TAX

FRAUD

SOUMYA KUDIYARASU -08D0032

NIMMI SARA JOSE -08D0020
 Tax avoidance
Tax Avoidance means the tax regime's legal use for one's own personal advantage so as to
lessen the tax amount that is payable to the government by ways that are legal. The
Avoidance of Tax is usually done by the people who desire to keep their money with
themselves and not give it to the government. Avoidance Tax includes situations when
people eliminate or reduce tax by following a transaction or many transactions that are legal.
The income tax department provides many provisions through which the people can go for
Tax Avoidance such as refunds, credits, benefits, and many other kinds of entitlements. 

Tax Avoidance reduces the revenue of the government and also brings into disrepute, the
tax system. Ideally, Avoidance of Tax should not be encouraged and the government should
also take measures in order to prevent it.

Methods of tax avoidance:

Country of residence:
Country of residence is a method that people adopt when they go for Avoidance of Tax.
Under this method of Tax Avoidance, the company or person changes the tax residence to a
place that is a tax haven in order to lower the amount of taxes that they pay. Under this
method, the person may also become a regular traveler so that taxation can be avoided.
Individuals and/or corporate entities can find it attractive to move themselves to areas with
reduced or nil taxation levels. This creates a situation oftax competition among governments.
Different  jurisdictions  tend to be havens for different types of taxes, and for different
categories of people and/or companies

(tax haven- A tax haven is a country or territory where certain taxes are levied at a low rate
or not at all.)

Double taxation:
Double taxation means that many countries charge taxes on the income that has been
earned inside that country without taking into consideration, the resident country of the firm
or person. So that people do not have to pay double taxes, once in the country where the
income has been earned and then again in the resident country, many countries have gone
for bilateral treaties of double taxation with other countries. This helps tax-payers as they are
able to avoid paying double taxes. 

Legal entities:
Legal entities are a method that people follow when they want to go for Tax Avoidance.
Under this method of Avoidance Tax, people legally defer paying personal taxes by creating
a legal separate entity to which they donate their property. The legal separate entity that is
set up is often a foundation, company, or trust. The properties are transferred to the trust or
company, as a result of which the income that is earned belongs to this entity and not by the
owner. Usually, people are taxed personally on earnings and property that they own and
thus by transferring property to a legal separate entity, individuals can avoid personal
taxation although certain taxes such as corporate taxes are still applicable. In order to go for
Tax Avoidance, the foundation, company, or trust can also avoid corporate taxes if the entity
is set up in a jurisdiction that considered offshore. 

Legal vagueness:
Tax results depend on definitions of legal terms which are usually vague. For example,
vagueness of the distinction between "business expenses" and "personal expenses" is of
much concern for taxpayers and tax authorities. More generally, any term of tax law, has a
vague penumbra, and is a potential source of tax avoidance.

Tax evasion
Tax Evasion entails the efforts that are made by trusts, individuals, firms, and various other
entities to avoid paying taxes by illegal and unfair means. The Evasion of Tax usually takes
place when taxpayers deliberately hide their incomes from the tax authorities in order to
reduce their liability of tax. 
Evasion Tax takes place when the people report dishonest tax that includes declaring less
gains, profits, or income than what has been actually earned and they even go for
overstating deductions.

The Evasion of Tax level depends on certain factors such as fiscal equation which means
that people's tendency to pay less tax declines when the payment due from taxes becomes
obvious. The level of Tax Evasion is also dependent on the tax administration's efficiency
and corruption levels. The level of Evasion Tax also depends on the chartered accountants
and tax lawyers who help companies, firms, and individuals evade paying taxes. Tax
Evasion is a crime in all major countries and the guilty parties are subjected to imprisonment
and fines.

(tax gap:

The difference between the amount of tax legally owed and the amount actually collected by
a government is sometimes called the tax gap.)

Methods of tax evasion:

Evasion of customs duty:
Customs duty evasion is another method of Tax Evasion under which the importers evade
paying customs duty by false declarations of the description of the product and quantity. The
importers in order to evade paying customs duty also resort to under-invoicing. 

Smuggling:
Smuggling  is importation or exportation of foreign products through unauthorized route.
Smuggling is resorted to for total evasion of leviable customs duties as well as for
importation of contraband items. A smuggler does not have to pay any customs duty since
the products are not routed through an authorized or notified Customs port and therefore,
not subjected to declaration and payment of duties and taxes.

Evasion of value added tax (VAT) and sales taxes:

During the later half of the twentieth century, value added tax (VAT) has emerged as a
modern form of consumption tax through the world, with the notable exception of the United
States. Producers who collect VAT from the consumers may evade tax by under-reporting
the amount of sales.[10] The US has no broad-based consumption tax at the federal level,
and no state currently collects VAT; the overwhelming majority of states instead collect sales
taxes. Canada uses both a VAT at the federal level (the Goods and Services Tax) and sales
taxes at the provincial level; some provinces have a single tax combining both forms.

In addition, most jurisdictions which levy a VAT or sales tax also legally require their
residents to report and pay the tax on items purchased in another jurisdiction. This means
that those consumers who purchase something in a lower-taxed or untaxed jurisdiction with
the intention of avoiding VAT or sales tax in their home jurisdiction are in fact breaking the
law in most cases. Such evasion is especially prevalent in federal states like the Nigeria, US
and Canada where sub-national jurisdictions have the constitutional power to charge varying
rates of VAT or sales tax. In Nigeria for example, some local states enforce VAT on each
goods sold by trader. The price must be clearly stated and the VAT distinct from the price of
the good purchased. Any act by the trader contrary to this (like including VAT in the price of
the goods) is punishable as attempting to syphoning the VAT. Intranational borders in such
countries usually lack customs offices or similar facilities that could effectively control the
movement of any goods carried in private vehicles from one jurisdiction to another and most
of the respective state and provincial governments simply lack the manpower and resources
to pursue and prosecute every case of state/provincial sales tax evasion arising from
purchases which do not cross state or provincial borders other than for major purchases
such as cars.[11]

Control of evasion
Level of evasion depends on a number of factors one of them being fiscal equation. People's
tendency to evade income tax declines when the return for due payment of taxes is not
obvious. Evasion also depends on the efficiency of the tax administration. Corruption by the
tax officials often render control of evasion difficult.

Tax administrations resort to various means for plugging in scope of evasion and increasing
the level of enforcement. These include:
  privatization of tax enforcement

 tax farming, and

 institution of Pre-Shipment Inspection (PSI) agencies.

Corruption by tax officials
Corrupt tax officials cooperate with the tax payers who intend to evade taxes. When they
detect an instance of evasion, they refrain from reporting in return for illegal gratification
or bribe.Corruption by tax officials is a serious problem for the tax administration in a huge
number of underdeveloped countries.

Level of evasion and punishment

Tax evasion is a crime in almost all developed countries and subjects the guilty party
to fines and/or imprisonment - in China the punishment can be as severe as the death
penalty. InSwitzerland, many acts that would amount to criminal tax evasion in other
countries are treated as civil matters. Even dishonestly misreporting income in a tax return is
not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not
the criminal courts. However, even in Switzerland, some fraudulent tax conduct is criminal,
for example, deliberate falsification of records. Moreover, civil tax transgressions may give
rise to penalties. So the difference between Switzerland and other countries, while
significant, is limited. It is often considered that extent of evasion depends on the severity of
punishment for evasion. Normally, the higher the evaded amount, the higher the degree of
punishment.

Privatization of tax enforcement:

Privatization of tax enforcement was suggested for overcoming limitations of government tax
administration in controlling tax evasion. Some governments have resorted to privatization of
tax enforcement to enhance efficiency of the tax system. The assumption is that leakage of
revenue will lower under a privatized regime.

Abuse by private tax collectors (see tax farming below) has led to revolutionary overthrow of
governments which have outsourced tax administration.

Tax farming:
Tax farming is an old means of collection of revenue when it is difficult to determine the
leviable amount taxes with certainty. Governments lease out the collection system to a
private entity for a fixed amount who then collects the revenue and shoulders the risk of
attempts at evasion by the taxpayers. It has been suggested that tax farming may be a
solution to the problem of tax evasion seen in developing countries.

Governments have historically turned to tax farming for quick cash. A "tax farmer" buys a
"franchise" by making pre-payment to the government. The "tax-farmer," then invested with
the authority of the government, goes into the "farm" and begins extracting "taxes" from
citizens. This is a system destined to be abusive as the "tax-farmers" seek back their
investment, plus profit, and are themselves unrestrained by "politics."

PSI Agencies:
Pre-shipment Agencies like SGS, Cotecna etc. are employed to prevent evasion of customs
duty through under-invoicing and misdeclaration. However, in the recent times, allegations
have been lodged that PSI agencies have actively cooperated with the importers in evading
customs duties.

Public opinion on tax avoidance

Tax avoidance may be considered to be the dodging of one's duties to society, or
alternatively the right of every citizen to structure one's affairs in a manner allowed by law, to
pay no more tax than what is required. Attitudes vary from approval through neutrality to
outright hostility. Attitudes may vary depending on the steps taken in the avoidance scheme,
or the perceived unfairness of the tax being avoided.

In the judiciary, different judges have taken different attitudes. As a generalization, for
example, judges in the United Kingdom before the 1970s regarded tax avoidance with
neutrality; but nowadays they regard it with increasing hostility. See the quotes below for
examples.

Responses to tax avoidance

Avoidance also reduces government revenue and brings the tax system into disrepute, so
governments need to prevent tax avoidance or keep it within limits. The obvious way to do
this is to frame tax rules so that there is no scope for avoidance. In practice this has not
proved achievable and has led to an ongoing battle between governments amending
legislation and tax advisors' finding new scope for tax avoidance in the amended rules.

legislation (known as "anti-avoidance" provisions) apply to prevent tax avoidance where the
main object (or purpose), or one of the main objects (or purposes), of a transaction is to
enable tax advantages to be obtained.
 Tax protesters
Some tax evaders believe that they have uncovered new interpretations of the law that show
that they are not subject to being taxed (not liable): these individuals and groups are
sometimes called tax protesters. Many protesters continue posing the same arguments that
the Federal courts have rejected time and time again, ruling the arguments to be legally
frivolous.

Tax resistance
Tax resistance is the refusal to pay a tax for conscientious reasons (because the
resister does not want to support the government or some of its activities). They
typically do not take the position that the tax laws are themselves illegal or do not
apply to them (as tax protesters do) and they are more concerned with not paying for
what they oppose than they are motivated by the desire to keep more of their money.

The technique of Resistance Tax is used by people who decide not to fund the
violent activities of the government and it is also used by the people who follow the
movements of non-violent resistance. Unlike the protesters of tax who deny that they
have the obligation to submit tax, Tax Resistors realize that the law orders them to
submit taxes but even then they resist paying taxes. There are various arguments for
Tax Resistance such as that the government is involved in destructive, immoral, and
unethical activities like capital punishment and war and so paying taxes will fund all
these activities. That the government has no legal right to a person's money and so
tax amounts to slavery or theft. 

Another argument for Tax Resistance is that the government that is in power is full of
corruption for it serves only its own needs. Tax resistors have also opined that the
government is wasteful and inefficient for it provides insufficient returns on the tax
that is collected. Further, they also claimed that the government in power is illegal for
they have come to power by unfair means. The arguments against Tax Resistance
are that if in a democracy people only funded those decisions which they go with
then this would undermine the government. Also, if people resist paying taxes then
the taxes would be left unpaid as a result of which the government would be forced
to take money from other people, which would be unfair to them. 
Further, the arguments against Tax Resistance are that it is too ineffective and
passive to bring about a political change. It has also been opined that individuals
who do Resistance of Tax are actually free-riders who benefit from the various
services of the government such as security and road infrastructure without paying
their part of tax. The government, in order to check Tax Resistance applies interest,
penalties, or fines against Tax Resistors. 
Various methods of Tax Resistance:

 Paying tax under protest

 Tax avoidance
 Redirection
 Refusing to pay specific taxes
 Tax evasion
 Reducing income and expenditure

Tax shelters
Tax Shelters are programs under which individuals participate in order to lessen their
amount of taxes irrespective of their financial status. Tax Shelters include investments in
equipment leasing, breeding and cattle feeding programs, real estate, and gas and oil
companies. There are some Tax Shelters which are legal and there are some which are
illegal.

The various types of legal Tax Shelters

Retirement plan:
Retirement plan is a type of legal Tax Shelter that is used to lessen the burden of the
pension funded systems of the government. In this type of Shelter Tax, the governments
may also allow the individuals to make investments in their own retirement pension plan. In
these kinds of retirement plans the income that is contributed will not be taxed at that point of
time but will be taxed at the time of the retirement of the individual. The advantage of this
kind of Tax Shelter is that the money is not taken out as tax and instead in the account is
compounded until the withdrawal of the funds. 

Flow through partnerships that are limited:

Another type of legal Tax Shelter is the flow through partnerships that are of limited nature.
These investments are made in oil drilling and mining companies in which the investors
normally do not want to invest for these companies take many years before they can
generate profit. So in order to encourage investors to make investments in these kinds of
companies, the governments reward the investors with Tax Shelters by giving them instant
savings on tax and also huge gains in case the company discovers oil or gold. 

The various types of illegal Tax Shelters

 Financing arrangements
 Offshore companies
Financing arrangements:
Financing arrangements is a kind of illegal Tax Shelter following which a person pays very
high rates of interest to a party as a result of which the person can reduce from an
investment the amount of income. But at the same time in the financing arrangements Tax
Shelter the person makes huge gain of capital when he withdraws the financing investment. 

Offshore companies:
Another type of illegal Tax Shelter is offshore companies under which the funds are
transferred to a company which is located in a different country. One may transfer the funds
claiming that it is an expense and thus lower his income that is taxable.