The tax liability of a person can be reduced through Tax Planning, Tax Avoidance & Tax Evasion. Although, in common parlance these terms are used interchangeably, these terms are technically different from each other and should not be used interchangeably.
Although, the objective of all the 3 (i.e tax planning, tax avoidance and tax evasion) is to reduce the taxes, the method adopted by them is different.
What is Tax Planning?
Tax Planning is the art of reducing the tax liability of a person by making use of the various provisions of Law. The govt. in many cases provides various deductions and exemptions which can be used by a person to reduce his tax liability.
Planning your incomes and expenses in such a manner so as to avail the various tax deductions and exemptions is called tax planning. In India, taxpayers commonly make use of Section 80C to reduce their tax liability. As per Section 80C, if certain specified investments are made for a specified period, they can avail tax deduction for the same upto a limit of Rs. 1,00,000. The most common tax saving instruments are investments in PPF Accounts, Tax Saving Fixed Deposit, National Savings Certificate, Provident Fund, Mutual Funds etc.
Tax Planning is 100% Legal and all taxpayers are advised to make use of the same to reduce their tax burden.
Tax Avoidance basically means making use of the loopholes in the Tax Law to one’s own advantage to reduce the tax burden. Although Tax Avoidance is 100% legal, it is not advisable as the taxpayer has defeated the intention of the Law maker and used this to his own advantage.
Although both Tax Planning and Tax Avoidance are legal ways to reduce tax, there is only a thin line of difference between Tax Planning and Tax Avoidance. In Tax Planning, a taxpayer is doing what the govt wants him to do whereas in tax avoidance, a taxpayer is doing something which the govt didn’t expect the taxpayer to do.
The Govt is trying very hard to remove any loopholes and brings regular amendments in the Budget so as to ensure that people don’t avoid tax by manipulating the law. With regular amendments being introduced in the Tax Budget by the Govt, it is very difficult for a person to do tax avoidance.
Tax evasion involves breaking the law, not paying one’s taxes where the law clearly states that they must be paid. Tax evasion is the method by which a person illegally reduces his tax burden by either deflating their income or inflating their expenses. Both deflating the income and inflating the expenses have the same impact that the profit gets reduced as a result of which the tax burden also gets reduced.
In India, people usually evade their taxes by dealing in cash without disclosing the same in the books of accounts.
To ensure that taxpayers don’t evade taxes, the govt has a vigil eye on almost all transactions and income tax notices are being issued in case discrepancy is expected in the tax that should have been paid and the tax that has actually been paid by the taxpayer. Tax Evasion is illegal and heavy penalty is levied in case caught.