Need for Introduction of Anti-Avoidance Measures - Income Tax - Ready Reckoner - Income Tax

Need for Introduction of Anti-Avoidance Measures Introduction of Anti -Avoidance measure was for the purpose to avoid the situation of tax evasion. Over the years, the terms tax avoidance and tax evasion are used without much distinction. Therefore, to better understand the purpose of introducing Anti-Tax Avoidance measures, it is necessary to be familiar with the concept of and distinction between Tax Evasion, Tax Avoidance and Tax Planning. Tax Planning Tax planning means reducing tax liability by taking advantage of the legitimate concessions and exemptions provided in the tax law. It involves the process of arranging business operations in such a way that reduces tax liability. OECD defines Tax Planning as an arrangement of person s business and or private affairs in order to minimize tax liability. Tax Avoidance Tax Avoidance means taking undue advantage of the loopholes, lacunae or drafting mistakes for reducing tax liability and thus avoiding payment of provision of law and avoiding payment of tax. Tax avoidance takes into the account the loopholes of law. Though it has legal sanction, it means following the provision of law in letter but killing the spirit of law. OECD defines it as an arrangement of a taxpayer s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal is usually in contradiction with the intent of the law it purports to follows . Example Sales and leaseback of assets, so that the depreciation is diverted but the asset remains with the assessee. Tax Evasion Tax Evasion means avoiding tax by illegal means. Generally, it involves suppression of facts, falsifying records, fraud or collusion. It is an attempt to evade tax liability with the help of unfair means. Tax evasion is illegal and would result in punishment by way of penalty, fines and sometimes prosecution. OECD defines Tax Evasion as illegal arrangements where liability to tax is hidden or ignored, i.e., taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities . Example Recording of bogus transactions. It is stated that tax avoidance is a situation when a taxpayer reduces a tax basis simulating one or some actions, which officially fulfil the requirements of tax laws. Therefore, the taxpayer gets a tax benefit. These actions usually are fixated in accountancy not falsifying them. Tax evasion is a situation when a taxpayer transacts contradictory to tax laws generally un fixating real transactions revenue in accountancy. Amongst others there are four basic tax avoidance techniques prevailing in world: Deferment of tax liability Re-characterization of an item of income or expenses to tax at a lower or nil rate Permanent elimination of tax liability Shifting of income from a high-taxed to a lower-taxed person / jurisdiction These techniques are carried out by using following methods: Treaty Shopping- use of favorable tax treaties Creation of artificial intermediary companies in nil/lower tax jurisdiction for utilization of passive funds without bringing them to home country Excessive use of debt over equity Manipulation of Transfer Pricing provisions methodology Use of tax havens Transfer of residence All the above tax avoidance techniques take advantage of inconsistencies and discontinuities in the tax systems through various tax arbitrage techniques. Anti-Avoidance has been introduced in the tax statute or developed by Judiciary over a period to curb the practice of tax avoidance.