Tax Evasion and Tax Avoidance: Definitions & Differences

Now that you have learned the difference between tax evasion and tax avoidance, it is clear that while both aim to reduce taxes, they operate in distinct ways. Tax evasion involves illegal methods whereas tax avoidance utilises legal tactics within the bounds of the law to lower tax obligations. Tax avoidance is a legal practice of minimizing tax liability within the boundaries of the tax laws, using legitimate strategies, and taking advantage of available tax benefits. 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.

Landmark case laws on tax evasion

1. But they are different terms that serve the same purpose- to provide means for reducing taxes or avoiding paying taxes.
2. This decision introduced a crucial distinction between tax avoidance and tax planning.
3. But before applying any method, you have to be very careful, as selecting an illegal method can cause some serious trouble for you.
4. Tax avoidance is taking unfair advantage of the lacunae in the tax law by finding ways to avoid the payment of taxes.
5. These actions are performed only after consulting an expert in the field of tax.

I will come back to that, but for the purposes of this blog I am using avoidance in the way that it is often used in everyday speech – i.e. getting round, or attempting to get round, the rules in a way that is legal. According to this definition a scheme may fail if tested in court or it may be found to be effective. But in either case the result which the taxpayer argues for is not the one which – broadly speaking – you could say was intended according tax evasion vs tax avoidance to the law. The “business purpose” doctrine established by the CIT v. McDowell & Co. case has been influential in shaping tax law and jurisprudence in subsequent years. It has provided a framework for courts and tax authorities to distinguish between genuine business transactions and those primarily motivated by tax avoidance.

Complexity in tax laws

It is deliberately done by overstating expenses, underreporting income, concealing sources of income and making offshore transactions. Taxpayers can use many strategies to avoid paying taxes and they’re legal and legitimate options. They include taking the standard deduction or itemized deductions, contributing to a qualified retirement account, claiming tax credits, and offshoring profits. You can accomplish it by claiming tax credits, deductions, and exclusions to your advantage. Corporations often use different legal strategies to avoid paying taxes. They include offshoring their profits, using accelerated depreciation, and taking deductions for employee stock options.

But an informed discussion about the line between acceptable planning and unacceptable avoidance is also needed. An arrangement made to beat the intent of the law by taking unfair advantage of the shortcomings in the tax rules is known as Tax Avoidance. It refers to finding out new methods or tools to avoid the payment of taxes which are within the limits of the law. On the contrary, tax evasion is a practice of reducing tax liability through illegal means, i.e. by suppressing income or inflating expenses or by showing lower income. To learn more differences, on the given topics, read the article provided below. The court reasoned that gross negligence requires a higher level of culpability than ordinary negligence because it involves a conscious and intentional disregard of the law.

The Income Tax Act of India is a comprehensive piece of legislation that governs the levy and collection of income tax in India. Enacted in 1961, the act has undergone numerous amendments over the years to keep pace with changing economic and social conditions. The Income Tax Act is administered by the Central Board of Direct Taxes (CBDT), a statutory body under the Ministry of Finance. Families often have a difficult time making decisions about retirement, savings, and education issues because the tax code can change annually. Businesses especially suffer the consequences of a tax code that frequently evolves and this can affect hiring decisions and growth strategies.

Key Differences Between Tax Avoidance and Tax Evasion

Any person who is able to avoid taxes is considered to be a wise guy. 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.

To curb this situation, the Government of India has taken some initiatives but as a citizen of India, it is also our prime duty to serve our nation and make some contribution to the stability of the Indian economy. Therefore, every taxpayer tries to escape tax evasion, which may sometimes lead to fines, penalties, imprisonment, and criminal charges. Taxpayers are advised to adopt the tax deduction and exemption provisions specified under the act for the benefit of reducing their tax liabilities and taking themselves away from the harsh provisions of the act. The court reasoned that the insurance policies served a legitimate business purpose by providing financial protection for the company in the event of the death or disability of key employees. The court held that the tax savings were merely incidental to the primary business purpose and therefore did not constitute tax avoidance. As we know, provisions under the acts are not easy to understand for common people.

You may face penalties, fines, legal actions, and damage to your reputation. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. Tax planning, Tax evasion, and Tax avoidance are all terms that come under the umbrella of the Income Tax Act, of 1961. Any attempt to “evade or defeat” a tax is punishable by up to $250,000 in fines ($500,000 for corporations), five years in prison or a combination of the two, according to the IRS Tax Crimes Handbook.

Creating shell companies

He wants to use any means for the purpose of not paying or evading from tax. 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. Taxpaying entities can avoid paying taxes in several ways with the help of the credits, deductions, and exclusions that make up the U.S. These are just a few of the tools that taxpayers have at their disposal to take advantage of tax avoidance.

These are very common methods used by taxpayers to reduce their income in a legal way. There are various deductions and exemptions introduced by the Income Tax Department. Tax authorities have limited resources, due to which they are not capable of watching or scrutinising each and every taxpayer.

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. Tax Avoidance involves the legal exploitation of tax laws to one’s own advantages. It can involve adjusting financial records so you do not break any tax rules. While tax avoidance is allowed, sometimes it can be seen as a crime, especially in certain situations.

Birla (2008), 175 DTR 1 (SC), the Supreme Court held that the imposition of a penalty under Section 271(1)(c) of the Income Tax Act, 1961, requires a finding of wilfulness on the part of the assessee. The court, in its judgement, held that mere ignorance of the tax law or inadvertent errors would not constitute wilful tax evasion. The court stated that the term “wilful” in the context of tax evasion requires a conscious and deliberate act or omission with the knowledge that it is contrary to the law. The court further held that the burden of proving wilfulness lies with the prosecution, and it must be established beyond a reasonable doubt. In the landmark case of Commissioner of Income Tax vs. Ramkanth Mohanlal Gandhi (1978) 113 ITR 266 (SC), the Supreme Court of India established the principle of “wilful tax evasion” as an essential element of the offence.