Tax Planning, Avoidance and Evasion
This domain tests the boundary between legitimate planning, abusive avoidance and illegal evasion, and the anti-avoidance rules that apply.
Core rules
- Tax planning uses the law openly to reduce tax: choosing an eligible entity, timing income and deductions, using exemptions, and structuring remuneration and investments within statutory limits. It is not concealment.
- Tax avoidance exploits loopholes or artificial arrangements to defeat the spirit of the law. It may be legal in form but vulnerable to GAAR, substance-over-form analysis and specific anti-avoidance provisions.
- Tax evasion is illegal: concealment of income, false entries, undisclosed cash, bogus expenses or failure to report transactions. It attracts penalty and prosecution.
- GAAR permits rejection of an arrangement if it is impermissible, lacks commercial substance, or is entered into mainly for tax benefit. Specific rules also address transfer pricing, thin capitalisation and treaty abuse.
Worked example
A promoter may take remuneration from a company instead of a larger dividend. Salary is deductible for the company but taxable in the promoter’s hands; dividend has different tax treatment. Comparing the net tax and cash position is legitimate planning. Creating a paper entity with no business substance solely to convert salary into tax-free receipts is avoidance and may be attacked.
Traps
Do not call every tax reduction “evasion”; document commercial substance; GAAR is not a blanket rejection of legitimate choices; check specific provisions before relying on general planning; shams and round-tripping are not saved by legal form.