Page 82 - DCOM301_INCOME_TAX_LAWS_I

Unit 3: Tax Planning: An Introduction

Notes
Example: If a person earns ` 10,00,000 India, the income tax that will go to the Indian
government will be ` 3,00,000, whereas the foreign government also will demand tax as per the
prevailing laws. This, however, has caused a lot of problems to the income tax payers in the
form of added taxation. Then, there’s also the Double Tax Avoidance Agreement.
A large number of foreign institutional investors who trade on the Indian stock markets operate
from Mauritius and the second being Singapore. According to the tax treaty between India and
Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of
the shareholder and not in the country of residence of the company whose shares have been
sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not
pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.

Did u know? The Indian and Cypriot tax treaty is the only other such Indian treaty to
provide for the same beneficial treatment of capital gains.
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 taxpayers who have paid tax to a country with which India has not signed
a DTAA. Thus, India gives relief to both kinds of taxpayers.
With DTAA, there are fixed TDS rates applicable for income in India. These rates vary from
country to country. Countries such as UK (15%), USA (15%), UAE (12.5%), Germany (10%), China
(10%), etc. have maintained good trade as well as income tax agreements with India. However,
it is advisable for all NRIs to consult with a financial advisor before entering into any financial
or investment-related agreement.

3.4.2 Differences between Tax Avoidance and Tax Evasion

Tax evasion and tax avoidance are both practices designed to reduce the amount people pay in
taxes. The difference is that one involves legal means, while the other is illegal and is a form of
tax fraud. Professionals such as attorneys and accountants who assist people with illegal means
of reducing tax liability can be penalized along with the taxpayer.
In tax avoidance, people take advantage of the tax law to find ways to reduce their total tax
liability. This is entirely legal and many people practice it every year at tax time. Using the
services of a sharp tax attorney or tax accountant can save people significant amounts of money
on their taxes. With tax avoidance, taxpayers seek out tax credits, write offs, and other means of
cutting down on their tax liability.

The tax code is constantly being updated. Tax professionals keep up with changes to the law so
that they can advise their clients on the best ways to reduce the amount of money they owe. With
tax avoidance, people declare all of their income as required by law and submit other financial
documents as needed, and the means used to reduce their tax liability are clearly documented on
their tax returns.
With tax evasion, people avoid taxes not by scrupulously following the tax code, but by hiding
or moving income, making false claims on a tax return, and utilizing other illegal means to pay
less on their taxes. Some tax evaders avoid paying taxes altogether; people who work as
independent contractors or receive monies under the table for their work, for example, may
simply not declare this income and thereby avoid paying taxes on it.
The line between tax avoidance and tax evasion can sometimes be very fine. There are some
things people can do with their money that are perfectly legal under the law, but could be read

LOVELY PROFESSIONAL UNIVERSITY 77