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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Corporate Tax Planning

Sundaram Textiles Ltd, a domestic company, restructures its supply chain by routing a sale through a newly formed related entity that performs no real function. The only purpose is to shift profit to a lower-tax place. Which characterisation is most appropriate?

This is tax avoidance through an arrangement lacking substance, which may be declared an impermissible avoidance arrangement. The sale is disclosed, so it is not evasion, but the shell entity performs no real function and exists only for a tax benefit. Legal incorporation and documentation do not make it acceptable planning.

  1. ATax planning, since every step is documented in writing
  2. BTax evasion, since the sale has been concealed from the books
  3. CTax planning, since the new entity is legally incorporated
  4. DTax avoidance through an arrangement that may be declared impermissible, as it lacks substanceCorrect

Explanation

The transactions are recorded, so it is not concealment and not evasion. But the arrangement lacks commercial substance and aims at a tax benefit, so it is tax avoidance that may be declared an impermissible avoidance arrangement and its tax consequences redetermined. Legal form or documentation alone does not make it acceptable planning.

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