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
