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Difference between Tax Evasion vs Tax Avoidance vs Tax Planning

Tax management encompasses various strategies, each with distinct implications. Tax planning is a legal and ethical approach to minimize tax liability through permitted deductions and exemptions. Tax avoidance, while legal, involves exploiting loopholes in tax laws and is considered morally questionable. Tax evasion, on the other hand, is illegal and involves fraudulent practices to reduce tax burden. This article explores these concepts, their differences, and their consequences, providing clarity on the complex landscape of tax management for individuals and businesses.

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Tax Evasion vs Tax Avoidance vs Tax Planning

What Is Tax Evasion, Tax Avoidance, and Tax Planning?

What Is Tax Evasion, Tax Avoidance, and Tax Planning?
July 11, 2024

Table of Content

 

  • Tax evasion and Tax Avoidance can leave your finances jeopardize for a long time
  • Tax planning is an umbrella term which not only covers the various aspects of tax-filling but focuses deeper on the need of reducing one’s tax liability and saving tax

Do you get confused by the various tax terms used by your Chartered accountant? Here’s your guide to understand them in the simplest terms:

Tax Evasion:

Tax Evasion is an illegal way to minimize tax liability through fraudulent techniques like deliberate under-statement of taxable income or inflating expenses. It is an unlawful attempt to reduce one’s tax burden. Tax Evasion is done with a motive of showing fewer profits in order to avoid tax burden. It involves illegal practices such as making false statements, hiding relevant documents, not maintaining complete records of the transactions, concealment of income, overstatement of tax credit or presenting personal expenses as business expenses. Tax evasion is a crime for which the assesse could be punished under the law.

Tax Planning:

Tax planning is process of analyzing one’s financial situation in the most efficient manner. Through tax planning one can reduce one’s tax liability. It involves planning one’s income in a legal manner to avail various exemptions and deductions. Under Section 80C, one can avail tax deduction if specific investments are made for a specific period up to a limit of Rs 1, 50,000. The most popular ways of saving tax are investing in PPF accounts, National Saving Certificate, Fixed Deposit, Mutual Funds and Provident Funds. Tax planning involves applying various advantageous provisions which are legal and entitles the assesse to avail the benefit of deductions, credits, concessions, rebates and exemptions. Or we can say that Tax planning is an art in which there is a logical planning of one’s financial affairs in such a manner that benefits the assesse with all the eligible provisions of the taxation law. Tax planning is an honest approach of applying the provisions which comes within the framework of taxation law.

Limitations of Tax Planning:

Tax planning comes with certain limitations. For the salaried class, the employers are responsible for correct deduction of tax. In the case of a business, the business owners are responsible for declaring the right and factual income. People with taxable income may hide income to avoid taxes, or claim excess expense claims and deductions to lower down the tax burden. In such cases, tax evasion/avoidance takes center stage.

Tax Avoidance:

Tax avoidance is an act of using legal methods to minimize tax liability. In other words, it is an act of using tax regime in a single territory for one’s personal benefits to decrease one’s tax burden. Although Tax avoidance is a legal method, it is not advisable as it could be used for one’s own advantage to reduce the amount of tax that is payable. Tax avoidance is an activity of taking unfair advantage of the shortcomings in the tax rules by finding new ways to avoid the payment of taxes that are within the limits of the law. Tax avoidance can be done by adjusting the accounts in such a manner that there will be no violation of tax rules. Tax avoidance is lawful but in some cases it could come in the category of crime.

Features and differences between Tax evasion, Tax avoidance and Tax Planning:

1. Nature:

Tax planning and Tax avoidance is legal whereas Tax evasion is illegal

2. Attributes:

Tax planning is moral. Tax avoidance is immoral. Tax evasion is illegal and objectionable.

3. Motive:  

Tax planning is the method of saving tax .However tax avoidance is dodging of tax. Tax evasion is an act of concealing tax.

4. Consequences:

Tax avoidance leads to the deferment of tax liability. Tax evasion leads to penalty or imprisonment.

5. Objective:

The objective of Tax avoidance is to reduce tax liability by applying the script of law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax planning is done to reduce the liability of tax by applying the provision and moral of law.

6. Permissible:

Tax planning and Tax avoidance are permissible whereas Tax evasion is not permissible.

  • Tax liability of an individual can be reduced through 3 different methods- Tax Planning, Tax avoidance and Tax evasion. All the methods are different and interchangeable.
  • Tax planning and Tax avoidance are the legal ways to reduce tax liabilities but Tax avoidance is not advisable as it manipulates the law for one’s own benefit. Whereas tax planning is an ideal method.

FAQs on tax planning, tax evasion and tax avoidance

Q: What is the difference between tax evasion and tax avoidance?

Simply put, the legal tactic of reducing tax liability despite following all tax regulations, employing prudent methods, and utilising all available tax benefits is known as the practice of tax avoidance. On the other hand, the term tax evasion is defined as the intentional and illegal use of fraudulent techniques, such as data fabrication or financial record falsification, to evade or avoid paying taxes.

Q: What is tax evasion?

The use of illicit strategies to lower one's tax liability, such as understating taxable income or inflating expenses, is known as tax evasion. These dishonest strategies aim to make it look as though a person is making less money in order to minimise their tax liability. Falsifying statements, concealing income or relevant documentation, inflating the tax credit, neglecting to maintain complete transaction records, and classifying personal expenses as business expenses are a few examples of known illegal activities.

An assessee who commits the crime of tax evasion may be punished under Chapter XXII of the Income Tax Act of 1961.

Q: What is tax avoidance in the Indian tax system?

Tax avoidance is the use of legal tactics to lower tax obligations. Basically, it's the process of lowering one's tax liability by utilising tactics that fall inside the corners of tax law.

This practice is not advised, since the ultimate objective is to minimise one's tax liability for private benefit, which is an unfair abuse of the legal system.

The typical strategies used in tax avoidance involve locating legal loopholes or making adjustments to the accounts to make sure that no tax laws are broken. However, there are circumstances in which it might not be lawful.

Q: How can GST reduce tax evasion?

As well all know, GST stands for Goods and Services Tax. Introduced in 2017, GST is an indirect tax that has replaced many other indirect taxes in India, such as excise duty, VAT, as well as services tax.

Through GST, taxpayers can only claim an input tax credit on invoices uploaded by each of their individual suppliers. This is what reduces the likelihood of fraudulent invoices being able to claim input tax credits.

Q: Why is tax planning important?

In every financial year, a common term we come across as taxpayers, is tax planning, whether you are a salaried person, professional or businessman. Tax planning can be used by both individuals and businesses to effectively manage their cash flow.

The taxpayers can ensure a consistent flow of income throughout the year by aligning their income and expenses in a tax-efficient manner. They can assess their estimate tax liability and accordingly invest in tax saving instruments for that financial year. This helps avoid cash flow issues and encourages financial stability.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Note - Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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