TAX EVASION AND TAX AVOIDANCE NEED TO EDUCATE TAXPAYERS

TAX EVASION AND TAX AVOIDANCE <!--[if gte mso 10]> TAX EVASION AND TAX AVOIDANCE NEED TO EDUCATE TAXPAYERS By Dr. Ikramul Haq, Advocate, Lahore Pakistan is one of those countries where tax evasion is rampant and widespread. People are unaware of lawful methods/ways/tools that are available to them to reduce their tax burden and thus avoid unlawful act of tax evasion. In this scenario, the role of tax consultants, especially the chartered accountants, is very important to educate the taxpayers about the difference between the tax avoidance and tax evasion. The tax consultants must tell their clients that tax evasion is prohibited under the law, but arranging one's affairs within the legal framework to distribute/divert the tax burden is permissible. Educating the taxpayers on these lines can bring a substantial change in the prevailing culture of tax evasion and will also improve the image of tax professionals. Difference between tax avoidance and tax evasion The difference between tax avoidance and tax evasion is the thickness of a prison wall.---Denis Healey The avoidance of taxes is the only pursuit that still carries any reward.---John Maynard Keynes The highest Court in Pakistan in the case reported as CIT Companies H, Karachi v. Sultan Ali Jeoffery and others 1993 PTD 443 held that avoidance of tax within legal framework is permissible. The relevant portion of the judgment says: "In the field of taxation, tax avoidance and tax evasion are two different terminologies conveying completely different meaning. Tax avoidance occurs when a person in a legitimate manner as provided by law adopts a course by which the tax liability is reduced or eliminated. In doing so the assessee seeks his remedy and mechanism within the provisions of law...Avoidance of tax by adopting legal methods will not amount to evasion of tax. But the moment avoidance is sought by illegal contrivance, deceitful methods and adopting a course not permissible in law, it turns to evasion...Evasion of tax or duty is always in the breach of the applicable and binding law." In the above mentioned case, the academic principles vis-a-vis tax avoidance and tax evasion have been discussed and decided by the apex Court. Avoidance occurs when the taxpayer takes advantage of a provision of law whose formulation is obscure or incomplete or complex, so that he can reduce or avoid his liability while remaining within the limits of the law. If, however, the taxpayer acts against the will of the Legislature, even if he remains within the literal interpretation of the law, he can be said to avoid the tax. The Revenue Authorities cannot brush aside any attempt of an assessee at saving the tax if that attempt is sanctioned by the law, or hold the assessee guilty of avoidance when the saving is the result of series of steps which at the time of taking the first step could not be contemplated or devised by the assessee. In Elahi Cotton Mill (1997 PTD 1555), the Pakistan Supreme Court also upheld this point of view. There are certain other cases of wherein it has been categorically held that avoidance of tax even through legal mechanism cannot be sanctified if it is against public policy. The Lahore High Court in the case of Mian Muhammad Hanif Monnoo v. Commissioner of Income Tax (Central Zone) Lahore 2000 PTD 1162 held as under: "It is correct that a person is allowed to arrange his affairs in any manner to minimize the tax burden. However, such an intention and the manner to achieve the goal must not amount to a design to evade tax." Tax evasion transactions, the Lahore High Court held in the above mentioned case, could not be approved on the theory of "one has a right to arrange one's affairs in any manner". In this case tax was avoided through the mechanism of Gift Deed under the Mohammedan Law but the Court did not approve the sham transaction, as the donor was still the beneficiary of the gifted property. The Supreme Court of Pakistan, in another case viz. Commissioner of Income Tax, Rawalpindi Zone v. Haji Maula Bux Corporation 1990 PLD SC 990 held that any plea to avoid tax that is against public morality cannot be accepted. In this case the assessee hypothecated much higher stock with the bank than what he had recorded in his accounts. The taxpayer took the plea that the position of stock was overstated to the bank in order to secure greater credit facility. The Supreme Court rejected this plea on the touchstone of violation of public policy. The Income Tax Appellate of Pakistan in a judgment reported as 1998 PTD 1280 held that the phrase `there is no morality about a tax' refers only to the legislative power to impose tax on any 'and every kind of business or income generating activity. However, it does not at all mean that immoral and illegal acts of a person will be baptized only in order to give effect to a levy. In this case the taxpayer claimed illegal gratification as business expenditure. The Tribunal rejected the claim of the taxpayer holding that amounts paid as illegal gratification do not constitute allowable expenses being against the public morality. This case fortifies the principle of non-recognition of revenue considerations of acts that are patently against public policy or public morality. Any tax avoidance scheme, which is against public policy, will thus be disapproved amounting to tax evasion although through legitimate mechanism. The Lahore High Court in the case of Mian Muhammad Allah Buksh v. CIT 1962 PTD 603 held that the Department is fully authorised to go beyond a transaction and lift the veil aimed at reducing tax liability. In this case an existing enterprise was split into four subsidiaries to reduce tax burden. The Lahore High Court held that the Tax Authorities were fully competent under the law to investigate that the splitting up constituted "transaction designed to evade tax liability". The High Court, however, made it clear that onus of proof vested with the Tax Authorities to establish affirmatively whether there was actually an intention to evade tax. Role of tax professionals The principles laid down in the above-cited cases by the Courts in Pakistan provide adequate guidance to tax professionals for educating their clients as to how they should arrange their tax matters and commercial transactions. The members of Institute of Chartered Accountants of Pakistan and other like bodies like ICMA and Tax Bars all over the country can play a significant role in enhancing business performance through knowledge and service of the highest professional standards. The example of Institute of Certified Public Accountants of Singapore can be followed as in recent years it laid down great emphasis on building professional image. There is an urgent need that ICAP, ICMA and Tax Bars announce Mission statements to raise professional image, credibility and standing of their profession in the eyes of general public. Education of clients A client deserves to be explained the manner in which he or she should maintain his or her affairs in a clear and simple way. This could also facilitate a professional's work. He may be reminded of compliance deadlines, new tax regulations, administrative instructions issued by the Central Board of Revenue and principles laid down by the Courts in important cases having bearing on their affairs. Clients must be informed about their rights, duties and liabilities under the relevant fiscal statutes. They must be educated about penal/prosecution provisions under the law. There must be guidelines available to the clients as to how they should keep their banks accounts and specially the cash transactions. For example they must be aware of the fact that which transactions are required to be mode through cross-cheque or other banking channels to avoid penal action under Income tax and Sales Tax laws. They must be educated about their withholding tax obligations. They must be informed about all kinds of exemptions, rebates, concessions and deductions under various provisions of the laws: It is high time that all the professional bodies in Pakistan prepare and announce Vision 2010 for their members aimed at reviewing the entire professional approach and achieving the goal of value addition in tax services. Educating a client in a proactive manner can provide a stimulus both for better business performance and quantum jump in tax revenues, besides restoring the image of tax professionals in public eyes.