Tax And White-Collar Crimes - Corporate Strategies – Part 2


COVID-19 has put an unexpected brake on the economy, resulting in loss of jobs, opportunities, income for businesses and reduced demand for many products, leading to reduced production capacity in many cases. This reduction could be a result of a variety of factors, ranging from paucity of funds, lack of availability of labour or due to strict lockdowns imposed by Governments, which has resulted in restriction on movement of raw materials and finished goods. All of these could potentially also lead to an increase in tax related white-collar crimes, as discussed in the first part of this series.

In Part 1 of the series, we gave an overview, analysing the regulatory framework put in place to check white-collar crimes such as tax evasion, money laundering and financial fraud. This article deals with corporate strategies that companies may consider for the purposes of mitigating risks arising out of the potential violation of law, while also discussing global practices put in place to curb tax avoidance and evasion. Here we shall also deal with the risk of liabilities of directors and key managerial personnel with respect to such white-collar crimes.

The Law vs Corporate Strategies

Tax and other related laws contain a variety of provisions as measures to prevent tax avoidance. These are typically contained in the form of specific anti avoidance rules (“SAAR”) and general anti avoidance rules (“GAAR”). However, even prior to the introduction of these rules in the statute, the judiciary had laid down various principles dealing with ‘substance over form’, which act as anti-avoidance measures to counter tax avoidance and aggressive tax planning. The introduction of GAAR into the statutes stems from the concern that corporates regularly use aggressive tax strategies and arrangements to reduce their total tax liability. This could be happening in the domestic scenario and/ or cross-border scenarios. While courts have generally upheld tax planning strategies as being legitimate, to the extent they are within the four corners of law, it has been increasingly felt that the line between tax planning and tax evasion is thin and hence such arrangements are viewed as being techniques for tax avoidance. While GAAR is part of the domestic law, since its successful invocation results in denial of the benefits of tax treaties to non-residents, these provisions help countries address their concern with erosion of the tax base.

In keeping with the international trend of several jurisdictions, India introduced GAAR in the Income-tax Act, 1961 (“IT Act”), in 2012, but it became effective from April 1, 2017. Under GAAR, an arrangement may be disregarded if it is an impermissible avoidance arrangement (“IAA”). As mentioned in the previous paragraph, there are also SAARs in the IT Act in relation to specific transactions. Some of these pertain to the requirement of transferring or receiving shares/ immoveable property at fair market value or if the transaction is with related party, then such transaction must be on arm’s length terms under the transfer pricing regulations, etc.

The Organisation for Economic Co-operation and Development (“OECD”) initiated the Base Erosion and Profit Shift (“BEPS”) project to tackle the issue of shifting profits to low tax jurisdictions, taking advantage of gaps and loopholes in the international taxation framework. India is a member of inclusive framework on BEPS. To implement the changes proposed by the BEPS Action Plans, a multi-lateral instrument (“MLI”), which amends or updates the existing network of double tax avoidance agreements (“DTAA”) without having to amend the individual DTAAs has been brought into effect. India has signed the MLI and it was ratified on June 12, 2019. Thus, India’s network of DTAAs would be impacted by the provisions of the MLI where its treaty partner is also a signatory to MLI and has not sought to exclude the provisions of MLI from being applicable to the relevant DTAA. The MLI contains provisions that target aggressive tax avoidance strategies, restrict the practice of ‘treaty shopping’ and use of aggressive transaction and financing structures.

In addition to BEPS and MLI, India has also signed many tax information exchange agreements and renegotiated many tax treaties to expand the scope of tax information exchange provisions. India enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“Black Money Act”), under which the tax authorities can bring into the tax net any undisclosed foreign asset/ income belonging to Indian residents, which have escaped Indian taxes. This Act was introduced with the intention of widening the net of the tax authorities and giving them extensive powers as there are no time limits prescribed under the Black Money Act for reopening of assessments where they find information on undisclosed foreign assets in respect of a resident. The effective rate of tax (including penalty) under this law is in excess of 120% of the undisclosed asset / income. Additionally, there would be a higher degree of risk of penalty and prosecution under the Black Money Act.

To combat the problem of offshore tax evasion and avoidance and stashing of unaccounted money abroad, requiring cooperation amongst tax authorities, the G20 and OECD countries working together developed a Common Reporting Standard (“CRS”) on Automatic Exchange of Information (“AEOI”). India was one of the early adopters of the CRS and has committed to exchange information automatically since 2017. The Government of India has joined the Multilateral Competent Authority Agreement (“MCAA”) for exchanging information as per the above timelines.

India has also made changes to its accounting practices. Indian Accounting Standards called (“IND AS”) are now converged with the International Financial Reporting standards (“IFRS”). However, at this time, all companies are not required to comply with the revised standards and there is a phase-wise transition to IND AS. Those Indian companies that are required to adopt IND AS have to ensure that the financial statements are in compliance with IND AS, requiring appropriate disclosures in the financial statements.

Clearly, companies and key managerial persons would need to consider all the above factors, which would impact the adoption of aggressive tax positions and build mitigation strategies around them. 

Identifying opportunities and threats

As in any other aspect of developing a business plan, it is very important to upfront identify the tax costs involved in the business plan and take them into consideration for deciding the way forward. As mentioned in Part 1 of this article, the Supreme Court of India in the cases of Azadi Bachao Andolan[1] and Vodafone[2] held that tax planning is legitimate if it is well within the four corners of the law. Therefore, a taxpayer is free to plan his taxes in the most efficient way, while being within the four corners of the law. However, as mentioned, the challenge is convincing the tax authorities that the strategies are well within the permitted legal framework. It is therefore advisable that the taxpayer should assesses the tax impact upfront, in case the tax authorities disagree with the legitimacy of the structure.

Some of the critical areas which the taxpayer needs to be careful about and which generally lead to litigation are withholding tax obligations, deduction of extraordinary expenses, characterisation of income, arm’s length price determination under transfer pricing (especially intra-group services and cost sharing agreements), inter-corporate loans/ advances to shareholders, sale and leaseback arrangements for assets, sale of undertaking at book value, restructuring of debts, rights issue at less than fair market price and so on. Failure to withhold taxes as per the provisions of law, results in the tax department seeking to recover the withholding taxes, along with applicable interest from the payer. Interest for failure to deduct tax at source is levied at the rate of 1% per month (or part of the month) till such time that the taxes are deposited. At the discretion of the tax officer, the tax authorities could also initiate penalty proceedings. Such penalties should not be imposed if the taxpayer has a legitimate reason for not withholding taxes. Such penalties could be levied at the rate of up to 100% of the taxes due. This means that failure to withhold taxes could increase the tax costs substantially. Additionally, the expense on which tax is not withheld or withheld short, would be denied as deductible expense for computing taxable income of the payer.

In the case of tax evasion related offences, the Foreign Exchange Management Act, 1999 (“FEMA”) (specifically Section 37), empowers the Director and Assistant Director of the ED to exercise the power of investigation for any contravention that may occur under FEMA. These officers under FEMA have the power to exercise all the rights for investigation, which have been conferred on income-tax authorities under the IT Act.

Such failures on the part of companies leading to potential actions related to tax evasion may also have adverse impact on key managerial persons of such companies. The Supreme Court, in Sunil Bharti Mittal v. CBI inter alia, held that an individual can be held liable for an offence by the company, (i) if there is sufficient evidence of the individual’s active role, coupled with criminal intent; or (ii) where the statute itself stipulates the liability of directors and other officials, such as under the Prevention of Money-Laundering Act, 2002. Although, the Companies Act, 2013, carves out exceptions for independent and non-executive directors, ensuring that they are liable only in cases where their knowledge and involvement can be established or where they, despite having knowledge, failed to act diligently. Regardless, ensuring that appropriate measures are in place to shield against any criminal investigation, prosecution and its effects is critical.

The master directions on fraud issued by the Reserve Bank of India in July 2017 provides guidelines to identify certain early warning signals for identification of fraud. For example, foreign bills that remain outstanding for a long time, the tendency for bills to remain overdue, and a substantial increase in unbilled revenue year after year, are some of the early warning signals. Upon identification of one or more early warning signals, the account is red-flagged, and triggers further reporting and investigation. If a fraud is identified, the banks are required to report it to the state police/CBI/SFIO, depending upon the size of the fraud and type of bank. It is essential that the board of directors of companies ask appropriate questions about business plans placed before them and obtain requisite confirmations from the audit committee, internal auditors, and external auditors in respect of all such transactions and dealings. Heightened pre-investment financial and forensic diligence, particularly in the case of companies with large outstanding debts, is also imperative.

Any business plan with tax considerations which are not accepted by the tax department, can result in unplanned costs, causing significant erosion of profitability of a taxpayer. It is therefore manifest that any tax mitigating strategy is backed by robust risk analysis and commercial justification as well as documentation for defence. Prolonged litigation can create both criminal and fiscal exposure for directors at least in case of private companies.

Other than the obvious impact on cash flows and profitability, tax litigations associated with criminal overtones can cause reputational risks and damage to the ability of companies to raise finances. It may also hamper the ability to give securities of assets for funding activities.


While the Government has announced many relief packages to help businesses and the common man to recover from the pandemic, the industry is still reeling under economic pressures of the same. Some tax relaxations have been announced in relation to payment of taxes and filing of tax returns. It is a natural tendency to try and save any cash outgo at this time. However, it is important to evaluate the risk of undertaking innovative structures and accounting treatment, with the intention to reduce tax incidence. Companies would be well advised to tread carefully while assigning financial targets to employees, who could resort to means which can lead to white collar crimes and tax exposure. Conducting audits in times of the lockdown is a challenge and may result in unintended gaps in the financial statements. Companies would also have to be mindful of the impact of the changes made to tax treaties by the MLI as well as impact of GAAR.

[1]   Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) 

[2] Vodafone International Holdings BV v. Union of India, (2012) 341 ITR 1 (SC)