Month: July 2021

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.

For example, in the case of CIT vs. Hindustan Coca-Cola Beverages Pvt. It helps to ensure that the government has the resources it needs to provide essential services to its citizens. The act also promotes equity by ensuring that individuals and businesses pay their fair share of taxes. The Income Tax Act is a complex piece of legislation, and taxpayers are advised to seek professional advice to ensure that they are complying with all the requirements of the law.

The principle established in the Ramkanth Gandhi case is important as it provides a safeguard against the arbitrary imposition of penalties and prosecution for tax evasion. It ensures that only those who have knowingly and deliberately evaded tax are held liable. It has made it easier for businesses to do business across state borders, and it has led to a reduction in the cost of doing business. GST has also helped increase tax compliance and reduce tax evasion.

To constitute gross negligence, the taxpayer must have been aware of the tax laws and wilfully failed to comply with them. Tax evasion is an unlawful activity and is considered a criminal offence or crime. Therefore, consequences are more severe than tax avoidance, which covers penalties and fines, imprisonment, and criminal charges. Tax evaders take advantage of loopholes in the provisions of the law in transactions between 2 countries.

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Penalties, fines, interest charges on unpaid taxes, criminal prosecution, imprisonment, and damage to one’s reputation are potential consequences. Tax authorities have the power to investigate, assess, and take legal action against individuals or entities involved in tax evasion. The ethical aspects of tax avoidance can vary depending on individual perspectives. Some argue that it is responsible financial planning within the confines of the law, while others believe that aggressive or abusive tax avoidance schemes may be unethical.

Tax laws in India

Tax evasion means illegally trying to pay less tax by using fraudulent methods. E.g., Section 80C allows a deduction of up to INR 1,50,000 if specified investments are made. The most popular ways of saving tax through planning are investing in Life insurance policies, PPF accounts, National Saving certificates, Sukanya Samriddhi Scheme, term deposits, Provident Funds, etc. Tax planning involves planning the financial affairs to entitle the taxpayer to the benefits of deductions, exemptions, concessions, and rebates.

Typically, only the last three years of your tax returns are eligible for audit. “If you omit 25% or more of your gross income [from a tax return], that extends the statute of limitations to six years,” Miller says. This interpretation of gross negligence has been consistently applied by courts in India in subsequent cases. It has ensured that penalties for tax evasion are imposed only when there is a clear and deliberate disregard of the law, and not for mere mistakes or inadvertent errors. However, corporate taxes can also have a negative impact on businesses. High corporate tax rates can make it difficult for companies to compete with their international rivals, and they can also discourage investment and job creation.

Tax planning is a genuine approach to applying all the provisions within the tax law framework to the taxpayer’s benefit. Some of the most common tax evasion cases involve people running cash businesses who pocket money from the cash register without reporting the income, Miller says. As a lawyer and a tax adviser I have always taken it as axiomatic that tax avoidance and tax evasion are different things. In this blog I would therefore like to explore in more detail to what extent there really is a difference between the two. The case involved the taxpayer, McDowell & Co., which purchased a series of life insurance policies for its key employees. The premiums paid for these policies were substantial and resulted in significant tax deductions for the company.

Tax evasion is an offense for which the assessee could be punished under Chapter XXII of the Income Tax Act, 1961. One common way people adopt to evade taxes is by transacting in cash without accounting for the same in books. However, to track and tax such transactions and the means utilized to evade tax, the government keeps a vigilant watch and picks the cases for assessment. “Tax avoidance is structuring your affairs so that you pay the least amount of tax due.

What are the common methods of Tax Evasion or Tax Avoidance?

While tax evasion and tax avoidance sound similar, they’re far from interchangeable. One is a legitimate strategy to reduce your tax burden, while the other could land you in serious trouble with taxing authorities. If you want to hand over less money to the IRS without the risk of going to prison, start by understanding what the two terms mean. An illegal act, made to escape from paying taxes is known as Tax Evasion. This will result in the disclosure of income which is not the actual income earned by the entity. Tax avoidance and evasion are both downgrading our Indian economy, which impacts our budget, borrowings, public debts, economic stability, and foreign direct investment.

In addition, corporate tax can be complex and time-consuming to comply with, which can be a burden for small businesses. The purpose of corporate tax is to generate revenue for the government, which can then be used to fund public services such as healthcare, education, and infrastructure. Corporate tax can also be used to discourage companies from engaging in certain activities, such as polluting the environment or exploiting workers. Corporate tax is a significant source of revenue for governments, and it is levied on the profits earned by companies.

In India, people try to find many ways of not paying or avoiding taxes. Tax evasion and tax avoidance are used interchangeably to describe such acts. But they are different terms that serve the same purpose- to provide means for reducing taxes or avoiding paying taxes. However, such avoidance is considered a serious offense if it is done using unfair means or by concealing information/income from tax authorities. Every assessee wants to escape from paying taxes, which encourages them to use various means to avoid such payment.

Consequences of tax evasion and tax avoidance in India

Tax Code has made it one of the most complex tax codes in the world. Its complexity causes many taxpayers to miss out on certain tax breaks because they simply don’t understand them. Taxpayers end up spending billions of hours each year filing tax returns and much of that time is spent looking for ways to avoid paying higher taxes. Tax avoidance, on the other hand, is the use of legal methods to reduce taxable income or tax owed.

1. Using these strategies can help them either avoid paying taxes altogether or lower their tax liability.
2. GST is a single tax that replaces multiple indirect taxes levied by the Central and State Governments.
3. You may face penalties, fines, legal actions, and damage to your reputation.
4. Now that you have a fair understanding of the basics, let’s differentiate between tax evasion and tax avoidance in detail.
5. 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.
6. Tax evasion is an illegal method adopted by a taxpayer to escape the liability of paying taxes to the government.

Retirement Savings

Tax evasion is lying on your income tax form or any other form,” says Beverly Hills, California-based tax attorney Mitch Miller. Tax shelters are the instruments and entities where money is invested to generate losses and set-offs from another source of income. While in a tax haven, taxpayers enter into a transaction with a country where rates of tax are lower.

This definition sets a high threshold for establishing gross negligence, requiring a level of culpability beyond mere carelessness or oversight. They are governed by various statutes, rules, and regulations issued by the Central Board of Direct Taxes (CBDT). These laws cover a wide range of taxes, including income tax, corporate tax, and goods and services tax (GST). Tax avoidance and tax tax evasion vs tax avoidance evasion have become common factors in higher revenue losses for India.