taxation abhishek tax avoidance vs tax evasionpptx

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1. Tax Avoidance vs. Tax Evasion BY- Abhishek Tripathi

2. In India, people try to find many ways of not paying or avoiding taxes. Tax evasion and tax avoidance are used interchangeably to describe such acts. But they are different terms that serve the same purpose- to provide means for reducing taxes or avoiding paying taxes. However, such avoidance is considered a serious offense if it is done using unfair means or by concealing information/income from tax authorities. If caught, the person may face an enormous penalty and imprisonment. Tax planning, Tax evasion, and Tax avoidance are all terms that come under the umbrella of the Income Tax Act, of 1961. Let us talk about them in detail.

3. What is Tax Evasion? Tax Evasion is an illegitimate way to minimize tax liability through unlawful techniques like inflating expenses or understating taxable income. Such fraudulent means are used with the motive of showing lesser profits to minimize one’s tax burden. Certain noted illegal practices are concealing income or relevant documents, making false statements, overstatement of the tax credit, not maintaining complete records of the transactions or accounting personal expenses as business expenses. Tax evasion is an offense for which the assessee could be punished under Chapter XXII of the Income Tax Act, 1961. One common way people adopt to evade taxes is by transacting in cash without accounting for the same in books. However, to track and tax such transactions and the means utilized to evade tax, the government keeps a vigilant watch and picks the cases for assessment. If caught, a heavy penalty may be levied along with taxes.

4. What is Tax Avoidance? Tax Avoidance involves using legal methods to minimize tax liability. In other words, it consists in using means within four corners of the tax law to minimize one’s tax burden. Although a legal method, it is not advisable as it ultimately aims to reduce the amount of tax that is payable by one for their own personal advantage, which is unfair exploitation of law. Tax avoidance is taking unfair advantage of the lacunae in the tax law by finding ways to avoid the payment of taxes. Tax avoidance is usually done by adjusting the accounts so that there will be no violation of tax laws or by finding loopholes in the law. Though lawful, it could be categorized as an offense in some cases. For example, companies channel their funds through offshore branches to avoid paying taxes in their home country.

5. What is Tax Planning? Tax planning is a comprehensive evaluation of one’s financial situation using current known and estimated future variables and drawing out a feasible plan. Tax planning, like tax evasion/avoidance, is also done to reduce tax liability. However, it involves legal planning regarding investments, expenses, etc., to avail various exemptions and deductions provided under the tax laws. E.g., Section 80C allows a deduction of up to INR 1,50,000 if specified investments are made. The most popular ways of saving tax through planning are investing in Life insurance policies, PPF accounts, National Saving certificates, Sukanya Samriddhi Scheme, term deposits, Provident Funds, etc. Tax planning involves planning the financial affairs to entitle the taxpayer to the benefits of deductions, exemptions, concessions, and rebates. Tax planning is a genuine approach to applying all the provisions within the tax law framework to the taxpayer’s benefit.

6. Difference between Tax Planning, Tax Evasion, Tax Avoidance Criteria Tax Planning Tax Evasion Tax Avoidance Legality Legal Illegal Legal Objective Minimize tax liability within the boundaries of the law Evade or avoid payment of taxes illegally Minimize tax liability within the boundaries of the law Methods used Utilizing legitimate tax provisions and strategies Fraudulent activities, false information Utilizing legitimate tax provisions and strategies Compliance Complies with tax laws and reporting requirements Violates tax laws and reporting requirements Complies with tax laws and reporting requirements Consequences No legal consequences Penalties, fines, legal actions, reputation damage No legal consequences Examples Maximizing deductions, tax credits, retirement planning Underreporting income, fabricating expenses Utilizing tax incentives, deductions, exemptions