Concept and significance of “Ethics” in taxation:
“Ethics” in taxation relates to the extent of compliance of tax laws i.e. the ethical factor in taxation is pari passu to the extent of compliance of tax laws. The ethical quotient in tax management is directly proportional to tax compliance (i.e. higher the degree of compliance with tax laws, the higher is the ethical quotient and vice versa) and inversely proportional to tax avoidance (i.e. higher the degree of tax avoidance, the lower is the ethical quotient). Compliance with tax laws does not literally mean paying high taxes. Tax compliance can also be ensured by effective tax planning. Tax planning is a lawful method to keep the incidence of tax at the minimum level by making effective use of various tax exemptions, deductions, rebate, relief, beneficial circulars and judicial rulings and at the same time discharge the tax obligations properly. Tax avoidance, on the other hand, is a device which takes advantages of the loopholes in the law to reduce/avoid or transfer one‘s tax burden. Tax evasion is, on the extreme end, avoiding tax liability by dishonest means like concealment of income, falsification of accounts etc. Tax evasion devices are unethical and evasion, once proved, attracts heavy penalties and also prosecution.
Justice O. Chinnappa Reddy of Supreme Court has, while briefing the evil consequences of tax avoidance in Mc.Dowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) , observed that one such evil consequence is the ethics (or the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of artful dodgers. As regards the ethics of taxation, he observed “We now live in a welfare State whose financial needs, if backed by law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation”.
A similar observation was made by Lord Chancellor in Latilla vs. Inland Revenue Commissioner (1943) 011 ITR (E.C) 0078 –
“There is, of course no doubt that they are within their legal rights but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of the good citizenship. On the contrary, one result of such methods, if they succeed, is of course to increase pro tanto the load of tax on the shoulder of the body of good citizens who do not desire or do not know how to adopt these maneuvers.”