
