Tax Avoidance: Methods of Tax Avoidance
Reduction of tax taking advantages of loopholes and weakness in tax laws – without breaking the laws-immoral/unethical practice. Tax avoidance is saving taxes without actually breaking the law. It is using the loopholes of the tax law. It is not illegal but unethical.
GSA Wheat Craft says,” Tax avoidance is the art of dodging tax with out actually breaking the law”.
In other words, it is a transaction entered into with full legal backing. However, such activities are of those kinds that the legislature does not want to encourage. The following are criteria used by English and Indian court to find out tax avoidance:
- Use of colorable devices
- Defeating the genuine spirit of law
- Twisting of facts
- Taking only strict of law and suppressing the legislative intent ‘
We can see following characteristics of tax avoidance:
- Basically, there is presence of an element of artificiality or, to put this another way, the various arrangements involved in a scheme which do not have business or economic aims as their primary purpose.
- In some case tax advisors sell ready-made avoidance devices, one term of the contract of sale being that the tax payer keeps the facts secret for as long as possible. It is in the interest of the avoiders to keep the administration from learning about new schemes because official and public knowledge may be followed by legislation to counter that kind of avoidance.
- Tax avoidance often takes advantage of loopholes in the law or of applying legal provisions for purposes of which they were not intended (e.g. provisions designed to encourage manufacturing of equipment being used for leasing used for leasing of motor vehicles).
Section 35 of Income Tax Act, 2058 has defined tax avoidance as any means of arrangement, one of the purposes of which is the avoidance or tax liability. This act has made the provision against tax avoidance section 35 of the act has given certain rights to Inland Revenue Department to minimize tax avoidance.
Methods of Tax Avoidance
According to Prof. Dr. Agrawal, the important devices used in avoidance of taxes are as follows:
- Registering firms which are not genuine composed mainly of family members to reduce incidence of tax.
- Diversion of income or assets to different taxable entities so that tax lowers tax rates may apply.
- Transfer of income to wife or children without adequate consideration.
- Transfer of assets and/ or income to non residents.
- Transferring business to ‘tax havens’.
- Payment of salaries, interest and other benefits to family members
- Expenses camouflage
- Investment in capital assets. (Capital gains are not taxed in Nepal).
- Formation of trust and other Philanthropic type’s institutions which are exempt from income tax but whose benefits are derived by the members of family. This is a usual device resolved to by rich tax payer. (trust in favor of children)
- Purchase of such firms which have amounts be carried forward as losses. Such firms can be purchased at low prices but their losses can be set off against the profits other entities etc (Agrawal, G.P., 1978).
- It helps in development of It helps in upgrading technology.
- It creates good business manpower.