Tax Evasion VS Tax Avoidance VS Tax Planning

People always think of how to reduce Tax liability or to avoid tax payment. Payment of Direct Tax reduces their saving or purchasing capacity. But Tax evasion & Tax avoidance are used interchangeably to describe such acts. They are different terms and they have same motive to reduce Tax liability or not to pay taxes.

Tax Evasion: Let’s understand 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.

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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.

So Tax Evasion is never advisable and always put assessee in trouble.

Tax Avoidance: Let’s understand 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.

Tax Avoidance may land assessee in some disallowances by Assessing Officers or objection on self assessment done by assessee of his/her annual income. Tax Avoidance is technically legal, it can be a contentious topic, as some argue that aggressive tax avoidance by large corporations and wealthy individuals can result in a loss of tax revenue for governments and may lead to calls for tax law reforms.

Tax Planning: Lets understand 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 is the process of arranging financial activities and transactions in a way that legally minimizes the amount of taxes an individual or business is required to pay. It involves utilizing available tax deductions, credits, exemptions, and incentives provided by the tax laws to optimize one’s tax liability. Tax planning is a legitimate and accepted practice, encouraged by tax authorities, as it allows taxpayers to use the tax code to their advantage while remaining compliant with the law.