181

CHAFTSR - 6

METHODS OF TAX EVASION - CAUSES AND EFFECTS

6 , 1 Importance of s tudy of 'Tax Evasion*

6 .2 Extent of tax evasion and avoidance In India

6 . 3 Causes of evasion and avoidance

6 , 4 Tax avoidance by companies

6 , 5 Tax evasion by companies

6 .6 Tax l i t i g a t i o n by publ ic sec tor under tak ings

6 , 7 Modes of tax avoidance and tax evasion

6 , 8 De tec t ion of evasion cases

6 , 9 Business Income never su f fe r s Income tax - e f f ec t of evasion

181 -

184 -

187 -

195 -

198 -

201 -

204 -

210 -

215 -

183

186

195

198

201

203

210

215

221

" In the reform proposals for income tax and

corporation tax there Is concern to reduce the

special r e l i e f s and concessions - what the

Americans ca l l ' t ax expendi ture ' s , to s t r e s s

the point tha t r e l i e f s through the tax system

make inroads on revenue similar to d i r ec t

expenditures. "

- Sedrlc ^ndford

181 CHAPTBt - 6

METHODS OF TAX EVASION - GAUSBS AND EFFECTS

6 . 1 Itqportance of the s tudy of 'Tax Evasion'

The study of t ax evasion and a n a l y s i s of

unaccounted Income Is Important to r e a l i s e the g r a v i t y of

t h e problem of Tax Reforms. I t he lps to f ind out -

1) Tax p o t e n t i a l ;

11) Ef fec t iveness of tax a d m i n i s t r a t i o n ;

i l l ) Limits to the e f f e c t i v e n e s s of f l scsJ . and

monetary Inbr inging about the neces sa ry

changes;

Iv) I n f l a t i o n and the phenomenon of i n c r e a s e In

p r i c e s p a r t i c u l a r l y in Items such as land

p r i c e s and those of goods of conspicuous

consumption;

v) Ihe l e v e l of tax mora l i ty of the s o c i e t y e t c ,

Prom the da ta r e l a t i n g to the s i z e of t h e

unaccounted Income, a measure of tax p o t e n t i a l of the

economy can be ob ta ined . For example, i f the s i z e of

unaccounted income in a p a r t i c u l a r year i s Rs,10,000 c r o r e

and the average r a t e of tax l i a b i l i t y i s 3 0 ^ then

fe.3,000 c r o r e r e p r e s e n t s tax p o t e n t i a l . The d a t a on t ax

p o t e n t i a l a r e of p a r t i c u l a r s ign i f i cance to developing

economies. Such economies r e q u i r e r e s o u r c e s fo r

development purposes and d a t a on tax p o t e n t i a l provide a

measure of untapped r e s o u r c e s , if there I s an improvement

182

In the conscience of people to pay taxes as provided under

the law and also effectiveness of tax authorities In the

administration of tax provisions. The media pf publicity-

should Increase the consciousness of the people to pay tax

on their own. Just as In the case of family planning

programme, there Is a need of constant action to Increase

the awareness of people to s ocial and economic

responsibilities which would bring about change In the

attitude of the people towards payment of Income tax. Mere

threats of penalties for non-payment of tax liability results

In 'tax planning' to avoid taxes by legal or Illegal means.

Search for new loopholes In the ever-changing provisions of

Income Tax law Is continuous. To some extent, administration

of tax provisions is also responsible for this purpose,

Those who do not approach with clean hands cannot ask for

equity or justice. Lack In effectiveness of tax authorities

In the administration of tax provisions Is ever growing,

This has only culminated In self-assessment tax provisions,

Lack of effective administration of the tax law, the heavy

rate of tax and complicated provisions of the Act are some

of the Important reasons for tax evasion. The developmental

programmes of the Government are ambitious and are full of

revenue pilferage. This requires Increase In tax revenue to

fill up the gap In the resources and the expenditure. The

Intensive and extensive tax measures for the purpose, further

lead to Ineffective administration which In turn leads to

Tax Evasion on the Increased scale. The following vicious

1^3

c i r c l e , therefore , developesi

Bvasion

Resource Gap Msr ^^^/T'l^'^t. ^ .^ -»administration

Increase In tax

Perhaps, none of the parties to the vicious circle are able

to break the same. The common man who Is under constant

pressure of taxes, finds out alternative sacrifice to make

both ends meet.

Data on unaccounted income are an indirect measure

of ineffectiveness in the administration of taxes. Given an

efficient system of tax administration, having necessary

support facilities for collecting information and detecting

defaulters, additional resources can be raised without any

change in the rate structure. !Ihus, the data on size of

unaccounted Income provider an index of tonnlng up that can be

Introduced In tax administration,

Most economies are experiencing serious constraints

in reviving their economies through fiscal and monetary

policies. It is suspected that a part of these constraints

are due to presence of unaccounted income. For example, if

business community possesses liquid resources provided by

unaccounted income credit squeeze Introduced by the

Government, shall achieve a limited success in restricting

expansion of certain industries.

IM

6,2 Sxtent of tajc evasion and avoidance In India

I t i s almost impossible to ascer ta in cor rec t ly the

extent of tax evasion and avoidance in the country because of

numerous d i f f i c u l t i e s involved in the process. Any such

est imate can only be a guess and would involve element of

sub jec t iv i ty . Certain attempts have, however, been made from

time to time to estimate tax evasion in the country. In the

view of National Planning Committee such estimate varied from

Bs,200 crores to Bs,800 c rores . In 1956, Professor Kaldor

estimated that a non-salary income of Bs.576 crores evaded tax

annually and thatkhe amount of income tax l o s t through tajx

evasion was of thqorder of Rs, 200 - 300 crores for the

assessment year 1953-54, even though before the Direct Taxes

Administration Bnquiry Committee he stated subsequently that

t h i s estimates included loss due to tax avoidance as w e l l ,

The Wanchoo Committee has estimated that "the extent

of income tax evaded during 1968-69 would be of the order of

Bs.470/- crores being one-third of Bs,1400 c ro res .

Recently, the Finance Minister Madhu Dandwate

estimated the unaccounted money or 'black money' a t

Rs,40,000 c rores .

There is considerable tax evasion in the case of

r elf-employed persons, professionals l i ke lawyers, doc to r s ,

chartered accountants, producers and manufacturers a t a l l

l e v e l s , businessmen both wholesalers and r e t a i l e r s ,

con t rac to rs , transport agencies, mine-owners and o the r s ,

c r 1£5

A naajor part of the Income tax Is evaded by the persons

belonging to the higher income groups. There is also

considerable tax evasion in the case of small traders*

In spite of the fact that the income tax Act Is

being made stricter year after year, our legislative

provisions could not produce the desired effect. The Income

Tax Officers have extensive powers of search and seizure,

In addition to the penal Interest and penalty provisions,

provisions of prosecution have now been added to stop

evasion of tax. Tax due has to be deposited within one month

of the submission of the return under self-assessment failing

which the assessee Is liable to a substantial penalty, Ihere

is a penalty for concealment, which shall not be less than a

sum equal to the amount sought to be evaded and the maximum

penalty may be twice the amount of tax sought to be evaded,

Penalty is also imposed for not paying advance tax or for

filling a wrong estimate. Then, there is also the provision

of search and seizure under Section 132 of the Income Tax Act,

Provision also exists for prosecution if the tax payer has

concealed Income or if he furnishes inaccurate or wrong

particulars. But all these penal provisions have not brought

about the desired effect in reducing the quantum of tax evasion,

No sooner is a method of concealment is detected,

another method or the same method in another garb is devised,

Thus, a regular game of hide and seek goes on between the tax

evaders and the tax gatherers,

r r^

The data on the size of the unaccounted income

give a measure of tax po ten t l t a l of the economy. For

example, If the s ize of unaccounted incoTie In a par t icular

year is Rs,lO,000 crores and the average r a t e of tax l i a b i l i t y

Is 30^, then Ks.3,000 crores represent tax po t en t i a l . The

data on tax potent ia l is of par t icular significance to

developing economies. Such economies require resources for

development purposes and data on tax potent ial provides

opportunity to increase revenue, provided there is an

improvement in the consciousness of people to pay taxes as

provided under the law and effectiveness of tax au thor i t i e s

in the administration of tax provisions,

Data on unaccounted income are an indi rec t measure

of effect ive administrat ion of tax law. I t a l so r e f l e c t s on

tax provisions which may be ideal for the economy but lack

f e a s i b i l i t y .

However, the extent of evasion cannot be proved with

reference to s t a t i s t i c s , but one of the r e s u l t s i s that tax

r a t e s have been ra ised for higher income brackets to meet the

growing expenditure. Since there was considerable c r i t ic i sm

on the maximum r a t e of tax, the same has been reduced but the

minimum ra t e of tax is increased, the number of Income tax

slabs in case of individuals are reduced. Thus, though the

maximum rate is reduced, the reglour of tax burden continued

and the worst sufferer remained the fixed Income group.

157

6.3 Causes of evasion and avoidance j

Reasons for tax evasion are numerous and vary from

person to person, trade to trade and profession to profession*

However, there are certain common reasons for evasion of

Income tax. According to ft-of. F.W. Taussing^the essence of

tax, as distinguished from other charges by Government, is the

absence of a direct 'quid pro quo' between the tax payer and

public authority. People do not want to pay taxes because

they do not get any direct benefit from such payment. These

people who evade taxes maintain big temples, dharmashalas and

spend a huge sum of money on Sadhus or pilgrimage but they do

not want to pay taxes.

(1) One of the reasons given is that tax has to be paid

under compulsion but charity is voluntary. Another possible

reason is the distrust in the utilisation of public money

collected as tax. People have no faith that the taxes levied

on huge scale are properly utilised for the purpose for which

they are meant. Tax payer earns money by certain means which

are Justifiable or not, legal or Illegal but It is a fact

that they become the owner of that money and once acquired they

feel that the tax which they have to pay constitutes a major

part of their income. The major part of such tax is enjoyed

by Government officers and other engaged in executing public

projects, part of it is a wasted and small part thereof is

used for the purposes for which they are meant. In short, it

is like one thief avoiding to pay to another thief .

188

Paople elect their representative for legislative

council say a member of legislature assembly or a member of

parliament or a municipal council. However, the tax payer

observes that these peoples' representatives use their offices

for themselves. They earn huge Income abusing their power,

Can this be stopped ? They remain undetected and continue to

enjoy their positions, election after election without being

puhished. If these ideals before the people are changed,

there would be an air of sacrifice and tax evasion can be

stopped to a large extent,

(II) Tax payers are not conscious of their responsibilities

towards the society and the country in which they are living.

People blame the Government for difficulties and shortages but

as regards the payment of taxes, they feel as If it is their

right to evade the tax. This is because proper training is

not imparted in this direction. In America, school-going

children are tt|[Ught to fill in an income tax return and they

are taught that they should pay proper taxes. In India,

nothing to talk of school-going children, many of the university

students do not know how to fill in an income tax return.

(III) On the other hand, the Indian Income Tax Act is

highly complicated and constant amendments have been made to

it from time to time. The Income Tax Act, 1961 was expocted

to simplify the 1922 Act, However, in the years that followed

more than 400 amendments were introduced. As a result the

whole Act has become so complicated that even the Income tax

189

a u t h o r i t i e s and tax consultants cannot keep themselves well

acquainted with the l a t e s t amendments along with the e a r l i e r

provis ions . This has, therefore , remained as one of the

reasons of tax evasion.

( iv) However, th is i s not the ent i re s to ry . There are

people who have got expert tax consultants to suggest them

the means and methods to evade taxes . There Is a lso the

dearth of experienced personnel in the Income Tax Department,

The present strength of ful ly trained and experienced o f f i ce r s

i s inadequate for dealing with the current cases . In add i t ion ,

there Is a backlog of a r rea r s which presents ser ious

d i f f i c u l t i e s . Because of the time lag in completing assessments

in quite a few cases, the asse t s are a l ienated or f r i t t e r e d

away during the interval between the earning of Income and I t s

assessment, and even if ul t imately a demand i s r a i s e d , i t s

co l lec t ion Is rendered very d i f f i c u l t ,

(v) There is no doubt that the Direct Taxes Acts provide

for prosecution and imprisonment in cases of concealments and

f a l s e declarat ion of statements but in actual prac t ice r a r e ly

any man i s prosecuted on th i s ground or severe panal t les are

imposed. Even the moderately levied penal t ies by the assessing

o f f i ce r s have been reduced by the appelate a u t h o r i t i e s . The i ^'

taxat ion ciaws i^endment Act (Amendments and Misc. Provis ions) ,

1986 w.e.f . 10.9,1986 and the amendments introduced by

Finance Act, 1986 have made these penalties s t i l l s t r i c t e r , Even

then the loopholes are ava i lab le . The prosecution proceedings

ISO

have to be kept pending when appeals are pending. When the

prosecution proceedings are In progress, the offences can be

compounded,

(vl) Previously, the Department was statutorily prohibited

from disclosing any information relating to persons' returns or

assessments, except to specified authorities like the courts

of law, Reserve Bank of India for limited purposes and the

Central and the State Governments. In such a case, even if a

tax payer was caught and penalised for concealment, he could

keep*? it a secret from everyone and escape the odium. It is a

happy augery that of late these provisions have been

relaxed to some extent. The Department now makes available

the names of tax evaders and may also supply information if it

is considered to be in the public interest. In fact. It may

be in public interest to publish the income returned in all

doubtful cases so that public will know who are the tax evaders

and to what extent they are doing so,

(vll) Many retail traders try to evade sales tax and

considerably understate their sales. They avoid the issue of

cash memos and the purchasers also do not insist because they

save sales tax. In such cases, although the Intention is not

primarily one of evading the Income Tax but since the business

has been done outside the books of accounts}, businessmen also

do not show it in their books of accounts. Thus, by supresslng

sales, a trader not only defrauds the State G-vernments of

the Sales Tax but also the Central and State Governments of

their share of Income Tax,

IDl

On the contrary, there are number of professionals

and small businessmen who inflate their purchases by obtaining

bogus bills and cash memos. In their cases, such purchases

Inflate the expenditure side and reduce their real income,

Manufacturers show these purchases as consumed in the

manufacture process. Such purchases are mainly of packing

material, raw material, travel expenses, office expenses,

stationery, advertisements, labour charges etc,

(viil) The officers of the Income Tax Department also find

it difficult to unearth cases of tax evasion because of several

reasons. Firstly, they are alloted large quantum of work.

Some of these officers are called upon to dispose of between

300 to 500 assessments per month. Prom the year 1944-45, in

which the reorganisation of the Income Tax Department commence

to the year 1966-67, the number of assessees increased from

about 4 lakhs to about 29 lakhs but the number of officers

employed on assessment duty increased only from 744 to 1648.

As on 31.3,1987 the total number of assessees in the books of

the Department was 62,61,465. In such a situation, it is very

difficult for these officers to detect cases of tax evasion,

Secondly, the field machinery of Income Tax Department is

hopelessly poor, resulting in a long gap between two surveys.

Surveys are undertake- from time to time but the time lag

between the two surveys is so wida that many businesses might

(1) Report of the Comptroller and Auditor-General of India, Uninon Government (Revenue Receipts - Direct Taxes for the year ended 31st March 1987 (Fage 2.05)

1 r 2

have come and gone without paying any income t ax . Moreover,

in these surveys, the inspectors were generally ca l led upon

to survey about 100 cases a day. This r e s u l t s in report ing

same aases in many survey r epo r t s .

Thirdly, the execution of the Income Tax Act requires

the knowledge of several other ac ts such as Hindu Laws,

|)artnersi"!ip Act, Gonipanas' Act, Registrat ion of Property Act,

'^•^Qgotiable Instruments Act, Evidence Act e t c . Moreover, the

Income Tax Officer has to handle cases of d i f f e r en t types

involving complexities of different t r ades , professions and

vocat ions . Unless an officer is wall-versed about the technical

d e t a i l s of each t rade , which is very d i f f i c u l t , he cannot detect

concaalments.

Fourthly, tax audit of accounts i s compuisory in

l imited cases . The audi tors are appointed or removed by the

Directors of Companies. Under such circumstances one can

hardly expect them to disc.iarge the dut ies properly.

F ina l ly , there i s no coordination between dif ferent

departnrents of the Government, ^t is a comnon knowledge that

the higher c lass society get their lands and bn i l l i ngs sale

or purchase t ransact ions a t much lower figure than the actual

p r i ce . On account of t h i s , the State Governments loose revenue

as r e g i s t r a t i o n fees and Income Tax Department finds i t

d i f f i c u l t to enhance the value of such property. The Income

Tax Department i s also not benefited much from obti- 'nlng

comparative figures from Registrat ion o f f i ce . A l a rge number

1^3

of coramodltles are subject to excise? du t i e s , ^he manofacturers

keep a record of the production. The production r e g i s t e r s

are signed by the off icers of the excise department but

businessmen manages to show In the r e g i s t e r s l e s s quanti ty

than ac tua l ly manufactured. When these r e g i s t e r s * are

produced before the Income Tax Officers, they are accepted as

correct record and thus tax on correct turnover Is evaded,

The worst affected cate<^ory of population i s the

middle c l a s s . Due to increase in population, there i s an

inf la t ionery t rend. Once the prices tak:e increase trend,

they never come dov/n to or ig inal l e v e l . Bven people l iv ing

in hand to mouth conditions have to pay income t ax . The

aTiount of income has increased but the r ea l value of the income

has gone down. 3ven then, they have to pay taxes on thei r

income. Hence the natural tendency, even from salary earners,

I s to adopt ev i l pract ices of evasion and they become the

victim of bribery and corruption,

( ix) High tax r a t e s are also responsible to some extent

for tax evasion. These high r a t e s are said t o be tolera ted

only because of the considerable evasion that takes place .

Tax evasion ex i s t s a t a l l l eve ls of income. The voluntary

disc losure schemes also do not evoke good response from people

because they fear that the income tax of f icers might probe

into the e a r l i e r or subsequent assessments which might lead

to further t roubles . I t appears that the Government Is caught

in a vicious c i r c l e . Government i s ful ly aware of the

1^4

magnitude of avoidance and evasion which has kept the income

tax r ece ip t s a t lower l e v e l s , taken into considerat ion

the inf la t lonery s i tua t ion . The low tax r ece ip t s do not

permit the Government to reduce r a t e s of income tax , as high

income tax r a t e s are necessary to f i l l up the resource gap

created by tax evasion suid in f la t ion . The high r a t e s of tax

in turn, provoke tax payers to evade tax payment,

(x) The Income Tax Department i s also responsible for

the present s t a te of a f f a i r s , """t is seen that even when the

assessees submit correct returns and produce suff ic ient

evidence in the i r support, the assessing of f ice rs do not

always accept them and make some add i t ions . However, t h i s

problem is now reduced by the summary assessment schemes,

But when a notice is issued and asseesee i s ca l led upon to

furnish infortiation, he feels more upset - more than going to

a police s t a t i o n . They prefer amicable sett lement a t lower

l eve l s than going to superior au thor i t ies for j u s t i c e . In

one case of a businessman, cer ta in deductions were disallowed

by the assessing officer and he went in appeal to the Appellate

Assistant Commissioner against the order of the Income Tax

Officer. The Appelate Assistant Commissioner told him that i t

was a question of fact and siiould have been se t t l ed a t the time

of assessment. Now i t would cost him acre to s e t t l e a t

appel la te l e v e l ,

Bribery and corruption are rampant a t a l l l eve l s and

in a l l walks of l i f e , therefore,the business cannot alone be

blamed for t h i s . Fact can be turned into fa l se and false in to

1 -5

a fact. Substantial relief is now available by the method

of siumnary assessments introduced.

6.4 Tax Avoidance by compaaies

It is often argued that the marginal (and average)

income tax rates are directly related with the degree of

tax avoidance and evasion by the individual tax payers.

The basic idea underlying this proposition is that as the

income tax rates rise, the tax payers try to adjust their

economic affairs so as to reduce their taxable incomes and

hence their tax liability. They attempt to (1) substitute

non-taxable income for taxable ones; (2) claim a sum as large

as possible by way of tax free deductions and allowances and

(3) even they coneal certain parts of their incomes from the

Income Tax authorities. The former two are the tax avoidance

devices and the later is tax evasion. While the scope of

the tax avoidance devices would depend on the provisions of

the income tax Act, the frequency with which latter will be

resorted to, would depend upon element of risk involved,

The reason for this behaviour is simple. The

higher the tax rate, the larger the incentives to reduce the

tax base; every rupee not shown as taxable Income Implies a

larger tax saving than even before. As Kaldar puts it,

"The incentive to evade taxes depends on the marginal rates

of taxation, since these govern the gains from evasion as a

percentage of the sums evaded,"

While investigating the causes of tax evasion in

I'^B

the country, the Direct Taxes Administration Enquiry Committee

found high Income tax r a t e s to be one of the major f ac to r s ,

The Committee Report said i '•It was stated by many witnesses

tha t the prevai l ing high r a t e s of taxat ion were one of the

main causes for tax evasion. The high r a t e s of tax In the

top Income brackets are said to be to lera ted only because of

the Considerable evasion that takes place . We cannot deny

that higher the r a t e of tax , the greater w i l l be the temptation

for evasion and avoidance . . . (for)as the stakes Involved

are larger . . . the tendency to avoid or evade tax Is a lso

g rea te r . " (1)

The d i r ec t r e l a t ionsh ip between Income tax r a t e s

and tax evasion and avoidance, given the Government needs,

has serious Implications in terns of Government revenues and

future tax r a t e s . In case, higher tax r a t e s lead to la rger

tax evasion, t h i s , in turn, would lead to s t i l l higher tax

r a t e s . To quote Kaldor again, "India, l i k e most Western

count r ies , has been In the gr ip of a vicious c i r c l e so far

as progressive taxation i s concerned - evasion amd avoidance

by cut t ing down potent ia l revenue led to higher marginal

r a t e s of taxat ion and t h i s . In turn, to further evasion and

avoidance and s t i l l higher r a t e s . I t i s a v ic ious c i r c l e of

charging more and more on l e s s and "'ess." (1)

(1) Report of the Direct Taxes Administration Enquiry Committee 1958-59 (New Delhl.Mlnistry of Finance, 1959) P.149 quoted in 'Some Aspects of Ind ia ' s Tax S t ruc tu re ' by Ved P.Gandhi, Brof.Indian I n s t i t u t e of Management, Ahmedabad, Publ ishers : Vora and Company Publishers Pvt. Ltd.

i':'7

While the Income tax r a t e s are In some ways

Inversely re la ted to the base on which income tax might be

levied In the case of individual tax payers, does t h i s

r e l a t ionsh ip hold good in the case of companies as well ?

Or, in other words, do high company tax r a t e s encourage tax

evasion and avoidance and reduce the company tax base ?

The feel ings of the Government were expressed by

the Finance Minister in 1963 that "in our system of

corporate taxat ion, there i s no co- re la t ion between the r a t e

of tax and the percentage of p r o f i t s " . (1)

The Implications of th i s statement appears to be

that p rof i t s in the Indian economy are monopoly p ro f i t s which

are not affected by the r a t e s of the corporation t ax . Or

that the corporate sector i s expected to take care in the i r

cost analysis of their product and serv ices , the element of

tax which they have to pay to the Government,

On the other hand, the corporate sector ha-^e

expressed the feel ings that high r a t e of corporat ion tax

"dis t roys a l l cost conscious . . . a company has l i t t l e

Incentives to economise when 70^ of i t s expenses are met by

the Government". (2)

By implication, as the corporation tax r a t e s r i s e ,

(1) Finance Minis ter ' s Budget Speech, Budget for 1963-64 (New Delhi, Ministry oT Finance, 1964)

(2) J . B . Kanga and N.A.mikhiwala, THE LAW AND FRAGTICS OF INCOME TAX, Vol.1 (Bombay, N.M.Tripathi, 1969) P.61

IS

companies Indolge in "wasteful" expenditures, leading to a

r e l a t i v e contract ion of the corporation tax base,

Theire i s a logic in t h i s contention of the corporate

sec tor . Instead of paying tax , they would l i k e to pay more

sa lary to the employees, more t ravel expenses on foreign

tour , more tax-free reimbursement of expenditure on fu rn i tu re ,

furnishings to of f icers and vrtiat not . Those who think In a

democratic se t up, that more revenue can be ra i sed by r a i s ing

taxes are l i v i n g in Fools ' I^radise . They should leave th i s

Job to the economists, legal experts to study f u l l implicat ions

and f e a s i b i l i t y of any tax pol icy. Merely rev is ing r a t e s by

every y e a r ' s Finance Act cannot solve the problem and such

ad hoc handling of tax policy leads to Inf la t ionery t rends

In the country,

6 ,5 Tax evasion by companies i

There i s a general impression, not only among the

public but a l so in the minds of policy makers that tax

evasion and avoidance by the companies i s d i f f i c u l t and not

safe for two reasons. F i r s t , under the Companies Act, a l l

companies are required to publish f inancia l s ta tements ,

including the profi t and loss account, audited by the qual i ­

fied audi tors and chart'^red accountants . Second, in modern

times, pa r t i cu la r ly in the case of public l imited companies

the management and ownership are so much diversed from each

other that the management can have l i t t l e i n t e r e s t , if any,

in the gains from tax evasion,

1' 9

This, however is not to say that companies do not

indulge in tax avoidance. The concept of taxable profits

being different from that of book profits, this provides the

companies with the tax avoidance devices.

Taxable profits equal to book profits plus

disallowances minus non-book allowances or concessions. The

higher the rate of tax, the greater might be the incentive

to the companies to control the partially or fully disallowed

expenses like employees perquisites, entertainment expenses,

advertisement expenses, conveyance and travelling allowances,

bonus and commission payments, payments and benefits to and

expenditure on directors with 'substsintlal interest in the

company' and initial capital expenditure,

Similarly, the higher the tax rate, the greater

might be the temptation to the companies to widen for

themselves the scope of tax concessions like the 'partial'

tax holidays, development rebate, loss off sets, special

allowances granted to 'priority industries' full deductibility

of interest costs and tax allowances granted towards business

expenses incurred on agricultural Inputs or that on export

market development,

In a nut shell, as comporatlon tax rate rises, the

companies might try to plan their present and future activities

in such a way as to minimise the tax disallowance and maximise

the tax allowances. One might conclude from this theoretical

reasoning that given their book profits, the companies try,

200

more than ever be fo re , to reduce t h e i r t axab le p r o f i t s

whenever the co rpora t ion tax r a t e s r i s e . " High c o r p o r a t i o n

t ax r a t e s in Ind ia in the pas t did have a tendency to be

a s s o c i a t e d wi th lower assessed p r o f i t s . But t h i s tendency

has been weak s t a t i s t i c a l l y . Hence, one cannot make a su re

enough s ta tement t h a t higher corpora t ion tax r a t e s have led

t o l a r g e tax avoidance by the companies. Thus, wh i l e the

inverse r e l a t i o n s h i p between the Income t ax r a t e and income

tax base may be va l id for the ind iv idua l tax p a y e r s , i t does

not appear to be t r u e for t h e companies on the b a s i s of

l i m i t e d da ta a v a i l a b l e . " (1)

The degree of d i f f e r e n c e between ' avo idance ' and

' e v a s i o n ' for a j o i n t s tock company is very sma l l . For

i n s t a n c e , c la iming excessive r e l i e f for new i n d u s t r i a l

under tak ing by d ive r s ing c a p i t a l of old u n i t to a new u n i t ,

s e t t i n g off bus iness l o s s a g a i n s t a g r i c u l t u r a l income,

c la iming d e p r e c i a t i o n and Investment allowance on i n f l a t e d

• a c t u a l c o s t ' , re imbursing expendi ture on f u r n i s h i n g s , med ica l ,

t r a v e l expenses by the D i r e c t o r s or employees, payment of

fore ign t r a v e l expenses of D i r e c t o r s c l a s s i f y i n g them a s

bus iness t o u r , c l a s s i f y i n g expenses on s e r v a n t s , v e h i c l e s ,

phones e t c . a s o f f ice expenses . PS.yments a r e so made and

accounted for t h a t they appear wi th in the ambit of the

p rov i s ions of the income tax law. V e r i f i c a t i o n of such

(1) SOME ASPECTS OF INDIA'S TAX STOUCTORS : AN ECONOMIC ANALYSIS by Ved P. Gandhi, Prof. Indian I n s t i t u t e of Management, Ahmedabad, f^ge 188^

21 1

transactions Is difficult even for auditors. Strictly-

speaking, they amount to evasion of tax liability. Whether

it is a question of fact or law, they can be challenged in

courts of law, if disputed by assessing officers,

6.6 Tax litigation by public sector undertakings

The Chokshi Committee have observed that there are

certain problems which are special to certain public

undertakings and considering this aspect, it made a very

strong recommendation on tax litigation by public sector

undertakings in its interim report. It said j "Frequently,

public sector undertakings and Government companies also get

involved in litigation with the tax authorities. Instances

are quite common where public corporations like Air India,'s

Indian Airlines, Life Insurance Corporation of India and

similar corporations have entered into litigation with the

department on certain questions. This is hsirdly a desirable

trend. It is difficult to understand why such litigation

should at all arise.and why it cannot be avoided. Ultimately,

it is the Government of India on either side and there is no

question of any benefit to the Govt, of India in any form

whatsoever by the outcome of the litigation. Similarly,

State Corporations have also got involved in litigation with

the tax authorities. In all these cases, public funds are

frittered away in futile litigation,

(1) DIRECT TAXES S?I(?JIRY COMMITTEE, INTHIIM REPORT, Dec.1977 I ge 41, mras 11.13 and 11.14,

2' 2

There should be no need for appeal by any Government

undertaking or company against any adverse decis ion In t a i

ma t t e r s . If, subsequently, a t any time the same issue i s

decided d i f f e r en t ly by a High Court or the Supreme Court in

the case of any other taut payer, then \V. i t would be open

to the undertaking/company to claim the benefi t of such

decis ion in respect of i t s past assessments. We recommend

tha t d ispute between public sector undertakings or Government

companies and the Income Tax Department should be resolved by

the Central Board of Direct Taxes by discussion with the

adminis t ra t ive Ministry of the Central Government or the lo3 a l

government concerned with the undertaking or company and

where necessary, in consultat ion with the Ministry of law."

J u s t i c e S, Rangar^than, judge Delhi High Court in (2)

h i s book 'Corporate Taxation in India* has commented on the above views as follows :

" I would, however, suggest that Instead of having

these disputes decided by the Central Board of Taxes, i t may

be appropriate to have them resolved by reference to a high

powered a r b i t r a t i o n Board which could s t r a igh t away give i t s

award on a case s ta ted, which can be treated as f i n a l , A

Board presided over by a Chairman from the Judiciary and

(1) This i s in the l i gh t of another recommendation made by the Committee in Para 11,16 of the same r e p o r t .

(2) 'Corporate Taxation in India ' Mr. Ju s t i ce S, Hanganathan Forwarded by N.A. I^lkhlwala. publlsned by Documentation Centre for Corporate and Business Policy Research, New Delhi.

2 3

having for I t s members the chairman or a senior member of

the Central Board of Direct Taxes, the President or a

senior vice-president of the Income Tax Appellate Tribunal,

a representa t ive of the profession of Chartered Accountants

may be thought of. Such a body w i l l , i t seems to me, command

respect and bring to bear on the issue raised before i t a

deep considerat ion from a l l aspects and points of view. The

decisions of th i s Board, on such of those Issues as may be

common and of general appl icat ion to a l l corporate sec tor ,

can be adopted for, and applied uniformly t o , a l l such

assessees by the Issue of necessary c i r c u l a r s . In case, some

of these c i r cu l a r s are adverse to assessees and not acceptable

to them, they may be made challengeable in the Supreme Court

a t the Instance of the assessee . The course suggested w i l l

have the advantage tha t , if on experiment i t i s found to be

p r a c t i c a l , i t can be extended to evolve a general procedure

by way of a l t e rna t ive to the cumbersome procedure of appeals

and references for solving fundamental, far-reaching and of

recurr ing problems on which there i s c o n t r ^ e r s y of Judic ia l

opinion and vrtilch, in the normal course, i t may take decide

or more to s e t t l e . This type of solution wi l l a l so perhaps

be found quicker and r e l a t i v e l y miore expedient in d i rec t tax

matters where large batches of cases involve a common point

lying In a narrow compass."

I t i s f e l t that the above suggestion i s very prac t icdf

and should be implemented and applied to only public

undertakings but to the whole of the corporate sector*

2 4

6.7 Modes of ta:s avoidance and tax evasion

(I) Modes of Income tax avoidance suid evasion adopted

by the tax dodgers, are varied and varying. Different

methods are adopted by different 'persons' as defined for

Income Tax in the Income Tax Act ;

In so far as HUF is concerned, tax avoidance is

practised (i) by throwing self-acquired property into common

hotchpotch of the Hindu Undivided Family; (11) by effecting

partial partition in the joint family; (Hi) by creating

smaller HUFs within the main family; (Iv) by retaining the

ancestral property as the property of the joint family,

In all these methods, the intention Is to avoid

increase in the tax liability applicable to the higher Income

slabs. In the case of an individual, whose total income Is

taxable at the rate applicable to higher income slab, his

efforts are to put the property td"common hotchpotch of the

HUF so that the income from such property is assessed in the

hand of that HUF whose income including income of such property

may attract lower rate of tax,

In the second method, if the income of the HUF is

substantial, falling in the higher Income slab and a ttractlng

higher rate of tax, a partial partition of 'PIF Is carried out

by allowing its one or more coparceners to claim partition.

Thus, the HUF property is divided into two or more HUFs so

that the total Income of the HUF is liable to lower rate of

tax, B.rtlal partition may even result in reducing total

2 5

Income of HUF and Increasing Income of an Individual

coparcener if it is so beneficial for purposes of reducing

tax liability.

In the third method, Instead of claiming partition

of HUF property, the ancestral property is continued as HUF

property thereby the income of an individual coparcener is

not increased while continuing to gain the benefits of HUF

property.

The HQF is a creation of law and within the provi­

sions of the law and taking the benefits of judicial

pronouncements, tax liability is avoided though the Joint

Hindu family exists for name sake,

These are only a few modes discussed above but In

practice even individual property or business is converted

Into HUF property or business by creating new HUFs.

(IT) As Individual basis of assessment is followed in

India, tax Is avoided (1) by employing spouse as a highly paid

employee of the flr«, (11) by admitting minors to the benefit

of partnership. Apart from these accepted methods of tax

evasion of registered firms, many more Ingeneous manipulations

of Income are done by multiplying the number of partnership

firms and dissolving the existing firms. The partnership

Act does not put any limitation on the creation of new

partnerships and the procedure for the purpose are very

simple. Similarly, the procedure of dissolution of a firm

2 6

Is very simple and as It suits to the partners, these

methods are employed making the assessing officers only as

silent spectactors.

Sometimes, HUFs are admitted tn partnership as a

partner so that the individual partner continues to earn

income as a partner and as a coparcener of HUF,

(Til) Some business houses who have control over groups

of companies, manipulate the results by dealing in the shares

of companies controlled by them. The outdated rules of

valuation of perquisites which still exist also help In

avoidance of tax,

(17) People try to evade taxes by showing less Income

In the form of sale proceeds, Interest or commission, etc,

showing the closing stock as damaged In a year of profit or

reducing the value of the closing stocky omitting a part of

cash sales or sales on consignment and. in the case of

professionals, not showing the names of customers in their

books, using the goods for self consumption without recording

them in the books of account; suppressing the production of

goods or claiming more wastage than the actual wastage,

crediting sales to proprietors or partners accounts or the

binaraidar's accounts without entering them in the sales

account; not recording the purchases and sales of certain

goods at all; suppressing Income from speculation, rebate,

discount, commission etc,

2 7

(V) Tax i s also evaded through s t a r t i n g a new business

or branch of an exis t ing business and not d i s c lo s ing income

therefrom. In some cases , the assessees close the businesses

and s t a r t new businesses or change the names of the bus iness .

They f i l e a fresh re turn for the new business thereby

reducing the income and avoiding track of the old bus iness .

The exis t ing business i s also sp l i t up wi thin the members of

the family or new business i s started in the names of wife

or chi ldren,

(VI) The shares of a company are a l so held under blank

t r ans f e r s , or in benami names and not d isc los ing e i the r the

investment made out of concealed prof i t s or divided incomes.

Many times the investments are not disclosed as they are

made in the names of wife, chi ldren, grand- chi ldren e t c .

Bank accounts and post office accounts are opened

in f i c t i t i o u s names. House property or income yielding

asse t s are also held in •Benami' names.

(VII) The manufacturing concerns s e l l the i r scrap but

do not record their sa les in the books of accounts. They

s e l l their goods at a premium but record these sa les a t

controlled prices in their books of accounts . The purchases

are inf lated by obtaining bogus b i l l s or by c lass i fy ing

domestic and household expenses as business expenses.

Expenses in the form of s a l a r i e s , insurance, advert isement,

i n t e r e s t , commission, t rave l l ing are a lso In f l a t ed . Traders

also purchase speculative losses from other p a r t i e s . They

2' 8

show bogus payments of salaries and bonus to employees or

compensation for breach of contracts to retiring employees

or paying lesser salary than for which a receipt Is taken

from the employees or agents and including in the -nuster

roll salary of non-exlstlng employees.

(VIII) Yet other methods employed for evading taxes

consist of appointing bogus commission agents and paying them

huge sums of commission. Employees are introduced as

partners and paying then nominal salaries only and pocketing

the difference. They show full fire insurance premium as

expenditure while keeping back the rebate secretly realised

from the insurance agents. They charge capital expenditure

as revenue expenditure. They show a part of income as

arising from racing by acting in collusion with printers and

bookmakers. Underhand profit transactions take place with

the help of 'loan racket' which operate on the basis of

post dated cheques and bogus bundles. They obtain miiltlple

expense vouchers by effecting chained sales by some bogus

importers of raw material for Industry,

The working group of the Administrative Reforms

Commission, in order to facilitate the tracing out of untaxed

money has given a more or less comprehensive list of avenues

into which the evaded or unaccounted money is generally (1)

utilised. These are as follow :

(1) Administrative Reforms Commission Repo-'t. Pp,111 ,112, quoted by MPS Suman in his book DIRSGT TAXATION AND GROWTH IN INDIA (pp.112) - Sterling Rablishers ,New Delhi.

29

(1) Deposits with IMlgneous bankers i . e . those vho

discount bundles, wltb companies and firms wi th f l c t l o u s

names or In the names of close r e l a t i v e s .

(2) Purchase of gold and jewellery and keeping them In

safe deposit vaul t s or in secret va lu ts In homes.

(3) Purchasing without b i l l s , raw mater ia ls and s tocks ,

for purchases of business or manufacturing and se l l ing the

stocks so manufactured without b i l l s In due course.

(4) Purchasing and hoarding of grains stock with a

view to se l l ing them In r i s i ng market.

(5) Purchasing quotas and l icences I l l e g a l l y ,

(6) Rirchaslng smuggled goods to be resold without b i l l s .

(7) F&yment of money towards purchase of land or house

proper t ies .

(8) F&yment of premium towards purchasing running

concerns or control l ing in te res t In f lour ishing companies.

(9) Payment of pugree to secure r e s i d e n t i a l p roper t i e s .

(10) U t i l i s a t i on of secret amounts held In foreign

countr ies for imports, under invoicing such imports to the

extent of such secret funds.

(11) Purchases of unauthorised foreign exchange to meet

expenditure on v i s i t s abroad,

2iO

(12) Lavish household and personal expenditure.

(13) Meeting expenses on marriages, r e l i g i o u s functions

and social p a r t i e s ;

(14) Payment of b r ibes .

6.8 Detection of evasion caseg -

In addition to the nortaal process of assessment,

reassessments, reopening of assessments by the Income Tax

Officers, there are provisions of 'search and seizure* which

are specifically meant for detecting concealed income.

sections 132, 132A and 132B of the Income Tax Act, 1961

provide for search and seizure operations. A search has to

be authorised by a Director of Inspection, Commissioner of

Income Tax or a specified Deputy Director of Inspection, or

Inspecting Assistant Commissioner. Where any money, bullion,

jewellery or other valuable article or thing Is seized, the

income tax officer has, after necessary investigations, to

make an order with the approval of the lAG within 90 days of

the seizure, estimating the undisclosed income in summary

manner on the basis of material available with him and

calculating the amount of tax on the income so estimated,

specifying the amount that will be required to satisfy any

existing liability and retain In his custody such assets as

are in the opanion sufficient to satisfy the aggregate of the

tax demands and forthwith release the remaining portion, if

any, of the assets to theperson from whose custody they are

seized. The books of accounts and other documents cannot be

211

re ta ined by the authorised officer for more than 180 days

from the date of seizure unless the Commissioner approves

of the r e t en t ion for a longer period,

The r e s u l t s of the search and seizure provis ions ,

however, are not very encouraging as seen from the d e t a i l s

given below t

Sections 132, 132-A and 132-B of the Tncome Tax Act

1961 provide for search seizure operat ions. A search has to

be authorised by a Director of Inspection, Goniraissloner of

Income Tax, or a specified Dy.Director of Inspection or

Inspecting Assistant Commissioner.

(a) The number of cases in which searches and se izors

were conducted for the three years ending 1984-85 to 1986-87

was as under t

Year

1984-85

1985-86

1986-87

No.of Jewer (

No

1840

2814

4376

cases where cash , a l l y e t c

(Rs

. a s s e t s seized

Value . i n thousands)

2 ,91 ,643

9,62,592

7,69,700

No,of cases . where no a s s e t s were s e i z e d .

1540

27786

2406

212

(b ) (1 ) P a r t i c u l a r s of o rders under Sec t ion 132(5) passed

du r ing the t h r e e years ending 1986-87 were as under :

Year

1984-35

1985-86

1986-87

Opening Balance of ca ses

882

1947

2548

Search c a s e s dur ing the year

1821

1853

3325

Total

2703

3800

5873

No.of ca ses where o rde r s were passed dur ing the year

756

1252

3673

No.of c a s e s pending a t t he end of the year

1947

2548

2195

( b ) ( l i ) P a r t i c u l a r s of income de te ra lned in t h e o r d e r s under

Sec t ion 1 3 2 ( 5 ) , tax involved t h e r e i n , a s s e t s r e t a i n e d and

a s s e t s r e tu rned of the threo years ending 1986-87 were a s

under t

Year No,of c a se s where o r d e r s were passed

Income d e t e r ­mined I n the o r d e r s

Tax Value of Involved a s s e t s t h e r e i n r e t a i n e d

(Rs.in thousands)

Value of a s s e t s r e t u r n e d

1984-85 712 3,62,668 5,77,303 1,30,135 86,346

1985-86 1192 13,12,160 16,91,260 2 ,59 ,691 1,32,886

1986-87 1693 14,14,474 10,05,150 5 ,13 ,231 65,912

213

( c ) ( 1 ) The number of search cases out of ( b ) ( i i ) where

f i n a l assessments were completed and pending for the three

years ending 1986-87 was as under t

Year

1984-85

1985-86

1986-87

Opening felance of o r d e r s under S e c t i o n 132(5)

663

758

1136

Orders under Sec t ion 132(5) passed du r ing the yea r

550

1361

1443

T o t a l

1213

2119

2579

No,of c a s e s where f i n a l a s s e s s m e n t s

wwere completed where con­cea l ed income found

380

723

684

where no con­c e a l e d Income found

75

260

285

t o t a l

455

983

969

G l a n c e c a s e s

758

1136

1610

( c ) ( i i ) I ^ r t i c u l a r s (if income determined, tax l e v i e d , balance tax

outs tanding a f t e r adjustment of value of a s s e t s r e t a ined on f i n a l

assessment for the three years ending 1986-87 were as under :

Year

1984-85

1985-86

1986-87

No. of c a s e s where f i n a l a s s e s -ments were Com­p l e t e d

663

1596

1475

Income Tax d e t e r ­mined

4 5 ^ 4 6

1258208

866422

Demand Raised Tax Pe­

n a l t y

205990 6922

758114 41322

502553 4859

T o t a l

212912

799436

507412

Demand a d ­j u s t e d ou t of r e ­t a i n e d a s s e t s

34781

G l a n c e o u t -s t a d i n ^ r e c o v e r y Tax Pe- To-

n a l t y t a l

174301 3830 178131

65999 696461 36976

78216

733437

425176 4020 429196

214

( c ) ( i l l ) The number of c a s e s of p rosecut ions l aunched ,

compounded and conv ic t i ons obtained for the th ree yea r s

ending 1986-87 was a s under : •

Year No.of p rosecu t ions launched No.of No.of No.of ca ses cases c a s e s

Opening During Tota l i n pending Balance the which

year con­v i c t i o n s obta ined

1984-85 1060 795 1855 86 _2 1769

1985-86 1769 1315 3084 361 r ? 2723

1986-87 2723 931 3654 128 12 3373

The d e t a i l s under l ined above e x h i b i t t he r e s u l t s of

t h e p rov i s ions of search and s e i z u r e s . However, a l l such

c a s e s a r e d i spu ted in appeal and the r e s u l t s of appea l s a r s

not a v a i l a b l e .

After In t roduc ing p rov i s ions for l evy of pena l ty

and prosecut ion for concealment of income, the p r o v i s i o n s

for ' s ea rch and s e i z u r e ' came in to f o r c e , and now the Di rec t

Taxes laws (Amendments) Act, 1987 has In t roduced a new

Sec t ion 158-B which came In to force from 1 .4 .1989 . Sect ion 158-B

p rov ides levy of a d d i t i o n a l Income tax a t a f l a t r a t e of 30 per

• F i gu re s obtained from the Report of the Comptrol ler and Audi tor-Genera l of I n d i a , for the year ended 31s t March 1987 - No. 6 of 1988 - Union Government Revenue Rece ip t s Di rec t Taxes, pages 2 .12 , 2 . 1 3 , 2 . 14 ,

2i5

cent on the excess of assessed Income over returned Income.

According to t h i s new Section 158-B, where in the case of

any person, the assessed income exceeds the returned Income

by any amount, the assessing officer shal l make an order that

such person sha l l pay addi t ional income tax on such excess

amount a t the r a t e of 30^. There i s no requirement here

tha t before making such an order the assessees shal l be beared,

There i s no provision for appeal against such as order when

made. This provision has been c r i t i c i s e d as discr iminat ing

between tax payers in whose case addit ions are made by the

assessing o f f i ce r s to the returned incomes and those in whose

case no such addit ions are made. I t i s a lso a question

whether these provisions would contravene a r t i c l e 14 of the

Const i tut ion which guarantees equali ty before the law,

6 .9 Business Income never suffers income tax - effect of

evasion

Tax evasion or avoidance therefore , ex i s t s (1) In

the computation of income from business or profession;

(11) in the appl ica t ion of r a t e s tructure or ( i l l ) In

concealing Income from business or profession,

The effect of tax evasion Is however, uniform or

common. The tax revenue is reduced, more energy and money

or time i s wasted in gaining revenue which is not commensurate

with t h i s l o s s . However, the important effect is tha t Income

from business or profession never suffers Income tax which i t

should have suffered. They recover tax from a consumer or

218

a customer and pay to the Government. Al te rna t ive ly , they

evade tax l i a b i l i t y . Though tax Is recovered, I t Is not paid

to the Government or i t Is not recovered and not paid,depending

upon market forces . This aspect needs d e t a i l invest igat ions by Government.

Five years plans of the Government require revenue

on a very large scale for developmental schemes. There i s

competition in various States to obtain maximum a l loca t ion of

revenue for Elan expenditure or, developmental projects In

theJr S ta tes . If spending on these projects i s not done in

t ime, there I s a pos s ib i l i t y of shift ing these projects to

other States or shelving them or dropping them a l toge ther .

This na tura l ly r e su l t s in urtjudlclous expenditdre. In other

words, the proper Implementation of projects iS not given

the importance which i t deserves. There I s , therefore ,

ever-growing need for Increase in revenue. Ih i s In tura ,

leaves no a l t e rna t ive but to increase the r a t e s of tax or to

introduce new taxes . There i s always an expectation that

higher Income bracket assesses should contr ibute more to

Income tax revenue. This income bracket cons i s t s mainly of

business or professionals .

Here a question a r i s e s as to how a business or

profession pays tax ? The answer may be that tax la paid by

them from the i r income from business or profession. According

to the plain meaning of the income tax law provisions, the

answer i s co r r ec t . Now say, there Is an Increase in the r a t e

of tax and the quantum of income remains thd same, whether

2i7

the same business or profession would pay the increased tax

l i a b i l i t y and accept the lower prof i t s a f t e r tax , other things

such as cost of the product or services of a business or

profession reraalning constant or the cost of l iv ing remaining

constant . The business or profession cannot accept the lower

p ro f i t a f te r tax for long. This would discourage h i s business /

profession and i t would be unable to face competition In such

business /profess ion. One day, the business or profession

would be closed if i t continues to pay tax honest ly . Similar

other business or profession around the honest business /

profession would force the honest business to manipulate the

deal ings in such a way that percentage of the prof i t a f ter

tax would not dec l ine . Ih ls may be cal led ' t ax planning'

practiced today or ' tax evasion' in lega l terms./ The effect

i s tha t the business or profession has not suffered due to

increase in tax l i a b i l i t y . In other words, in ordinary

terms of meaning, the business income has not suffered the

increase in tax , since prof i t af ter tax remains constant and

there may be no increase in contr ibut ion to r ea l revenue by

such business/profession as a r e s u l t of increase in r a t e of

tax . The increase in tax revenue that appears in the

Government account may be due to Increase in quantum of busi­

ness a c t i v i t y or due to inf la t ionery t r ends . Thus, there

would noc be expected rea l increase in tax revenue and then

Government would introduce new provisions or cancel exis t ing

concessions to r a i s e the revenue required and the cycle of

business delalngs would repea t . This amounts to concealment

218

of the t rue income which is possible for a business or profession.

In t h i s process,only the c lass of fixed Income group people

suffer due t o increase in tax l i a b i l i t y as the r a t e of tax for

the business/profession and the assessees having fixed income

i s the same i . e . i t does not increase in proportion to r i s e in

p r i ce s . The burden of increase in tax l i a b i l i t y i s passed on

the tax payers who have l e s s opportunity to manipulate the i r

income. However, i t has to be c lar i f ied here that t h i s fixed

income group cannot be called in general as free from tax evasion.

They also indulge in earning side by side other income, each

according to h i s capacity, from legal and i l l e g a l means. But

the fact remains that the business/profession pass on the i r

l i a b i l i t y to increase tax to other class of the society which

i s more vulnerable. This i s a subject which requi res d e t a i l

study at the Government l e v e l .

This remi|inds the period of the pre-budget days of

January or February each year when the budget day or the day

on which finance M i l i s presented to the State Legis la ture

Assembly or F&rliament. There i s a pre-deterrained effort on

the part of business community to speculate increase in taxes

and pr ices are increased in an t ic ipa t ion . But once the price

of a product or service is increased, i t hardly comes to

o r ig ina l l e v e l . In any case such an ant ic ipatory prj.ce increase

takes care for payment of increased tax on income from bus iness /

profession if any. Thus, the l i a b i l i t y to addi t ional tax, if

any, i s passed on the customer or consumer in a n t i c i p a t i o n .

I t i s , however, argued that increase in price level due to

213

budget I s temporary phase and should not be construed as on

account of increase In taxes .

In a case of a building cont rac t , an heavy income

tax l i a b i l i t y ar i s ing as a r e su l t of detect ion of a large con­

cealed Income i s passed on to the f la t owners. In addi t ion to

l ega l and i l l e g a l methods avai lable to him to obtain reduction

in tax l i a b i l i t y through br ibery, corruption or from appeals

at various l eve l s such as appelate a s s t t , commissioner,

commissioner of Income tax , settlement commissioner, t r i buna l ,

high cour ts , Supreme Court, the building contractor w i l l

simultaneously pract ise other ways and means which are open to

him. He may use s l igh t ly Inferior wood for wood work or use less

cement, iron and s teel or infer ior quality of other raw

material for construction works in progress and make good the

• l o s s ' sirlsing due to unexpected increase In tax l i a b i l i t y ,

Such a business may also increase the price per scf.

f t , of construction or may charge in excess for the extra

amenities that may be provided or economise the space or change

the plans of construct ion. These a c t i v i t i e s are a l l aimed at

recovering the amount of addi t ional tax l i a b i l i t y from the

customers. In other words, such business would not meet the

increase In tax l i a b i l i t y from his predetermined Income but w i l l

pass i t on to the customers by hook or crook. This p r inc ip le

can be adopted by any business a profession with modification

wherever necessary. Any business - manufacturing, trading or

agency or profession would not allow i t s marginal r e tu rns to be

affected by increase in tax l i a b i l i t y . I t may adopt e i ther

220

any one or more methods mentioned below :

1) increase the price of goods or se rv ices ;

11) change the formula and use cheaper raw material In

production or processing of goods;

111) reduce the quantity for the same price charged

previously;

Iv) change the qua l i ty ;

v) change the packing;

vl) drop the middleman;

v l l ) reduce the cost by any available method;

v l i l ) I n f l a t e , manipulate, overstate the overhead expenses;

ix) change organisation of business/profession - say

Individual to partnership;

x) shif t or discontinue one business and s t a r t the saame

In the garb of new,

All t h i s and many more actions are affecting the customers and

consumers. Whether incentives provided in the Income Tax law

are avai lable or not, they would cotinue to keep up the margin

or prof i t or Increase i t according to increase in cost of

l iv ing or according to avai lable oppor tuni t ies . They would

r a i s e hue and cry against tax l i a b i l i t y but they are f u l l y

conscious that the business/profession would not be affected by

increase in tax l i a b i l i t y as the payment of tax i s considered

by them as prira;ary cost of their business/profession and has

to be passed on to consumers or customers without affect ing

the i r prof i t s af ter tax.

221

This proposition Is not eas i ly acceptable as I t i s

argued that Incoae tax Is a d i rec t tax and i t cannot be passed

on to consumers or custonjers. If pet rol pr ices are increased,

everybody fee ls that prices of other commodities would shoot

up but if income tax is increased or income tax l i a b i l i t y i s

increased, i t is expected that a business or profession should

absorb i t in i t s prof i t s or gains. To what extent , t h i s i s

possible is a matter of inves t iga t ion .

The term ' tax avoidance' used in th is Chapter has

the same meaning as that of ' tax evasion". However, tax

avoidance is practised with the misuse of the loopholes in

exis t ing provisions of the law. In e f fec t , tax avoidance with

colourable devices amount to tax evasion.

22 r

CHAPTER - 7

•TAX PLANNING' - A TOOL TO PASS ON THE BURDEN OF TAX

7 .1 The r o l e of Tax Planning . . 222 - 223

7,2 Tax Planning and the p rov i s ions of . . 223 - 226 Income Tax Act

7 . 3 Abusive use of p l a i n meaning of the . . 226 - 228 p rov i s ions of the Income Tax Act

7 .4 Evasion of tax through Tax Planning . . 228 - 231

r, e Tax avoidance by colourable and 231 _ 233 • dubious dev ices

7.6 Tax Planning, an a r t f u l tax dodging . . 233 - 238

7 . 7 In s t ances of a r t f u l tax dodging . . 238 - 243

7 ,8 March of the j u d i c i a r y a g a i n s t , , 243 - 247 tax dodging

•* For years a battle of manoeuvre has been

waged between the legislature and those who

are minded to throw the burden of taxation

off their own shoulders on to those of their

fellow subject. In that battle, the

legislature has often been worsted by the

skill, determlhation and resourcefulness of

its opponents ..... "

- Lord Greene, M.R,