Tax reduction strategies are often tainted with legality. Income tax statutes have provisions for charging tax on “any income, profits or gains, from whatever source derived” u/s 2(34)(a) and hence, according to the spirit of this provision, legality of the source may not be questioned if tax is duly paid. Suffice it to say, in the Income Tax Ordinance, there are several sections where investment out of undisclosed income can be legalized by paying tax at a stipulated rate not always on the invested amount and the tax rate is often very low [e.g., specific tax rate at Taka 300 or Taka 500 or Taka 200 per square meter for investment in house property u/s 19B, 7.5% of the deed value in case of investment u/s 19BB, and 10% or 15% of the purchase value in case of investment in motor vehicle]. Income by way of winnings from “card games and other games of any sort or from gambling or betting” referred to in section 19(13) is subject to source-tax of 20% (u/s 55) and this tax deducted at source is a “final discharge of tax liability” u/s 82C(4). However, given these moral issues, while dealing with any sort of strategy regarding tax, we must be aware about the distinctions among tax evasion, tax avoidance and tax planning.
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Tax Evasion
Tax evasion has the objective of reduction of tax illegally. Sometimes, it is referred to as ‘tax cheating” through acts of commission or omission. Deceit, concealment, and/or misrepresentation are common elements in most illegal tax plans (Sommerfeld et al., 1980: 28/1). As stated by Webley et al. (1991: 2-3), “Noncompliance is a more neutral term than evasion since it does not assume that an inaccurate tax return is necessarily the result of an intention to defraud the authorities and it recognizes that inaccuracy may actually result in overpayment of taxes. … In evading tax one is knowingly breaking the law. This has social and psychological consequences such as stigma and guilt and involves confronting different costs since there is a risk of being caught and fined or sent to prison.”
According to Lakhotia and Lakhotia (1998: 9), “The expression ‘本文来自优.文,论-文·网原文请找腾讯752018766Tax evasion’ means illegally hiding income or concealing the particulars of income or concealing the particular source or sources of income or in manipulating the accounts so as to inflate the expenditure and other outgoings with a view to illegally reduce the burden of taxation. Hence, tax evasion is illegal and unethical.”
Tax Avoidance
Tax avoidance and tax evasion usually both have same objective of reduction of tax, but tax avoidance encompasses only legal means of achieving the objective.C语言数据结构课程设计题-图的遍历的演示
Justice Jagadisan J. has mentioned in the verdict of Aruna Group of Estate v. State of Madras (1965) case, “Avoidance of tax is not tax evasion and it carries no ignominy with it, for, it is sound law and, certainly, not bad morality, for anybody to so arrange his affairs as to reduce the brunt of taxation to a minimum.” (Palkhivala and Palkhivala 1976: 46).
Avoidance involves ‘every attempt by legal means to prevent or reduce tax liability which would otherwise be incurred, by taking advantage of some provision or lack of provision in the law … it presupposes the existence of alternatives, one of which would result in less tax than the other’ (Report of the Royal Commission of Taxation 1966: 538; vide Webley et al. 1991: 2).
Tax avoidance “is the art of dodging taxes without breaking the law. ……tax avoidance means of traveling within the framework of the law or acting as per the language of the law only in form, but murdering the very spirit of the law and thus acting against the intention of the law and defeating the purpose of the particular legal enactment” (Lakhotia and Lakhotia 1998: 10).
Perhaps the most celebrated statement made in defense of tax avoidance came from the pen of Judge
Learned Hand. In a dissenting opinion, in Commissioner v. Newman case, he once said:
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant. [Commissioner v. Newman, 159 F.2d 848 (CA-2,1947), vide Scholes et al., 2002: 5].
Tax Planning
As stated earlier, tax planning is legal, desirable for the fiscal policymakers and ethical. In a narrow sense, tax planning and tax avoidance are used interchangeably. But for tax avoidance purpose, usual means are the exploiting the ‘tax loopholes’, or getting the advantages of tax law ambiguity, and hence it is often distinguished from tax planning. According to Lakhotia and Lakhotia (1998: 10), “‘Tax planning’ takes maximum advantage of the exemptions, deductions, rebates, reliefs and other tax concessions allowed by taxation statutes, leading to the reduction of the tax liability of the tax payer.”
However, according to Scholes and Wolfson (1992: 3), “Traditional approaches to tax planning fail to recognize that effective tax planning and tax minimization are very different things. The reason is that in a world of costly contracting, implementation of tax-minimizing strategies may introduce significant costs along nontax dimensions. Therefore, the tax-minimization strategy may be
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