Strengthening of tax laws has always been resisted
Big hue and cry from the rich and the powerful against modification of tax return forms has again pushed the govt on back foot
John Maynard Keynes famously said the avoidance of tax is the only intellectual pursuit that carries a reward.
Historically, tax ‘avoidance’ is understood as an intellectual exercise involving interpretation of the complex laws and the ability to structure transactions within the framework of the relevant laws in such a way –without breaking it — that one either does not pay any tax at all or pays a lower amount. In this case, the dispute between the taxpayer and taxmen gets a halo of academic dialogue, even if the arguments happen at the precincts of the judiciary.
But tax ‘evasion’ is usually viewed as a less glamorous exercise. It is seen as a visible violation of law either by withholding of relevant information from the authorities or submitting wrong information. In this case the taxpayer is breaking the law, cognizably.
In the case of tax avoidance, the assessee is not seen as the one who breaks the law, but as the one who bends the law.
Therefore evasion is viewed as a lower intellectual activity that may attract the wrath of the state in the form of raids, interrogation and confiscation of assets, books, documents and finally prosecution. Tax evasion, if caught, is a one-way road to hell.
“The difference between tax avoidance and tax evasion is the thickness of a prison wall,” Denis Healey, a tax expert, once said.
Globalisation, a process purportedly introduced to provide a level playing field to all nations, also brought its own problems. One among them is the globalisation of tax avoidance with multinationals, allegedly shifting profit from high tax territories to low-tax ones.
According to studies conducted in the United States between 1996-2000, around two-thirds of transnational corporations (TNCs) paid no tax at all, and over 90 per cent paid below five per cent of their total income. From 2005 to 2006, of the 700 largest firms in the UK, 220 paid no UK tax at all and a further 210 paid under £10 million. A fallout of the practice of avoiding tax by shifting profit from one territory to the other is the additional tax burden on the domestic companies.
Such shifting of profits is engineered on a global scale and the significance of the phenomenon can be easily gauged from the proportion of the related party transaction to the entire cross-border transactions — 60 per cent of the global trade is carried out between related parties.
Companies under a gigantic common umbrella spanning continents can make intra-group adjustments of the transaction prices and can possibly escape the tax net of the host country, by interpreting and bending the domestic law or the laws governing cross-border transactions.
It was the global concern for safeguarding the revenue interest of the governments that compelled the international tax regimes to evolve transfer pricing rules. The TP rules had been put in place by the governments to ensure that taxes due to them are paid within the territory, without fail. Most member countries of Organisation For Economic Co-operation and Development (OECD) have put in place the rules and India too followed suit in 2001.
While TP laws are still evolving in India, the trend seen in the country is to resist attempts to enact laws that can curb tax avoidance and tax evasion.
Many countries have enacted laws to prevent tax avoidance. Australia, as early as 1981 has introduced general anti-avoidance rules (GAAR). India has introduced GAAR, as a part of direct tax code (DTC), a celebrated endeavour to replace India’s Income-Tax Act 1961. DTC, however, is yet to be made law. But the government’s attempt to introduce GAAR was met with skepticism by India Inc. that did not like it. GAAR’s focus is on denying tax benefits to an entity that structures a transaction with the tax benefit in mind, rather than the commercial expediency. GAAR empowers the tax authority to look at the substance of a transaction rather than the form. The form can be deceptive, a facade that hides the ulterior motive of gaining an undue tax benefit.
GAAR could have been a severe blow to those who seek to avoid paying tax by using the loopholes in the existing tax laws, and go scot-free without paying any. But GAAR has not come to effect so far.
DTC, originally scheduled to be operational in 2013 too has not come to effect so far. As things stand now, both DTC and GAAR are in limbo and the cynics do not expect DTC and even GAAR to come back to life anytime in the near future.
More often than not, the governments’ attempts to tighten the law against tax avoidance/evasion have been scuttled one way or the other. The government either retracted the steps or the judiciary came in between. The attempts of the income -tax department to investigate the commercial substance of the companies claiming to be residents of Mauritius was knocked down by the Supreme Court in the case of the ‘Azadi Bachao Andolan’, wherein it held that residency certificate from Mauritius authorities is sufficient proof of its residential status that entitles it to capital gains tax exemption. The apex court’s decision rendered the income-tax department powerless to investigate the veracity of the claims of resident status in Mauritius.
The introduction of GAAR could have offset the setback the Indian tax regime suffered in the Azadi Bachao Andolan case. But, GARR was accused by India Inc of giving excess discretionary power to the tax office. Instead of announcing measures addressing this apprehension, the government procrastinated.
The 2011 bill amending the Benami Transaction (Prohibition) Act 1988, was introduced with the objective of checking benami transactions and generation and preservation of black money. However, the new provisions incorporated in the act go against the spirit of the law. Prior to the amendment, the said act allowed exemption from the application of the law to only the spouse and unmarried daughter. The amended version had extended the exemption to a large number of people, including the brother or sister or any lineal ascendant or descendant. The extension of the exemptions is apparently against the very purpose for which the law was sought to be enacted. The point is not limited to the dilution of the act. The amended act did not become law and lapsed with the last Lok Sabha. However, there are media reports suggesting that the government may again introduce the bill limiting the exemptions to the spouse and unmarried daughter.
The proposed modification in tax returns asking the taxpayer file details of foreign travel and other details of bank accounts also met with stiff resistance. The big hue and cry from the rich and the powerful has pushed the government on the back foot and it appears that the government is contemplating dilution of the proposal. The resistance to frame tax policies that can strengthen and widen the tax net has been a historical trend in India and going by the recent developments, the trend does not seem to be changing at the desired pace.
