Introduction and Background

In the era of globalization and competition, the world has become one village. The
advantages of efficiency and lower cost to run business of the person in one part of the world
can be earned in any part of the world. While prices are governed by market, cost is outlook
of manufacturer of goods or service provider, therefore no one can charge extra price to
customer on the grounds that his cost of production or cost of provision of service is more
than the others. Today, no one can operate on the theory that he can recover the entire cost
from customers. At the same time he cannot sell his products below costs.
If he starts selling his products below cost, the existence of the organization itself will be in
danger. The earlier equation i.e. Sale price = Cost + Profit is now changed. Keeping the
factors same but only by changing their places, it can be said that today
Sales Price – Cost= Profit. Today sales price is dictated by the market. Profit is essential for
survival and therefore always under pressure. Therefore the concept of target costing is
getting importance. In target costing the price of the goods, which market can offer is a target
and one has to maintain his costs below the target. Under such circumstances, cost
management and cost reduction has become the most important tasks of the organizations.
Due to pressure on the costs, the traditional methods of cost reduction have reached to its
saturation and the organizations have to search for new and unconventional avenues for cost
reduction. Since indirect taxes are part and parcel of the material cost and services, reduction
in the payment of indirect tax leads to cost saving. Therefore Tax planning in Indirect Taxes,
though unconventional, has become a major source of Cost Reduction
Activities.
Whether Tax planning is a legal and legitimate way of reducing tax liability? The answer to
this has been given affirmative by courts in series of decisions and therefore the researcher
felt it necessary to study the various aspects and avenues of tax planning in Indirect Taxes
and its impact on cost. Under Central Excise, Service Tax and Customs law, certain
exemptions are being granted through notifications. Cenvat Credit Rules do help in
minimizing cascading effect of taxes. Therefore, proper understanding of various rules,
regulations and provisions, exemptions and procedures in taxation and application of the
same in the business operations is one of the non traditional areas for cost reduction. The
Industry and business, to a great extent try to reduce burden of Income Tax using various
means and methods.

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However, in Indirect Taxes, particularly Central Excise Duty, Service Tax, Customs Duty
and Vat, which play a very crucial role in cost of production, stress is given on the
compliance of tax provisions to avoid stringent penalties and interest .This can be called as
Tax Management. The implementation of indirect tax provisions generally rests in the hands
of middle management, who is also responsible for daily routine activities. Resultantly
priority is given to routine work. Also due to inadequate knowledge of the subject, lack of
training and continuous up-dation of knowledge, the aspect of tax planning is being ignored.
Therefore Researcher felt that the research in the area of tax
planning should be undertaken.
The scope of Indirect Taxes is very wide. While law for Central Excise, Customs and Service
Tax is one for the whole nation, VAT, Octroi, Entry Tax, LBT have state-wise separate
provisions . The researcher has made concentrated efforts to understand various provisions
related to Central Excise Duty and Service Tax, and to some extent Customs and Foreign
Trade Policy, application of the same to various sectors, various exemptions thereunder ,
Cenvat credit provisions which are common to Central Excise and Service
Tax, and effect of the same in cost reduction.

What is 'Tax Evasion?

Tax evasion is an illegal practice where a person, organization or corporation intentionally
avoids paying his true tax liability.
Those caught evading taxes are generally subject to criminal charges and substantial
penalties. To willfully fail to pay taxes is a federal offense under the Internal Revenue
Service (IRS) tax code.

Tax evasion is the illegal practice of not paying taxes, by not reporting income, reporting
expenses not legally allowed, or by not paying taxes owed. In this situation, the phrase
"ignorance of the law is no excuse" comes to mind.
Tax evasion is most commonly thought of in relation to income taxes, but tax evasion can be
practiced by businesses on state sales taxes and on employment taxes. In fact, tax evasion can
be practiced on all the taxes a business owes.

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Tax evasion is the illegal act or practice of failing to pay taxes which are owed. In
businesses, tax evasion can occur in connection with income taxes, employment taxes, sales
and excise taxes, and other federal, state, and local taxes.

Examples of Practices Which Are Considered Tax Evasion:

It's considered tax evasion if you knowingly fail to report income.
Under-reporting income (claiming less income than you actually received from a specific
source
 Providing false information to the IRS about business income or expenses
 Deliberately underpaying taxes owed
 Substantially understating your taxes (by stating a tax amount on your return which is
less than the amount owed on the income you reported).

The Cost of Tax Evasion

Some tax evasion cases may be reviewed in tax court, but others are turned over to the IRS
criminal division for prosecution. Even if the taxpayer is eventually found not guilty, the
costs in time and money are enormous.
Because tax evasion is considered intentional and "willful," the IRS can bring criminal
charges against those convicted of tax evasion. The penalties can include jail time as well as
substantial fines and penalties.

Domestic Practices: Reflections on Indian Scenario

Systems and methods of tax planning: The systems and methods of tax planning, in any case,
will depend upon the result sought to be achieved. Broadly, the various methods of tax-
planning will either be short-range tax planning or long-range tax-planning.

The short-range tax planning has a limited objective. An assessee whose income is likely to
register unusual growth in a particular year on account of say, the sale of a capital asset like
house property, as compared to the preceding year might plan to invest the same in bonds of
National Highway Authority of India or Rural Electrification Corporation Limited to claim
exemption under section 54EC. This has a locking period of 3 years. Such a plan does not

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involve any permanent or long –term commitment and yet it results in substantial tax saving.
This is an example of short-range tax planning.

The long-range tax planning, on the other hand, may not even confer immediate tax benefits.
But it may pay-off in none too distant future. For instance, in the case where an assessee
transfers certain shares to his spouse, the income arising from the shares will, of course, be
clubbed with the transferor’s income. However, if the company subsequently issues bonus
shares in respect of those shares the income arising from the bonus shares will not be clubbed
with the transferor’s income. Similarly, the income arising out of the investment of the
income from the transferred assets will not also be clubbed with the transferor’s income.
Long range tax planning may be resorted to even for domestic or family reasons.

Therefore there are two roads to the taxpayer’s final destination of minimizing tax liability-
one through legitimate tax planning as explained above and other is through tax avoidance or
tax evasion. There are many instances where the taxpayer has compromised on compliance
with the ethical standards of tax law by taking advantage of the loopholes in the tax
legislation. Thus such action of evading tax by resorting to concealment, misrepresentation or
willful omission of any portion of the income, wealth, turnover or receipts of the taxpayer
amounts to tax evasion which is illegal and unethical. Taxpayers tend to avoid taxes by
resorting to unfair accounting and business practices which are as follows:

Claiming personal expenditure as business expenditure;

Claiming capital expenditure as revenue expenditure;

Treating revenue receipt as capital receipt;

Accounting for amount paid as “Salaries” as business expenditure by classifying the same
under different account heads like conveyance, tour and travel, employee welfare, etc.;

Altering the form of transaction;

Breaking up of large value contracts with smaller contracts to avoid attracting TDS
provisions;

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Breaking up of cash payments in respect of expenditure to escape disallowance of such
expenditure;

Transferring their income/property to avoid tax, etc.

Splitting up the turnover of excisable goods and excisable services in order to claim scale
exemption;

Not disclosing correct turnover figures in case of excisable goods excisable services;

Resorting to unfair practices while valuing goods or services for the purpose of paying excise
duty, customs duty and service tax respectively;

Misclassifying goods and services to avoid excise duty, customs duty and service duty.

The intentional non-disclosure or concealment of the income is it fraudulent or not on the part
of the taxpayer amounts to tax evasion which is in stark contrast to tax planning which is
mitigation of tax within the letter of the law.

Global Practices on tax evasion:

The global international tax framework reflected in countries’ domestic law and bilateral tax
treaties assumes that multinational companies will pay tax somewhere on their cross-border
income. Generally speaking, it is envisaged that income will be taxable either in the country
where the income is earned (the source state) or the state where the multinational is
headquartered (the residence state) – depending on the nature of the cross-border activity
undertaken by the multinational.

A fundamental concern is that international tax standards, both concerning domestic law and
bilateral arrangements, have not kept pace with developments in the global economy. But it is
difficult for any country, acting alone, to fully address these issues. In some cases, it reflects
gaps and inadequacies in the design of domestic laws. Countries’ domestic rules for taxing
multinationals on their worldwide profits (“controlled foreign company” (CFC) rules) may be
inadequate. In other cases, countries’ rules for taxing investment into their country may be
undermined by the use of related party debt funding to strip out profits. In some instances,
certain transfer pricing practices (i.e. “mispricing”) result in base erosion and profit shifting.
These practices are particularly prevalent in relation to multinational profits generated by

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brands, intellectual property or digital services that are highly mobile and can be located
anywhere in the world but can also exist in relation to the pricing of extractive resource-
related contracts, for example.

Another set of problems arises from complex interactions between different countries’ tax
rules. For example, one country may classify a local entity like a company. But the country
where the investor in that entity is resident may treat the investor as the direct owner of the
assets of the company. That is, that second country does not recognize the existence of a
separate legal entity between the investor and the assets. These types of “hybrid entities” can
be used to claim the same deduction in two countries and may result in unintended double
non-taxation. Similar double non-taxation problems can arise from mismatches in the way
different countries classify instruments as being either debt or equity

For instance, global firms such as Starbucks, Google and Amazon have come under fire for
avoiding paying tax on their British sales. Companies have long had complicated tax
structures, but a recent spate of stories has highlighted some tax-avoiding firms that are not
seen to be playing their part. Starbucks, for example, had sales of £400m in the UK last year
but paid no corporation tax. It transferred some money to a Dutch sister company in royalty
payments, bought coffee beans from Switzerland and paid high-interest rates to borrow from
other parts of the business.

Amazon, which had sales in the UK of £3.35bn in 2011, only reported a “tax expense” of
£1.8m.

And Google’s UK unit paid just £6m to the Treasury in 2011 on UK turnover of £395m. Thus
tax dodging by multinationals by huge margin represents the sophisticated means of tax
evasion being employed thereby placing an immediate action for cooperation between
countries to tackle it.

Ultimately, base erosion and profit shifting has adverse implications for the important task of
actual tax collection. Efficient administration of many income tax systems depends upon the
voluntary compliance of taxpayers. Voluntary compliance is adversely impacted by
perceptions of unfairness. If multinationals don’t pay their share of tax, this is perceived as
unfair, and that perception may undermine voluntary compliance by other taxpayers.

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Whenever any tax is introduced, there is always a struggle between Government and tax
payers. While taxpayer always try to minimize or reduce tax liability by adopting certain
measures rightly or wrongly , the Government tries to amend the tax provisions in such a
way that there is
minimum scope for reducing tax burden. In spite of this, due to various economic or social
reasons, certain exemptions are granted in Excise Duty, Customs or even in Service Tax.
Certain deductions and abatements are provided on fulfillment of certain conditions and to
extend benefits to certain sectors of the society. Sometimes, taxpayers take advantage of
faulty drafting
of the rules. The decisions by Supreme Court, High Courts and Tribunals become a law on
the subject and are binding on taxpayers as well as Government authorities. Sometimes to
overcome the decision of the Apex Court, amendments are made in the law. In such
conditions Tax management and Tax planning becomes an important task of the taxpayer.

Illustration of difference between tax planning, tax avoidance and

Tax evasion.
The Government has issued Notifications No. 49/2003-CE, 50/2003-CE granting exemption
from excise duty for ten years if industry is set up in the specified area such as Himachal
Pradesh, Uttarakhand, and North East India. The purpose behind these notifications is to
encourage industrialization in these areas.
If a manufacturer sets up manufacturing unit in Himachal Pradesh, it is a tax planning.
However, if he sets up manufacturing facility somewhere else and brings almost ready
product to Himachal Pradesh for carrying out minor operations like, testing, packing,
repacking etc and sells from Himachal Pradesh, it can be said as tax avoidance, because the
intention of the government to encourage industrialization in Himachal Pradesh is defeated.
Thus the manufacturer follows the letter of the law but defeats the purpose of behind the law.
If a manufacturer manufactures and dispatches the goods from somewhere else and only
raises invoices of sale from Himachal Pradesh to show that goods have been manufactured
and sold from Himachal Pradesh , this is a tax evasion.

McDowell & Co. Ltd Vs CTO, reported in 1985(3)SCC 230 (SC 5 Members
Bench).

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In tax planning principle set in McDowell’s case is always referred. The principle set by Hon.
Court that tax planning is permissible but not subterfuges are allocable universally to all the
taxes.
Facts of the case: - McDowell & Co. Ltd (hereinafter referred to as the appellant) was a
licensed manufacturer of Indian Liquor. Buyers of liquor used to obtain passes for release of
liquor after making payment of excise duty directly to excise authorities and present said
passes before appellant whereupon bill of sale was prepared by the appellant showing price of
liquor but excluding excise duty. Sales tax was paid by appellant to sales tax authorities on
basis of turnover but excluding excise duty. The method followed by the appellant resulted in
reduction of sales tax amount on liquor. The issue before Hon. Supreme Court (5 Member
Bench) was whether excise duty which was payable by appellant but had been paid by buyer
was actually a part of turnover of appellant and was, therefore liable to be so included for
determining liability to sales tax. In the instant case appellant followed this method to reduce
burden of sales tax. The liability to pay excise duty is on the manufacturer at the time of
removal of the goods from the factory, though he can recover it from the customer. However,
in the instant case, the duty burden was directly transferred to buyer and the value of the
excise duty, which should have been part of the taxable value for the purpose of sales tax,
was not included in the taxable value. Hon. Supreme Court, on this issue, held that excise
duty, which was payable by appellant but had been paid buyer was actually a part of turnover
of appellant and therefore liable to be included for determining liability of sales tax.
On the other issue i.e. whether it is open to everyone to so arrange his affairs as to reduce
burden of taxation to minimum and such a process does not constitute tax evasion, Hon.
Apex Court held that the process will amount to tax evasion.
Decision :- In the said case of McDowell & Co. Ltd Vs CTO, reported in 1985(3)SCC 230
(SC 5 Members Bench), Hon. Supreme Court, observed that “ Tax planning may be
legitimate if it is within the framework of law, but colorable devices cannot be part of tax
planning. It is wrong to say that it is honorable to avoid payment of tax by dubious
methods. It is obligation of every citizen to pay tax honestly without resorting to
subterfuges”.
This view was expressed in majority judgment delivered By Hon. Justice Rangnath Mishra.
However, in the separate judgment, Justice Chinnapa Reddy, expressed that “In our view, the
proper view to construe a taxing statute , while considering a device to avoid tax , is not to
ask whether a provision should be construed liberally or principally, nor whether the

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transaction is not unreal and not prohibited by the statute , but whether the transaction is a
device to avoid tax and whether the transaction is such that the judicial process may
accordapproval to it .- The series of transactions has to be viewed as a whole and then the
court should see the real purpose of the transaction. – It is neither
fair nor desirable to expect the legislature to intervene and take care of every device and
scheme to avoid taxation. It is up to the court to take stock and determine the nature of the
new and sophisticated devices to avoid tax and expose for what they really are and refuse to
give judicial beneficiation”.

What Is Tax Avoidance?

Tax avoidance is the legitimate minimizing of taxes, using methods included in the tax
code. Businesses avoid taxes by taking all legitimate deductions and by sheltering income
from taxes by setting up employee retirement plans and other means, all legal and under the
Internal Revenue Code or state tax codes.
Some Examples of Tax Avoidance:
 Taking legitimate tax deductions to minimize business expenses and thus lower your
business tax bill.
 Setting up a tax deferral plan such as an IRA, SEP-IRA, or 401(k) plan to delay taxes
until a later date.
 Taking tax credits for spending money for legitimate purposes, like taking a Work
Opportunity Tax Credit for hiring workers in your business.

What Is the Difference Between Tax Avoidance and Tax Evasion?

-No one likes to pay taxes. But taxes are the law.
-The terms "tax avoidance" and "tax evasion" are often used interchangeably, but they are
very different concepts.
-Basically, tax avoidance is legal, while tax evasion is not.

Tax avoidance is generally the legal exploitation of the tax regime to one’s own advantage,
to attempt to reduce the amount of tax that is payable by means that are within the law whilst
making a full disclosure of the material information to the tax authorities.

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Examples of tax avoidance involve using tax deductions, changing one’s business structure
through incorporation or establishing an offshore company in a tax haven.

By contrast, Tax evasion is the general term for efforts by individuals, firms, trusts and other
entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers
deliberately misrepresenting or concealing the true state of their affairs to the tax authorities
to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as under
declaring income, profits or gains; or overstating deductions).

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 BIBLIOGRAPHY-

PRIMARY SOURCES:

KAILASH RAI, TAXATION LAWS (Allahabad Law Agency, Reprint 2016).

WEB SOURCES:

https://iproject.com.ng/economics/causes-and-effects-of-tax-evasion-and-avoidance-on-the-
economy/index.html

http://www.supremecourtcases.com/index2.php?option=com_content&itemid=5&do_pdf=1
&id=494

https://www.taxation.co.uk/content/landmark-avoidance-cases

https://www.ssconline.com

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