Difference Between Tax Avoidance and Tax Evasion
Every assessee wants to escape from paying taxes, which encourages them to use various means to avoid such payment. Tax Avoidance and Tax Evasion are two techniques which are used by many people to reduce their tax liability. They do so by taking expert advice. Tax Avoidance is completely lawful while Tax Evasion is considered as a crime in the whole world. In spite of many differences in the two practices, people use them interchangeably, which is incorrect. So, this article will help you to know the significant differences between Tax Avoidance and Tax Evasion.
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. This can be done by adjusting the accounts in a manner that it will not violate any tax rules as well as the tax incurrence will also be minimized. Formerly tax avoidance was considered as lawful, but now it comes to the category of crime in some special cases.
The only purpose of tax avoidance is to postpone or shift or eliminate the tax liability. This can be done by investing in government schemes and offers like the tax credit, tax privileges, deductions, exemptions, etc., which will result in the reduction in the tax liability without making any offense or breach of law.
An illegal act, made to escape from paying taxes is known as Tax Evasion. Such illegal practices can be deliberate concealment of income, manipulation in accounts, disclosure of unreal expenses for deductions, showing personal expenditure as business expenses, overstatement of tax credit or exemptions suppression of profits and capital gains, etc. This will result in the disclosure of income which is not the actual income earned by the entity. Tax Evasion is a criminal activity for which the assessee is subject to punishment under the law. It involves acts like:
- misrepresentation of material facts
- Hiding relevant documents
- Not maintaining complete records of all the transactions
- Making false statements
The following are the major differences between Tax Avoidance and Tax Evasion:
- planning made to reduce the tax burden without infringement of the legislature is known as Tax Avoidance. An unlawful act, done to avoid tax payment is known as Tax Evasion
- Tax Avoidance involves taking benefit of the loopholes in the law. Conversely, Tax Evasion includes the deliberate concealment of material facts
- The arrangement for tax avoidance is made prior to the occurrence of tax liability. Unlike Tax Evasion, where the arrangements for it, are made subsequent to the occurrence of the tax liability
- Tax avoidance is completely legal however Tax Evasion is a criminal activity
- Tax avoidance is completely legal however Tax Evasion is a criminal activity
Tax Avoidance and Tax Evasion both are meant to reduce the tax liability ultimately but what makes the difference is that the former is justified in the eyes of the law as it does not make any offense or break any law. However, it is biased as the honest tax payers are not fools, but they can also make arrangements for postponing unnecessary tax. If we talk about the latter, it is completely unjustified because it is a fraudulent activity, since it involves the acts which are forbidden by the law and hence it is punishable. So now you know, choose your tax savings path wisely!
