100 Ways of Evading Tax and 101 Ways of Catching Evaders

loopholes in the law
loopholes in the law

Indian Bureaucracy Interview : The awareness about tax evasion as a social and political issue has been on the rise in last few years. With demonetisation, Benami Act, and Black Money Act to counter offshore undisclosed assets, the government has demonstrated its will to eliminate tax evasion. In a new book titled Loophole Games: A Treatise on Tax Avoidance Strategies, 2008 Batch IRS officer Smarak Swain argues that tax avoidance is the new tax evasion. Avoidance preys on loopholes in the law. If one loophole is plugged, dodgers will find another. IndianBureaucracy.com caught up with the author and had an interesting interaction.

Edited excerpts of the interview with our Editor is as under:

Q: Conventional wisdom is that tax evasion is legal. Tax avoidance is legal but immoral. But you have argued in your book that tax avoidance too is illegal. How is that so?

Swain: There used to be a thin dividing line between avoidance and evasion. Tax avoidance used to exploit grey areas in law to reduce tax incidence. But, of late, many anti-abuse provisions have been introduced in the law book. For instance, the Place of Effective Management (POEM) rules tax profits that many businesses used to shift to non-operative subsidiaries in tax havens. Changes in the India-Mauritius tax treaty have made it necessary for investors using the Mauritius route to demonstrate that the principal purpose of their establishment in Mauritius is to do business in Mauritius. Many other anti-abuse provisions have been introduced. To top it all, the General Anti Abuse Provisions (GAAR) makes any attempt to subvert these new laws illegal.

Smarak Swain IRS

I have demonstrated in my book that, earlier whenever a new statutory provision was introduced to plug a loophole, dodgers managed to find another loophole to exploit. This was made possible by ‘corporate structuring’. But GAAR renders ‘corporate structuring’ itself illegal. If any complex corporate structure is established just to get around a law, GAAR is triggered.

What we used to refer to as tax avoidance earlier has, thus, become illegal. I feel that there is no thin dividing line between tax avoidance and tax evasion anymore. In fact, I have proposed in the book that there is a continuum of tax-related behaviour. Tax planning, tax avoidance, artificial tax avoidance, and tax evasion are behaviours on this continuum, with increasing intensity of unlawful behaviour as you move from planning to evasion.

Q: Loophole Games has made, for the first time, an exhaustive study of Hawala in India. However, you have not given any solution to the problem in the book. What solution do you propose to eradicate the practice of Hawala?

Swain: First I would like to clarify that the chapter on Hawala is not an exhaustive narrative on Hawala. I have focussed on the historical and social aspects of hawala. I have explained how Hawala has evolved through the ages from ancient times to modern times. But I have not discussed all modus operandi of money laundering using Hawala.

My approach to the subject of Hawala was more academic than investigative. Most people don’t understand hawala well. Hence, it was important to give a perspective to it. Hawala is a trust-based system. It has arisen out of the society. So it cannot be eradicated.

Hawala is used extensively by pravasi Indians to remit funds to India. In fact, it is used by migrants all over the world to remit money cheaply to their home country. In short, it is an informal money remittance system.

Hawala is problematic from the perspective of law enforcement because hawaladars (hawala agents) do not maintain conventional accounts; and their money remittance methods are violative of foreign exchange laws. There is no wire transfer to establish money trails. Launderers harness these very features of Hawala. There are reported instances of donors from Tamil Diaspora sending funds to LTTE through the Hawala channel. Funds to support the 9/11 attack on World Trade Centre were also moved via the Hawala channel. Proceeds of drug trade and flesh trade are also moved around using the Hawala route.

Only possible solution, in my opinion, is to make formal money remittance cheap and encourage migrants to use formal channels to send money home. This will demolish the hawala networks that launderers misuse.

Q: How easy is it for bureaucrats to write books? What are the constraints imposed on bureaucrats from writing books?

Swain: There are actually no constraints on a bureaucrat if they wish to write books. Rule 15(2) of CCS Conduct Rules states that a government servant does not need prior sanction to engage in occasional work of artistic, literary, or scientific character. In my view, this means that no approval is required to write fiction books. Even no approval is required for writing academic books, as they are of a scientific character.

However, bureaucrats should not divulge details of any work they have undertaken in their official capacity. If they wish to do so, they should take prior approval. Secondly, they should not violate the Official Secrets Act. Divulging sensitive information is violative of the employer-employee trust. Divulging non-sensitive information is unbecoming of a government servant, if no prior sanction is sought.

The challenges are even more glaring for a bureaucrat working in a sensitive department such as the Income Tax department. Income tax department collects many taxpayer information from the taxpayer as well as third parties. The private information collected is retained by the department in a fiduciary capacity. Leakage of such information is a breach of the taxpayer-treasury trust. That’s why Income Tax Act itself prohibits any leakage of taxpayer information.

Q: This is your seventh book. How do you get the time to write books in between hectic work schedules?

Swain: (Laughs) Writing a book is like framing a judicial order. If you have not studied the case in detail, you tend to pass a non-speaking order. You cannot be adequately articulate in your order. But if you have studied and processed the facts of the case, writing down the order does not take much time. In fact, some assessment orders of income tax officers run into hundreds of pages. Orders of their Lordships in the Supreme Court and High Courts run into hundreds of pages, and are full of insight and wisdom. This is because they had invested time in comprehending the case before they got down to write.

Quite similarly, writing a book is 80% conceptualisation and 20% writing. Conceptualisation takes time. Research takes time. Building a structure takes time. Writing is the easiest part. To build the concept of a book, I discuss with friends and colleagues. I take feedback on a concept from people I meet in the office. Civil servants generally do not move in the same circles as academicians, students, or journalists. But interaction with them gives greater perspective and fresh ideas. So I interact with students and academicians on my own volition. I share ideas with them. I fervently read international reports and books by investigative journalists.

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