Tax Planning Vs. Tax Avoidance Vs. Tax Evasion

Tax is a mandatory fee levied by the Government on an individual or entity to collect revenue for public work and we all are aware of the importance of tax for the development of any country.

But, in many instances, we come across the news in our surroundings about tax evasion or non-payment of tax by the entity or individuals, etc. by using some illegal or legal techniques. Recently, we came to know that the Dainik Bhaskar group allegedly evaded taxes on Rs. 700 crores of income over a period of six years.

Actually, any business or person in search of saving tax often comes up with these terms viz, Tax Planning, Tax Avoidance, and Tax Evasion. The tax liability of a person/entity can be reduced through these ways, and in common parlance, these terms are used interchangeably, but technically these terms are different from each other.

So, let us understand these techniques in brief

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Tax Planning: – Tax planning is a legal process and art to reduce one’s tax liability by making use of various provisions of the law. Tax planning assists the taxpayers to reduce their income or lessen the tax liability through a variety of means. For e.g., by applying Deductions, credits, Rebate, Exemptions provided under the tax laws. Tax planning generally is to be done after considering the below factors:-

• Nature of the entity
• Nature of product to be produced
• Size of the entity
• Owner residency status
• Expenses nature
• Capital structure

Tax planning is 100% legal and all taxpayers should use this technique to reduce their tax burden.

Tax Avoidance:- Tax avoidance is a process in which taxpayers reduce their tax liability by following loopholes of the Tax Act. This is the act of minimizing the tax liability within the limits of the law or without breaking the law. This is very much similar to Tax planning except a difference that in this the taxpayers use the method to reduce their tax liability which is unacceptable to the Government. This can be performed by any of the following or likewise:-

• Use of tax deduction for reducing business expenses
• Delaying in tax payment until the last due date with some deferral plan

Tax Evasion: – Tax evasion is a process to reduce tax liability by following illegal ways like inflating expenses or understating the income. Tax evasion is performed by the taxpayers to evade profits and avoid tax burden. The taxpayers evade their taxes by using below mentioned illegal practices:-

• Making false statements
• Hiding relevant documents
• Not maintenance of proper records and statements
• Charging personal expenses as a business expense
• Charging bogus expenses

In India, people usually evade their tax liability by dealing in Cash without having any presentation of those transactions in the books of accounts. Tax evasion is an illegal way to save the tax and taxpayers can penalize heavily for this action.

After analyzing these above facts, we came to know that Tax planning and Tax Avoidance is 100% legal, Although taxpayers should have proper knowledge of these techniques before any tax avoidance, as an inappropriate application of tax avoidance, may lead the taxpayers towards tax evasion that would result in violation of jurisdiction regulations.

Author: CA Rakhi Thakur | rakhithakur3103@gmail.com