♦ Tax Avoidance is one of the most important method resorted to by the taxpayers as here they try to look after the loopholes present or existing in the tax law may be in the form of lack of proper jurisdiction to hear case or in the form of lack of proper stringent and vigil mechanism for its implementation or liberal penal provisions or any other such loopholes exists here, and this gets noticed by taxpayers, and they tried to utilise such gaps, and therefore use legitimate mechanisms to reduce their own tax liability required to be paid.
For e.g. Using tax deductions for decreasing business expenses and related tax bill/ Sheltering revenue from tax liability by formulating a proper employee retirement plan/ When a person transfers income from an asset without actually transferring that asset, then the said income is included in the transferor’s income.
Therefore, though it is legal but then also against the intention of law makers, and that’s why it is also known as loopholes tax planning.
♦ Tax Planning is the most utilised method resorted to by taxpayers wherein the persons or the companies try to utilise the maximum benefit of the legal provisions in the form of deductions or exemptions or any other such mechanism present in Income Tax Act of 1961, and ultimately try to reduce their respective tax liability, and that’s why this method of reducing tax liability is 100% safe and legal.
For e.g. utilising various deductions prescribed u/s 80 of 1961 Act/ Making investments in Special Economic Zones/ Making investments in fixed deposits, mutual funds, provident funds or any such funds wherein certain tax exemption or rebate is granted or given either spontaneously or in due course of time.
♦ Tax Evasion is considered to be a purely unlawful or illegal method of avoiding one’s tax liability wherein the main intention of all the taxpayers, whether individuals or businesses or companies, have the major objective of showing less profits through various illicit practices to lesser their tax liability or they may also show more expenses accordingly to gain certain exemptions and so on.
For e.g. Showing false and fabricated books of accounts as well as financial statements/ inflation deductions without sufficient backing of information/ claiming more and more expenditure / transferring assets illegally / hiding of legal documents showing real income earned or generated and then claiming exemptions by showing less income/ transferring black money to foreign bank accounts like Swiss Bank A/c’s or in a tax heaven country, and so on
♦ Tax Management is basically complying with finance management for the sole purpose of paying tax, and is therefore a much wider term than tax planning as in former, the main goal is to comply with the concerned income tax laws and such other allied rules
E.g. Saving from Prosecutions or Penalties/ Filing income tax return in due date, etc.
♦ Now lets look at the basic difference between all the four after having gone through their basic meanings.
| Points of Distinction | Tax Avoidance | Tax Planning | Tax Evasion | Tax Management |
| Meaning | Herein the taxpayer legally takes advantage of the loopholes present in income tax laws | Herein the taxpayers try to take maximum advantage present in income tax law and allied rules through deductions, exemptions, reliefs and rebates thereon | Herein the taxpayers try to suppress their income or manipulating such income/expense figures illicitly that ultimately show a total reduction in income of such payer | Herein the taxpayers try to comply with all the necessary and required provisions of tax law and it’s rules. |
| Object | To reduce tax liability to its minimum without actually breaking the law | To follow provisions of law as has been mentioned in due and proper manner for better compliance and secured future purposes | To reduce one’s tax liability by resorting to illegal and illicit ways | To adequately comply with all the formalities of laws present. |
| Time Period | Though Futuristic but for a short span of time as the government after identifying such loophole or gap immediately comes up with an amendment to either rectify it or eliminating it. | Not only futuristic but also positive in nature and sense, as planning is made today for availing better benefits or privileges in future. | Not exactly futuristic but more of past nature as it is in major cases resorted to after a tax liability had actually arise, and is therefore a very negative approach | It comprises of past (rectification, revision), present(filing of tax and return), as well as future( taking corrective assessment or action) |
| Benefits | Basically for short span of time | For long term purposes, therefore long run benefits | Again for a short period of time till the appropriate authorities catches the evader and apply penal provisions against him/her | Short, Medium as well as Long term benefits as there is complete compliance here. |
| Practice | Tax Hedging | Tax Saving | Tax Hiding/Concealment | Tax Administration |
| Relation with Law | Uses loopholes present in law | Uses benefits present in law | Overrules or breaks the law and administration | Implements and comply with the law |
| How they are look at | It is avoidable | It is practicable and desirable also | It is objectionable | It is essential |
| Morality attached | Immoral though legal in nature | Moral | Illegal and against morals and ethics of taxpayer and a law abiding citizen | Not only moral, but actually one’s duty to fulfil |
| Penalty | Results in prosecution and penalty if done against the letter and spirit of law, otherwise won’t | No levy of penalty and prosecution as completely under spirit of law | Results in harsh penalties, and appropriate civil and criminal consequences follow | No penalty/ Prosecution |
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Disclaimer:- The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.
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