In this blog post, Shreetama Ghosh, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes what is tax avoidance.  

 

INTRODUCTION

It is said that nothing in this world is certain except for death and taxes. While the former is out of one’s control, the latter can be minimised through a technique called tax avoidance. Although tax avoidance and tax evasion are terms often used synonymously, they are radically different concepts. Whereas tax avoidance is the use of legal procedure to reduce the amount of tax owed, usually by claiming the permissible deductions and benefits, tax evasion is a criminal act punishable under law in which illegal methods, such as understating or underreporting income, etc. are used to avoid paying the taxes which are legally due. Tax avoidance is the legitimate minimizing of taxes, using methods approved by taxation laws. It is the legal usage of the tax regime to one’s own advantage. 

Most taxpayers use some method of tax avoidance to tax bills by structuring transactions in such a way that one can reap the maximum tax benefits. Tax avoidance is a tool which is used by the governments to satisfy the tax-paying citizens of their country. It is encouraged in the sense that the governments intend to allow the taxpayers to save up on taxes owed through tax planning, but this is often taken advantage of by the citizens who use these legal measures for purposes not intended by the government.

TECHNIQUES OF TAX AVOIDANCE IN INDIA

Tax avoidance can be legally ensured through the following:

 

• Income Tax Act, 1961

 

The Chapter VIA of the IT Act provides that after computing the total income of an individual or a corporation, certain deductions can be allowed on the total amount of tax on the basis of certain provisions. The following are the provisions dealing with all tax deductions under the Act, providing a leeway for tax avoidance for the taxpayers:

1. Section 10(5)

A Leave Travel Allowance (LTA) is the remuneration paid by an employer for his employees’ travel in the country when he is on leave alone or with family. This Section provides for the exemption of LTA from tax up to the limit of Rs. 25,000 and outlines the conditions to which this provision is subject. This allowance is provided for two trips in a block of 4 years, with the Air Economy or Rail 1st AC fare payable for the shortest distance and only one destination. In case the assessee has not availed this benefit in one block, the benefit can be transferred to the next block, i.e. he/she is allowed LTA for three trips in that block.

1. Section 17(2)

The proviso to this Section covers the tax exemption provided for medical reimbursement by the employer to an employee up to the limit of Rs. 15,000 in aggregate annually.

1. Sections 44AD & 44AE

This Section provides a Presumptive Tax Scheme if the assessee is engaged in business or freelancing or providing professional services, provided that the annual turnover does not exceed 2 crore rupees. Resident citizens, HUFs and partnership firms, but not LLPs, are covered under this Section. The income calculated at the rate of 8% is the final taxable income of the enterprise covered under this Scheme and no further expenses will be allowed or disallowed. For professionals, their annual income must not exceed 50 lakh rupees and taxes have to be paid only on 50% of the receipts (which are shown as profits). Those availing the benefit under these Sections do not have to maintain any books of accounts or get audit done and are exempt from advance tax.

1. Section 44DA

Under this Section, small professionals whose professions are covered in Section 44AA(1) and whose annual income does not exceed 50 lakh rupees will have to pay taxes on only 50% of the total receipts (which are shown as profits). This also applies to the same conditions as Sections 44AD and 44AE, with the professional only being allowed exemptions under the Sections 30 to 38.

1. Section 80C

This Section deals with the deduction from the total income with regards to certain investments or expenditures or payments to the extent of 1.5 lakh rupees. This provision was enumerated under Section 88 before the Act of 2005. The investments or expenditures or payments covered under this Section include –

1. Life insurance premium
2. Deferred annuity payment under a contract
3. Contribution under the Employees’ Provident Fund (EPF)
4. Contribution to a Public Provident Fund (PPF)
5. Contribution by an employee to a recognised provident fund or an approved superannuation fund
6. Sums deducted from the salary payable to the Government servants to secure deferred annuity for one’s self, spouse or child
7. Subscription to any notified securities or deposit schemes
8. Subscription to any notified savings certificates
9. Contribution to a unit linked insurance plan of LIC Mutual Fund
10. Contribution to notified deposit schemes or pension fund set up by the National Housing Bank
11. Certain payment made by way of instalment or part-payment of loan taken for purchase/construction of residential house property
12. Subscription of units of a mutual fund notified under Section 10(23D)
13. Subscription to any deposit scheme of a public sector company engaged in providing housing finance
14. Any subscription to equity shares/debentures forming part of any eligible issue of capital by a public company or public financial institution
15. Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for the purpose of full time education
16. Any Term Deposit (TD) for a fixed period of not less than five years with the scheduled bank
17. Subscription to notified bonds issued by NABARD
18. Payment made into an account under the Senior Citizens Savings Scheme Rules, 2004
19. Payment made as five year TD in an account under the Post Office Time Deposit Rules, 1981
20. Contribution to Sukanya Samriddhi Account opened in the name of daughters
21. Stamp duty and registration fees at the time of purchase of a house on acquiring its possession

1. Section 80CCC

Under this Section, the premium paid for an annuity plan of LIC or any other such insurer can be deducted to the ceiling of 1.5 lakh rupees (from the A.Y. 2016-17). For this deduction to take effect, the premium under the annuity plan contract must be deposited with the insurer.

1. Section 80CCD

Under this Section, the amount to the extent of 10% of an employee’s salary can be deposited by him in his pension account and this amount will be exempt from taxation. But if any amount is received from this account in any year, the amount will be taxed as a part of the income of the previous year. This provision was previously restricted to Government employees, but has now been extended to any individual employee. An additional deduction upto Rs. 50,000 for contribution to the New Pension Scheme (NPS) raises the limit of deductions under Sections 80C, 80CCC and 80CCD to 2 lakh rupees. In addition to this, withdrawals from the scheme will be tax exempt upto 40% of the total accumulated corpus.

1. Section 80CCG

This Section provides for deduction of 50% of the amount or Rs. 25,000, whichever is lower, on investment under the Rajiv Gandhi Equity Savings Scheme and the maximum amount of such investment which is permissible for this deduction is 50,000 rupees. While the aggregate of deductions under Section 80C, Section 80CCC and Section CCD cannot exceed 2 lakh rupees, this deduction is available additionally over the total deduction under the aforementioned Sections.

1. Section 80D

This Section deals with deductions for payment of premiums of medical insurance in the following situations –

1. To the extent of Rs. 15,000 if the medical insurance in the name of the assessee or his/her spouse, and to the extent of Rs. 20,000 if the assessee is a senior citizen.
2. To the extent of Rs. 15,000 if the medical insurance in the name of the assessee’s parents and to the enhanced extent of Rs. 20,000 if his/her parents are senior citizens.

To avail this deduction, the premium must be paid by any mode of payment but cash, and the insurance scheme must be either framed by the General Insurance Corporation of India and approved by the Central Government, or framed by any other insurer and approved by the Insurance Regulatory and Development Authority. Any contribution made to the Central Government Health Scheme is also covered under this Section.

1. Section 80DD

This Section provides for deductions to the extent of Rs. 50,000 for

1. The expenditure incurred on the medical treatment (inclusive of nursing), training and rehabilitation of any dependent disabled relative.
2. Payment or deposit to any specified scheme for the maintenance of the dependent disabled relative.

The disabled dependent should be a dependent relative suffering from a permanent disability, which includes blindness as well as mental imbalance, as certified by a specified doctor. The deduction amount is enhanced to 1 lakh rupees in case of a dependent with a severe disability, defined as a person with 80% or more of one or multiple disabilities as given in Section 56(4) of the Persons with Disabilities (Equal Opportunity, Protection of Rights and Full Participation) Act, 1995.

1. Section 80DDB

This Section covers the deductions that accrue in respect of the medical expenditure of the assessee to the maximum amount of Rs. 40,000 or the actual expenditure incurred, whichever is least. For a senior citizen, the deduction extent enhances to a maximum of Rs. 60,000. For this Section to be applicable, the expenditure has to be incurred on the assessee himself or on any dependent relative for the treatment of any disease specified in Rule 11DD, in respect of which a certificate in Form 10I is to be furnished from a specialist working in a Government hospital.

1. Section 80E

This Section relates to deductions due to the payment of interest in the previous year on a loan for higher studies taken from a financial institution or approved charitable institution for a period of 8 years. This deduction is available for any such loan under the name of the assessee, his/her spouse or children.

1. Section 80EE

Under this Section, a deduction can be availed for the interest payment on any loan taken for residential house property. This deduction is available to the limit of 2.5 lakh rupees for any such loan, not exceeding 35 lakh rupees for the acquisition of a residential house whose value does not exceed 50 lakh rupees, provided that the assessee is a first time home buyer on the date of sanction of the loan.

1. Section 80G

Deductions are available under this Section for donations specified under it to certain funds, charitable institutions, etc. upto either 50% or 100%, with or without certain restrictions, as specified therein. This provision exists to encourage such donations which provide an incentive to the charitable institutions to continue their noble work.

1. Section 80GG

The deduction referred to in this Section relates to the payment of rent by an assessee who or whose spouse or minor child do not own a residential place at the place of employment, who does not own residential premises elsewhere and who is not in receipt of House Rent Allowance (HRA). In such situations, the assessee is entitled to deductions to the extent of the least of the following:

1. Excess of rent paid over 10% of the monthly income;
2. Rs. 5000 per month;
3. 25% of total monthly income,

In case the assessee recieves an HRA, the least of the following are available for exemption from taxation –

1. The actual HRA received from the employer;
2. Excess of rent paid over 10% of the monthly income;
3. 50% (for a metro) or 40% (for a non-metro) of the basic salary.

1. Section 80QQB

This Section provides that the assessee is entitled to deductions on any income received through royalty or copyright for authoring a book (except a textbook) of literary, artistic or scientific nature to the extent of 3 lakh rupees or the total income received, whichever is lesser, subject to the following conditions :

1. The assessee is an individual citizen of India;
2. The assessee receives the income in exercise of his profession;
3. The assessee can furnish a certificate of holding the copyright in the prescribed form along with his income returns.

1. Section 80RRB

The assessee is entitled to deductions under this Section on any income by way of royalty in respect of a patent registered in or after the financial year of 2003-04 under the Patents Act, 1970 to the extent of 3 lakh rupees or the income received, whichever is lesser, provided that the patentee is an individual resident of India and can furnish a certificate for holding the patent in the prescribed form authenticated by the prescribed authority and his income returns.

1. Section 80TTA

Under this Section, the assessee is entitled to deductions for the interest accrued on deposits (other than TDs) in savings accounts held with banks, cooperative banks or post office limited to the amount of Rs. 10,000 or the actual interest accrued, whichever is lesser.

1. Section 80U

This Section covers any deductions to the limit of Rs. 50,000 accruing to an individual suffering from a physical or mental disability on the basis of certificate obtained in the prescribed format from a notified medical authority. This limit is enhanced to 1 lakh rupees for persons suffering from severe disabilities.

1. Section 87A

This Section provides for a rebate of Rs. 5000 or the amount of tax owed, whichever is lower, for individuals in the lower income bracket, i.e. having a total annual income not exceeding 5 lakh rupees.

 

• HUF

 

A Hindu Undivided Family (HUF) is treated as a separate entity from its members, having its own PAN No. and thus, taxed separately. This helps to segregate the tax obligations of the HUF and its members. Its tax slabs are the same as that of its members, and it qualifies for all the tax benefits that its members can avail under the Income Tax Act, 1861. It can additionally avail exemptions under Sections 54 and 54F with respect to capital gains and is entitled to deductions for interest on self-occupied house property upto 2 lakh rupees annually under Section 24.

 

• Salary Restructuring

 

Salary restructuring may not always be a feasible option, but if the assessee is allowed to do so, he may restructure his salary in the following ways to save on taxes –

1. Opt for food coupons instead of lunch allowances since they are tax exempt to the extent of Rs. 50 per meal.
2. Include medical allowances, transport allowances (Rs. 1600 per month), education allowances, leave travel allowances, uniform expenses and telephone expenses as part of the salary along with producing the actual expense bills for availing the reduction in the taxes.
3. Opt for the company car instead of using one’s own to avoid prerequisite taxation.

 

• Investment of Gifted Money in Tax-Free Instruments

 

The gift tax provisions do not apply on transfers to one’s non-working spouse, minor child, parents or the lineal ascendants and descendants of one’s spouse and such money can be invested in a tax-free instrument such as a PPF, tax-free bonds, etc., in which case the assessee will not incur any tax liability even on the clubbing of incomes.

 

• Investment in Minor Children

 

A deduction upto Rs. 1500 can be claimed per child upto two children in the event of making any investment in the name of the said minors.

 

• Investments leading to Long-Term Gains

 

The assessee will be exempt from capital gains tax in case he invests in stocks and equity mutual funds and holds them for a more than a year. In case of investment in gold and property and debt-related mutual funds for the same purpose, the holding period is 3 years.

 

• Reinvestment of Income

 

If the assessee re-invests his income in the relative’s name who is not earning or falls under a lower income bracket, the money will be treated as part of the relative’s income and the assessee will incur no further tax liability on that amount from the second year onwards.

 

• Transfer of Income to Adult Children

 

There is no clubbing of income after the child of the assessee becomes an adult, and he/she will be entitled to a tax-free income of 2.5 lakh rupees along with all the tax benefits and deductions available to any other taxpayer, which can be transferred to his name by the assessee legally before he/she turns 18.

 

• HRA Benefits

 

The assessee can incur tax benefits if he/she is living with his/her parents in a house registered in their name. The assessee can pay rent to them and claim HRA benefits and the parents can claim deduction of 30% of the annual rent collected as maintenance charges and will only be taxed for the income above the basic tax exemption limit (2.5 lakh rupees generally, 3 lakh rupees above the age of 60 and 5 lakh rupees above the age of 80) and if the House is co-owned by them, they can split the rent earning and separate their tax liability.

 

• Investment in the name of Parents

 

The assessee can invest in the name of his/her parents, the clubbing rules and gift tax not being applicable on the same, so as to benefit from their basic tax exemption limit and tax benefits that can be availed by them.

 

• Loans

 

The income clubbing rules apply on earnings from gifted money, but if the assessee can show it as a loan wherein the relative pays him/her a nominal interest, the income from the gift will be exempt from taxes.

 

• Declaration of Losses

 

The assessee can set off the losses incurred in one business against the gains in another one, depending upon several criteria. If the assessee incurs only losses in a year, he/she can show this loss in the tax returns and carry it forward and set it off against any future profits upto a period of 8 years.

CONCLUSION

It is indeed an irony that the taxes which are imposed by the Government to promote the welfare of the poorer section of the society by taxing the richer section can be legally avoided in such a variety of ways under the Income Tax Act itself. Although it is undeniable that the Government implements the tax avoidance schemes so as to throw a positive light on the tax regime being imposed by it. Therefore, such schemes are encouraged by almost every government in their tax legislation. But in a developing country like India, such a scheme has a very detrimental effect on economic progress and development. The main principle behind the imposition of taxes is to cause equitable distribution of wealth by procuring taxes from the rich and using the same for providing the poor with a better condition of living, but legal means of tax avoidance prove to be a hurdle in the path of achieving this objective. Since the rich almost always have legal and tax advisors, they are made aware of the legally allowed methods of avoiding taxation and they are able to prevent their income from getting taxed as much as intended by the Government. This results in reduction in the funds that can be utilised for the welfare and development of the poorer section of the society, which forms a major part of the population in a developing country, thereby impeding economic development. Moreover, the poorer are ignorant about the tax benefits and exemptions they are entitled to due to illiteracy and other factors resulting from their underdeveloped state. Thus, the tax avoidance provisions only result in the rich becoming richer and the poor, poorer. This goes completely against the spirit of the scheme of taxation in any country, thereby negating the intended effect of any such scheme. It is, therefore, important to scrutinise the claims of tax benefits, deductions and exemptions carefully and prevent frivolous claims from atrophying the economic growth of a nation.