The Hindu Business Line : Countering tax evasion the Kautilya way

Every action has an equal and opposite reaction. So too, every levy of tax meets with ingenious ways to avoid paying the tax, says K. R. Sampath in Tax Avoidance under Direct Tax Laws (www.cliofindia.com).

Our Income-Tax Act does not define the phrase `tax avoidance' but there are specific anti-avoidance provisions, the author observes. He takes readers on a tour of international tax law relating to `avoidance'.

For instance, Singapore tax law speaks of how authorities can cancel any `tax advantage' taken by a taxpayer, such as alteration in the incidence of tax. In Australia, `tax avoidance agreement' refers to conscious steps to avoid or reduce tax liability; this is allowed, so long as it is found to be bona fide looking to the circumstances and criteria specified.

Of interest should be this snatch from http://taxpolicy.ird.govt.nz on Australian legislation, defining the phrase, thus: "`Tax avoidance agreement' means an agreement, not being an agreement entered into or carried out in the course of ordinary family or commercial dealing, that was entered into or carried out by any person for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into or carried out, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into or carried out."

When avoidance is illegal, it becomes evasion, explains Sampath. "There is a thin line of difference between the two though both result in avoidance of tax."

While legitimate tax avoidance, by taking advantage of the loopholes or lacuna in the law, has the nod of the judiciary, illegal tax avoidance - evasion - if deliberately undertaken is criminal in nature and both the law administrator and the judiciary come down heavily on such mode of avoidance of tax, he elaborates.

Doing away with the `licence raj' and bringing tax rates to a minimum help counter tax evasion, the author notes. However, a third necessary measure is the tackling of corruption in the tax offices.

Sampath is of the view that handling tax evasion requires all the four methods that Kautilya prescribes in the Arthashastra for conflict resolution, viz. sama (adopting a conciliatory attitude), dhana (placating with rewards and gifts), bedha (sowing dissension by creating mutual suspicion), and dhanda (threatening to use force).

Of exotic value in the book is an analysis of appropriate tax provisions under these four heads. The detailed definition of `jewellery' in of the I-T Act, for example, adopts the sama route by facilitating compliance, the author reasons. However, the Finance Act, 2007 plugged a loophole by excluding `drawings, paintings, sculptures and other work of art' from the gamut of `personal effects'.

Historically, a popular dhana measure in tax has been VDIS ( voluntary disclosure of income scheme), offering leniency to tax evaders with a view to collect tax sought to be evaded. Such schemes are like `a launderette owned and operated by the Government, where `black' money is turned to `white' money at a cost with a concession that punishment will be waived,' the author rues. Recommended addition to the tax professionals' shelf.

D. MURALI

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