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Income Tax Laws – I

Notes Most taxpayers engage in a certain amount of tax avoidance, because people want to avoid
paying more taxes than they need to. In a simple example, most people claim all of the exemptions
available to them. Likewise, people may take advantage of retirement accounts which offer tax
savings if they plan on saving money for retirement; as long as one is putting money aside, one
might as well reduce taxes at the same time. These tax avoidance strategies are usually encouraged
by financial planners and accountants.

Example: A skilled accountant can show a taxpayer where he or she can save on taxes,
and provide advice about conducting financial affairs in a way which will limit tax liability.
Accountants will usually not guarantee to reduce tax liability by a set amount or percentage, but
they do pride themselves on finding as many ways as possible to generate tax savings for their
clients.
Other tax avoidance strategies may be more aggressive. While still legal, they are sometimes
deemed ethically questionable, and taxpayers may skirt the line between legality and illegality.
Most accountants have personal limits when it comes to assisting people with tax avoidance,
and while they will provide advice and help with fully legal activities, they may be reluctant to
be involved in more gray areas. Aggressive tactics can include taking advantage of loopholes in
the law which may be subject to interpretation, and not all accountants interpret these loopholes
in the same way.
When people engage in tax avoidance, they are knowingly trying to reduce their taxes, but they
are not knowingly breaking the law. Tax evaders, on the other hand, are aware of the fact that
the means they are using are not legal, and they are choosing to engage in evasion activities
despite this. Evasion tactics vary by nation, but include hiding or moving income so that it
cannot be taxed even though it is legally taxable, or simply refusing to send in tax payments.

3.4.1 Double Taxation

Double taxation is the levying of tax by two or more jurisdictions on the same declared income
(in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the
case of sales taxes). This double liability is often mitigated by tax treaties between countries.
Most countries impose taxes on income earned or gains realized within that country regardless
of the country of residence of the person or firm. Most countries have entered into bilateral
double taxation treaties with many other countries to avoid taxing non-residents twice — once
where the income is earned and again in the country of residence. However, there are relatively
few double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not
enough to simply move one’s assets to a tax haven. One must also personally move to a tax
haven to avoid tax.
India has comprehensive Double Taxation Avoidance Agreements (DTAA) with 84 countries.
This means that there are agreed rates of tax and jurisdiction on specified types of income arising
in a country to a tax resident of another country. Under the Income Tax Act, 1961 of India, there
are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save
them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with
which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax
to a country with which India has not signed a DTAA. Thus, India gives relief to both kinds of
taxpayers.

Did u know? What is DTAA?
This means that there are agreed rates of tax and jurisdiction on specified types of income
arising in a country to a tax resident of another country.

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