Article explains what is Tax Avoidance and what amounts to Tax Evasion. It further explains Characteristics of Tax Avoidance, Perception of Court’s on Tax Avoidance, Activities relating to Tax Evasion, Perception of Judiciary on Tax Evasion and Difference between Tax Avoidance and Tax Evasion.
Page Contents
Introduction
Every individual or assessee in a country dreams about to find a way in which he can avoid tax. He wants to use any means for the purpose of not paying or evading from tax. Tax Avoidance and Tax Evasion are two terms that serves a common purpose i.e ‘To reduce the amount of tax from person, firm or any legal entity’s earnings” but one difference which can be drawn from these two concepts is that one aims to do it in a legitimate manner and other strives for an illegitimate manner. Tax Evasion and Tax Avoidance are two techniques which are used and applied by many people for the purpose of reducing their tax liability. These actions are performed only after consulting an expert in the field of tax. Tax avoidance is a completely legal procedure while Tax Evasion is considered to be crime in the whole world.[1] Tax Avoidance is defined as a practice of using all the legal means to pay the least amount of tax possible.[2] The core difference which can be ascertained from these two concepts of taxes is that Tax evasion is a criminal offence and whereas Tax avoidance is perfectly legal thing.
Tax Avoidance:
Any person who is able to avoid taxes is considered to be a wise guy. It is believed Tax Avoidance is a term which signifies a situation in which a taxpayer reduces his tax liabilities by taking advantage of the loop holes and ambiguities in the legal provisions.[3] Since it is not illegal, tax avoidance is some sort of a legally allowable way to reduce the tax burden. It is not completely defined under Income Tax Act 1961.
♠ Characteristics of Tax Avoidance:
Tax Avoidance is a way of reducing the taxes through the medium provided by government but before moving towards those ways, it is important to analyze tax avoidance from depth. Here are the following features for tax avoidance:
1. Tax Avoidance involves the legal exploitation of tax laws to one’s own advantages.
2. Every attempt by legal means to prevent or reduce tax liability which would otherwise be incurred, by taking advantage of some provisions or lack of provisions in the statutes of the country.
3. An arrangement entered into solely by or primarily for the purpose of obtaining a tax advantages.[4]
♠ Perception of Court’s on Tax Avoidance
Role of judiciary on the concept of Tax Avoidance can be traced back on the judgment which was pronounced by Justice Chinnapa Reddy’s in the Mcdowell’s Case[5]. This case defines the distinction between the term tax avoidance and tax evasion in a crisp manner, it defines Tax Avoidance as “the art of dodging tax without breaking the law”. The inception of Tax Avoidance can be traced back from England as in the case of IRC v. Duke of Westminster[6], Lord Tomlin said “Every Man is entitled, if he can, to order his affairs, so that the tax attaching under the appropriate Acts, is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the commissioners of Inland Revenue or his fellow tax gatherers may be of his ingenuity, He cannot be compelled to pay an increased amount of tax.”[7]
Tax Evasion
Tax evasion is a crime in which an individual or a business entity intentionally underpays or hide their certain amount of income in order to save more amount of taxes. This method is certainly illegal in all the countries. Tax Evasion is basically non-payment of taxes by means of not reporting all taxable income, or by taking not allowed deductions. It originated in England between 1920 -1925.[8]
♠ Activities relating to Tax Evasion
1. Under reporting income.
2. Inflating deductions or expenses.
3. Hiding Money.
4. Hiding interest in offshore accounts.[9]
♠ Perception of Judiciary on Tax Evasion.
There are several cases relating to evasion of taxes. Some of the evasion of tax are like in the case of Union of India v. Playworld Electronics Pvt. Ltd. & endash[10] the court declared that “It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges”. In the case of Calcutta Chromotype Ltd. V. Collector of C. Ex., Calcutta & endash[11], the Hon’ble SC observed “Colourable devices, however, cannot be part of tax planning. Dubious methods resorting to artifice or subterfuge to avoid payment of taxes on what really is income can today no longer be applauded and legitimated as a splendid work by a wise man but has to be condemned and punished with severest of penalties.”[12]
Difference between Tax Avoidance and Tax Evasion
| S.No. | Tax Avoidance | Tax Evasion |
| 1. | Payment of tax is avoided though by complying with the provisions of law but defeating the intention of law. | Payment of tax is avoided through illegal means or fraud. |
| 2. | It is undertaken by taking advantage of loop holes in law. | It is undertaken by employing unfair means. |
| 3. | It is not performed through malafide intention but by complying through the provision of law. | It is performed through unlawful way of paying taxes and defaulter may get punishment.[13] |
Conclusion
It is concluded from the above discussion that Tax Avoidance and Tax Evasion are those concepts which enables a person to avoid liability on his income tax charged. One concept is completely legal as provided under Income Tax Act 1961 and another is a complete illegal. For the purpose of Tax Avoidance, Government has provided various ways in which a person can legally restrain tax on his income whereas on the other hand Government has given various penalties on the concept of Tax Evasion.
[1] Surbhi S, Difference Between Tax Avoidance and Tax Evasion, KEY DIFFERENCES (May 16,2015), key differences.com/difference-between-tax-avoidance-and-tax-evasion.html
[2] Lexicon, Definition of Tax Avoidance, lexicon.ft.com/term?term=tax-avoidance
[3] Kumar Jain, supra note 1
[4] Tojo Jose, What is tax mitigation, tax evasion, tax avoidance etc., Indian Economy(Jan 11, 2017), www.indianeconomy.net/splclassroom/333/what-is-tax-mitigation-ta-evasion-tax-avoidance-etc/
[5] Mcdowell & Co Limited vs Commercial Tax Officer 1997(069)-ECR-0029 SC
[6] (1936) AC 1.
[7] K Vijay Kumar, TAX AVOIDANCE VS TAX EVASION, TIOL NEWS SERVICE, www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php&newsid=605.
[8] Legal dictionary, Tax Evasion, Legal Dictionary, legaldictionary.net/tax-evasion/
[9] Id.
[10] 1989 (41) E.L.T368 (S.C).
[11] 1998(99) E.L.T 202(S.C).
[12] K Vijay Kumar, supra note 8.
[13] Income Tax Management, The Difference between Tax Avoidance and Tax Evasion, IT Department, http://incometaxmanagement.com/Pages/Tax-Management-Procedure/5-5-The-Difference-Between-Tax-Avoidance-And-Tax-Evasion.html
(Republished with Amendments)
Author Bio
Really very nice explanation on this topic .
So ‘tax avoidance’ is really ‘tax minimization’. But what is the penalty if the minimization scheme is a legally grey (i.e. disputable) area and is later disallowed by tax authorities?