TAX AVOIDANCE & TAX EVASION

Definition of Tax Avoidance

An arrangement made to beat the intent of the law by taking unfair advantage of the shortcomings in the tax rules is known as Tax Avoidance. It refers to finding out new methods or tools to avoid the payment of taxes which are within the limits of the law.

This can be done by adjusting the accounts in a manner that it will not violate any tax rules as well as the tax incurrence will also be minimised. Formerly tax avoidance is considered as lawful, but now it comes to the category of crime in some special cases.

The only purpose of tax avoidance is to postpone or shift or eliminate the tax liability. This can be done investing in government schemes and offers like the tax credit, tax privileges, deductions, exemptions, etc., which will result in the reduction in the tax liability without making any offence or breach of law.

Definition of Tax Evasion

An illegal act, made to escape from paying taxes is known as Tax Evasion. Such illegal practices can be deliberate concealment of income, manipulation in accounts, disclosure of unreal expenses for deductions, showing personal expenditure as business expenses, overstatement of tax credit or exemptions suppression of profits and capital gains, etc. This will result in the disclosure of income which is not the actual income earned by the entity.

Tax Evasion is a criminal activity for which the assessee is subject to punishment under the law. It involves acts like:

• Deliberate misrepresentation of material facts.
• Hiding relevant documents.
• Not maintaining complete records of all the transactions.
• Making false statements.

Key Differences Between Tax Avoidance and Tax Evasion

The following are the major differences between Tax Avoidance and Tax Evasion:

1. A planning made to reduce the tax burden without infringement of the legislature is known as Tax Avoidance. An unlawful act, done to avoid tax payment is known as Tax Evasion.
2. Tax avoidance refers to hedging of tax, but tax evasion implies the suppression of tax.
3. Tax avoidance is immoral that tends to bend the law without causing any damage to it. Unlike tax evasion, which is illegal and objectionable both according to law and morality.
4. Tax avoidance aims at minimizing the tax burden by applying the script of law. However, tax evasion minimizes the tax liability by exercising unfair means.
5. Tax Avoidance involves taking benefit of the loopholes in the law. Conversely, Tax Evasion includes the deliberate concealment of material facts.
6. The arrangement for tax avoidance is made prior to the occurrence of tax liability. Unlike Tax Evasion, where the arrangements for it, are made after the occurrence of the tax liability.
7. Tax avoidance is completely legal however Tax Evasion is a criminal activity.
8. The result of tax avoidance is the postponement of tax, whereas the consequence of tax evasion if the assessee is found guilty of doing so, is either imprisonment or penalty or both.

Tax Avoidance and Tax Evasion both are meant to reduce the tax liability ultimately but what makes the difference is that the former is justified in the eyes of the law as it does not make any offence or breaks any law. However, it is biased as the honest tax payers are not fools, but they can also make arrangements for postponing unnecessary tax. If we talk about the latter, it is completely unjustified because it is a fraudulent activity, because it involves the acts which are forbidden by the law and hence it is punishable.