It is a standard conversation in any board meeting of companies to ask the chief financial officer to find out how the income tax could be reduced. It is a done thing. There are chartered accountants who rack their brains only to achieve income tax planning. But nobody talks of tax planning on the reducing indirect tax side. The reason is in the difference in the nature of their taxable events.
The taxable event in income tax is the act of generation of income, which is measured in terms of net profit. It is an accounting concept. The taxable events in the case of indirect taxes are transaction based. In the case of Customs duty it is the act of import or export. In the case of Excise duty it is the act of manufacture. In the case of VAT, it is the act of adding value. In the case of service tax, it is the act of providing service.
These are all precise and physical concepts. Import is bringing things into India from a foreign country, which is a very precise concept. Manufacture is a physical concept. The act of addition of value for the purpose of value added tax is reflected on paper but it is a simple concept. The act of providing service is also a clear concept with few controversies about whether something is a service or not.
Thus, we find that the taxable events on indirect taxes are much more precise. Either they are physical or easily identifiable. On the other hand, net profit can be shown as less or more due to manipulation of accounts. There are very many provisions in the income tax law to provide for bad debts or other receivables which can suitably lead to a lesser net profit.
But a tax advisor on the indirect tax side cannot reduce the amount of indirect tax by manipulation of the production or manufacture or import etc. He can only correctly interpret the law to come to the proper taxable amount.
Evasion is not the same as tax planning. If a manufacturer does not show his production in the register and thereby avoid tax, it is evasion, pure and simple. It is not tax planning. In income tax, some people argue that legal avoidance is different from evasion. I however, hold that there is no such concept.
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There is nothing like legal avoidance. Legal avoidance is a contradiction in terms. If it is legal, it is compliance to law. If it is illegal, it is evasion. There is a legendary judgement known as MacDowell case[1][1] in which Justice Chenappa Reddy and Justice Ranganath Misra observed that the notion that tax avoidance is legal is wrong.
This judgment has been quoted by many subsequent judgements even on the indirect taxes side only to emphasise that interpretation should not encourage evasion.
It is important to clarify that availing of an exemption is neither evasion not tax planning. An exemption for opening a factory in a designated area such as Uttarakhand or for using some special types of input is clearly available to the manufacturers. If they avail of it, it is just legal and not an evasion. This cannot be called tax planning. The word tax planning has a shady connotation. It smacks of suitable manipulation of accounts.
The conclusion is that tax planning can be done on the direct tax side by manipulating net profit but there is no such scope on the indirect tax side as it is transaction based.