There are mainly three methods by which one can reduce his tax burden that is: Tax Planning, Tax Evasion & Tax avoidance. Saving of taxes by following legitimate means could be done through Tax planning and tax avoidance but when one follows illegitimate or unlawful ways to escape from tax liability then it results in Tax evasion. There is a very minute difference between Tax evasion and tax avoidance, which we will discuss by discussing both of them in the following paragraphs.
Tax avoidance is the situation when one person is saving his taxes by strictly following the law, Tax exemptions or Tax privileges offered by the government. Finding out Tax Loophole in the law is also a way of tax avoidance. A loophole is a technicality that allows the person to depart himself from the provisions of the law without directly violating the law.
Before claiming any deductions or to lower your taxable income, you should be aware of the expenses which are deductible and which are not. There are many special provisions that apply for some expenses like Staff welfare expenditure, Employee reimbursement, Travelling expenditure. So, there could be many expenditures which are deductible but business houses would consider them non-deductible like Business trips, etc.
By varying the residential status of an individual by managing the number of days outside India for a person who is becoming an Indian resident by just a few days. Choosing an appropriate investment option in order to avoid tax liability by considering deductions in respect of interest, claiming exemptions in respect of dividends, etc.
So, only by having knowledge of proper deductible expenditures and every other aspect of law one should avoid his tax liability in a legitimate manner.
Tax evasion is an attempt to reduce one’s tax liability by illegal means like fraud, misrepresentation of facts or falsification of accounts. Thus, tax evasion is referred to any attempt by which a person avoid payment of tax by using illegal means. Some of the commonly adopted ways and examples of Tax evasion are:
- Misrepresentation or suppression of facts.
- Recording false expenditure in books of accounts.
- Deliberate under-reporting of income or receipts.
- Claiming expenditure not substantiated by any evidence.
- Deliberately treat personal expenditure as revenue expenditure.
- Non-recording of any Asset or investment in books of accounts.
- Maintaining two sets of books and making false entries in books in order to reduce taxable income.
This also constitutes misreporting of income and also attracts a 200% penalty under section 270A.
From the above discussion of Tax evasion and Tax avoidance, it is clear that both are ways to reduce Tax liability. But, along with this similarity, there is a huge difference in both of them as Tax avoidance is a legitimate way allowed by the government to benefit the taxpayers. On the other hand, Tax evasion is the reduction of tax liability by adopting various illegal methods which are also not tolerable by the government and therefore huge penalties are imposed by the government on tax evaders.