CA. Abhay Desai / “Tax planning is still feasible”

All India Rank holder at CA examinations, CA. Abhay Desai has also obtained a law degree. Working as a partner at Yagnesh Desai & Co., specialising in the field of GST, he has delivered more than 500 talks on various issues in indirect taxation across India. While talking at the recent conference “GST Gyan Manthan”, at Sri Balaji University, Pune, (SBUP), organised by Pimpri-Chinchwad Branch of Western India Regional Council (WIRC) of ICAI, Desai, takes us through a brief history of tax planning in taxation and the ratio we can derive out of it

Justice Oliver Wendell Holmes, Jr., a very famous American jurist said that law is not logic but it is experience. It is rightly so because the logic through which we understand the provisions may not be true, when we see the legal background behind it, legal theory and the statute of interpretation, in trying to decipher the meaning out of it.

I am reminded of one anecdote—there was a professor who flunked one of his students. The student came to the professor and asked him that he wants to ask him three questions and if he can’t answer them correctly, then he will have to change his grade and pass him. So the professor was very confident and agreed to the student’s condition. Student told the professor to give three illustrations of something which is logical but not legal, which is legal but not logical and which neither legal nor logical, in the real world. The professor was perplexed and could not really think of those three scenarios. So, he admitted defeat and told the students to tell him the answers to these three questions. The student said to the professor to change his grade as agreed before, to which the professor agreed and changed the student’s grade. Then the professor insisted the student to tell him the answer.

The student said, “Professor you are 63 years old and you are married to a woman who is 28 years old, which is perfectly legal but not logical. Your wife who is 28 years old, is having an affair with a boy who is of 29 years old, perfectly logical but not legal. And the boyfriend of your wife is your student, whose grades you changed to pass, despite having flunked the exam, is neither logical nor legal.” Figuring out somethings which are legal, may or may not appeal to your logical sense, but that is the world we live with.

Figuring out somethings which are legal, may or may not appeal to your logical sense, but that is the world we live with

Brief history of tax planning in taxation

It all started with the first judgement in 1935. This first case where the attempt of tax planning was given legitimacy, in the case of Westminster, wherein the UK court held that the person is entitled to arrange his affair, so as to reduce the tax liability. Then, India’s Supreme Court followed, in Sivakasi, in 1964. In 1985 came a twist where Mc Dowell & Co. Ltd. case happened, wherein the Supreme Court said tax planning is legitimate, however if the colourable devices are used to plan your affairs so as to reduce the tax liability, the officer has the right to disregard those colourable devices and to make the addition. That judgement was misinterpreted down the line by the officers, where every attempt of tax planning was questioned and the expenses which were considered as deductible under the Income Tax law were not permitted. Madras High Court stepped in immediately in 1988, in case of Valliappan, where they held that the Mc Dowell’s case does not lay down the ratio that every tax planning needs to be questioned. It only held that where colourable devices are used, only in that limited scenario it can be questioned, and the legitimate tax planning within the purview of the contract law and legal provisions, need not be questioned.

Then came the landmark judgement of Azaadi Bachao Andolan, wherein the Supreme Court again differentiating with Mc Dowell and clearing by bringing out the principle held that a legal tax planning is perfectly permissible. Punjab High Court in that same year very categorically held that if on an account of lacunae in law or otherwise, if an assessee is able to avoid the payment of tax within the letter of law, it cannot be said that the action is void because it is intended to save the payment of tax. So, the Punjab and Haryana High Court concurring with Azaadi Bachao Andolan held that a legal tax planning is perfectly valid.

Then we have a very interesting ruling of the Supreme Court, which is the last ruling on the little history of tax planning Arvind Narottam case. The Supreme Court accepted the fact that the tax planning strategies are not to be encouraged, because the reason is, a smart person, a smart businessman, a smart consultant by taking recourse to those tax planning means, will pay lesser tax than someone who is not well-versed with the provisions of law. So, in that context they said it should not be encouraged. However, the Supreme Court said, but in our country, if you look at it, the revenue that is been expended by the government on various schemes and various projects, is to some taxpayers minds, waste and ostentatious. Hence the Supreme Court said that the government instead of giving moral sermons to avoid tax planning, should better focus on better utilisation of revenues and should not question the legitimate tax planning strategies.

So, having said that, what is the ratio that we derive out of all the little history that we just talked about? Tax planning is still feasible. We don’t have general anti-avoidance provisions in GST laws, which could have brought out certain transaction which can be questioned, even though legitimate. However, at the same time all the means that we are going to discuss today, are legitimate means—we are not going to encourage bogus billings, not going to encourage sham transactions or circular trading, because those are things clearly beyond the scope of tax planning. Into the scope of tax evasion, it would definitely be looked upon adversely by the revenue. In legitimate tax planning also, it is not so that all the risks are eliminated—risks are always there because it would always be a matter of interpretation. So, a client and consultant need to take a professional call based on the facts and the interpretation of the provisions, whether to go ahead with this planning, and if so, what can be risks and what can be the maximum adverse outcome.

To put it in the other way, the tax planning strategies, we are discussing, are all strategies which are backed by a lot of legal precedence. So, these are not the strategies which can be simply disregarded by the revenue authorities.

I have divided the tax planning strategies under GST, into two major types - the Business Model Centric Planning and the Transaction Centric Planning. What I mean by Business Model Centric planning is a person having multiple registrations, how can he plan his affairs to minimise the tax cost. Transaction Centric planning will look at certain unique transactions which take place routinely, where the tax right now appears to becoming a cost, but it can be converted into a credit by way of either rearranging those transactions or by interpretation of the relevant restriction, which are either contained in section 17(2) or 17(5) of the CGST Act, 2017. With this background we will look at major areas where tax planning is possible.