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Tax Avoidance: A No!

Wisdom lies in not trying to find loopholes in the system but to follow the applicable laws wherever you reside. You may forego peace of mind, and live in exile for years, or even permanently, to save taxes, but is it worth it?

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Often tax specialists are consulted and people come up with offshore structuring to avoid paying taxes. While tax evasion is illegal, tax avoidance and tax planning are legal. Famous offshore countries that are tax havens are British Virgin Islands (BVI), Cyprus, Cayman Islands, Mauritius, Panama, Seychelles among the top listers and I am sure you can find some hidden here and there. People from world over set up shops in these countries to try to avoid paying taxes. Dubai is a famous tax-free destination and is famous among well to do Indians who have taken residency there in large numbers. There is no capital gains tax in Hong Kong which again is a hot destination for placing a special purpose vehicle (SPV). However, people trying to avoid taxation may find it difficult to run their businesses smoothly. If the idea is permanent change of place of domicile into a tax-free country, then you may be fine but incorporating companies in tax free jurisdictions may give you less legal protections. They could be cumbersome to manage. They may not be what you want!

In case of structuring of companies through tax havens, if you have these companies that are being managed through offices in India, then it is likely that the company pays tax here. However, if a person or a group of people reside in India, and are not running these businesses then the company pays taxes in the tax haven. It doesn't matter where the directors are from or where the shareholders are from, it's the management of these companies that matter or the promoters that matter in this case and showing fake records can end you up in paying heavy compounded penalty. This essentially means you must not evade taxes and such an endeavor is flawed. Do not listen to word on the street.

As far as tax avoidance goes, if an Indian company has a subsidiary in a tax haven and the subsidiary makes money, then there is no mechanism to bring the money back into India, by the parent company, lest they pay taxes on dividends or capital gains, whatever it may be. Ultimately, the money will be taxed. If a company wants to preserve assets or capital in a subsidiary in a special purpose vehicle (SPV) in a tax haven, and use it in the future to grow or invest, then it can, but ultimately the parent company benefits only after paying taxes since the moment any capital comes into India, the parent company will be taxed. The system has been made very watertight and all loopholes are being discovered and closed by governments across the world, and India has made huge strides to this end. 

In case of countries other than tax havens, there are usually double taxation avoidance treaties in place between countries, and if key people running the show of an entity, have conflicting residencies, then they get tax credits worth the amount of difference between the country having the higher tax and where they may have paid. If they have paid in the country with higher taxation, then they have complied. Hence, there is a system of tax credits. If the company pays corporate tax nowhere, and is being managed from a taxed location, then they pay the entire taxation of that jurisdiction and there is no escape. 

There are about 17.79 lakh companies in India, out of which 66% only are active, rest are shell companies. There were 11,89,826 active companies as on June 30, 2018 according to Corporate Affairs Ministry, rest have been closed, struck off or are under liquidation. These active companies paid ₹5.78 lakh cores in corporate tax in financial year 2019-20 cumulatively. 

Just to draw a comparison, corporate tax for revenues up to ₹250 crore in India is 25% and if it’s higher than ₹250 crore, the company would be taxed at 30%. Corporate tax levied in USA is 21%, China is 25%, France is 28-31%, Germany is 15%, UK is 19%, Russia is 15%, Canada is 38% and Switzerland is 8.5%. Thus, we see Indian rate of corporate tax is on the higher side. However, paying taxes is a moral responsibility and a civic duty of individuals and corporations. 

Citizens and corporations use the resources of a country to grow, and in return they are meant to pay taxes honestly, and they do have done our duty towards nation building and adhered to the right  philosophy of citizenship and businesses, an institution which is symbiotic to the State. Income tax and corporate tax are the largest source of revenue for any government. In India, 55.75% of the revenue for the country is obtained through taxes – corporate tax, income tax, goods and services tax(GST), customs duty and excise. Net income tax paid in fiscal year 2019-20 by Indian citizens is ₹8.23 lakh crores. In 2020, the figure of number of individual taxpayers stood at 1.46 crore mark for financial year 2018-19. This figure is a little over 1% of Indian population and 1.6% of the adult population.

Non-resident Indians (NRIs) don't necessarily have to pay taxes in India but this is constrained to personal taxation and there are detailed cases in which it applies, like minimum number of days outside India  and employment overseas. There are approximately 3 crore 21 lakh NRIs as per Ministry of External Affairs, in 2020. If a person has lived in India for at least 182 days during the financial year or lived in India for at least 60 days of a year, in the previous year, and at least 365 days in the preceding four years, then the person of India is a resident for tax purpose.
Otherwise, the person can be liable for taxation in any alternative place of domicile, if they choose so. 

Tax avoidance is a no! Wisdom lies in not trying to find loopholes in the system but to follow the applicable laws wherever you reside. You may forego peace of mind, and live in exile for years, or even permanently, to save taxes, but is it worth it? 

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Vaibhav Maloo

The author is Managing Director of Enso Group. He resides in Mumbai. He holds an undergraduate degree in business from Carnegie Mellon University and a postgraduate diploma in global business from Oxford University.

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