The concept of Tax Avoidance
Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that although it is within the four corners of the taxation laws an the advantage is taken by finding out loopholes in the laws.
The tax avoidance is defined as ‘’it is the art of dodging tax without breaking the law’’.
Royal Commission on Taxation for Canada has explained the concept of ‘avoidance of tax’ as under:
The expression “Tax Avoidance” will be used to describe 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 excludes fraud, concealment or other illegal measures. In other words, ‘’tax avoidance’ is a device that technically satisfies the legal requirement of the law but in fact, it is not in accordance with the legislative intent.
Methods of Tax Avoidance
1. Legal Entities: Legal entities are a method that people follow when they want to go for tax avoidance. Under this method of tax avoidance, people legally defer paying personal taxes by creating a legally separate entity to which they donate their property. The legal separate entity that is set-up is often a foundation, company, or The properties are transferred to the trust or company, as a result of which the income that is earned belongs to this entity and not by the owner.
Usually, people are taxed personally on earnings and property that they own and thus by transferring property to a legally separate entity, individuals can avoid personal taxation although certain taxes such as corporate taxes are still applicable. In order to go for tax avoidance, the foundation, company, or trust can also avoid corporate taxes if the entity is set-up in a jurisdiction that considered off-shore.
2. Country of Residency: Country of residence is another method that people adopt when they go for the avoidance of tax. Under this method of tax avoidance, the company or person changes the tax residence to a place that is a tax haven in order to lower the amount of taxes that they pay. Under this methods, the person may also become a regular traveler so that taxation can be avoidance.
3. Double Taxation: Double taxation means that many countries charge taxes on the income that has been earned inside that country without taking into consideration, the resident country of the firm or person. So that people do not have to pay double taxes, once in the country where the income has been earned and then again in the resident country, many countries have gone for bilateral treaties of double taxation with other countries, this helps the tax-payers as they are able to avoid paying double taxes. Tax avoidance reduces the revenue of the government and also brings into disrepute, the tax system. Ideally, avoidance of tax should not be encouraged and the Government should also take measures in order to prevent it.
Causes of Tax Avoidance
- High tax rates make evasion or avoidance more rewarding and also make it worthwhile spending more tax advice and using more complex schemes.
- Imprecise laws mean that the letter of the law is not tight enough to stop avoidance and the spirit of the law may be unclear.
- Apparent inequity can lead to an increased desire to evade tax, and also make tax avoidance and evasion more socially acceptable.
Remedial Measures to Cheak Tax Avoidance
- Avoidance could be checked only by plugging the loopholes in the law and by careful drafting of new legislation.
- In India, it is seen that people take undue advantage by forming small Hindu Undivided Families. It has been suggested that if the income of the member of Hindu Undivided Family is above the maximum exemption limit, it should be taxed at progressive rates and all the members should be taxed separately.