Tax Basics


  • India 157th Rank for Ease of Paying taxes.
Difference between Tax avoidance and Tax Evasion:
  • Tax evasion involves not paying taxes on your income and is illegal
  • Tax avoidance, on the other hand, is about managing your taxes across different tax jurisdictions to take advantage of differences in tax rates, such as corporate tax rates, in tax treatment of different kinds of income, such as capital gains, and in tax treaties among countries. Companies call it Tax Planning
What are various Taxation Models?
  • UN Model: Tax income at source country i.e. where income is earned. Good for developing countries.
  • OECD (Organisation of Economic Cooperation and Development) Model: Resident of country would be taxed on worldwide income, while non-residents would be taxed only on their domestic income.
  • India in Double Taxation Avoidance Agreements (DTAA) opted OECD Model. Therefore, FDI will pay little or no tax in India.
  • BEPS: Base erosion and profit shifting by G20 aims that profits are taxed where economic activities are performed and value is created.
Money circulation methods:
  • Transfer pricing: Licensing fee, royalty, or interest to parent company located offshore and payment treated as cost thereby slashing profits. Google and Microsoft using Bermuda.
  • Illicit capital flight by Multinational Enterprises (MNEs).
  • Indian Start-Ups moving headquarters abroad to avoid complex tax and other obligation.
  • LRS (Liberalised Remittance Scheme): Indian resident allowed to invest abroad $2,50,000/year (taxed already in India).
Purpose and Benefits of Tax Havens:
  • Round Tripping of Fund.
  • Simple laws and low taxes
  • Maintains secrecy.
  • Illegal activity, Money Laundering, tax evasion or parking, foreign income/asset also Legitimate business (tax avoidance).
Why we need to curb Tax evasion:
  • To boost public finances so that more investment can be made in health and education.
  • Tax Justice Doctrine: curbing tax evasion to boost public finance is part of SDGs
  • Inequity rises because of tax evasions that leads to poor infrastructure and higher indirect taxes
  • Indian tax rates are moderate unlike Japan and other countries where tax rate is 50%. So amount of tax is not the reason to hide money abroad



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