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Concept Relating to Tax Avoidance and Tax Evasion

TAX AVOIDANCE

It is an act of dodging tax without breaking the Law. It means when a taxpayer arranges his financial activities in such a manner that although it is within the four corner of tax law but takes advantages of loopholes which exists in the Tax Law for reduction of tax a liability. In other words though he has complied the letter of law but not the sprit behind the law.

Following transactions are held as Tax Avoidance which are :

  1. Where tax law is complied with by using  colorable devices which means that use o dubious method or a method which is unfair for reduction of tax liability.
  2. Where the fact of the case is presented in a false manner.
  3. Where the sprit behind the law is avoided.
  4. There is a malafide intention.

It means that method adopted for reducing tax liability should be within the framework of law. If it is not within the framework of law,  it amounts to tax avoidance and not Tax planning.

TAX EVASION

Any illegal method which leads to reduction of tax liability is known as Tax Evasion. The Tax Evasion is resorted to by applying following dishonest means :

  1. Concealing the Income
  2. Claiming excessive expenditure
  3. Falsification of accounts.
  4. Willful violence of Rules

E.g. Claiming depreciation where no asset exist in the Business or claiming depreciation on the assets which is used for residential purposes. It Is basically a fraudulent method of reduction in tax liability.

TAX AVOIDANCE TAX EVASION
(i) Where the payment of tax is avoided though by complying with the provisions of law but defeating the intension of the law is known as tax Avoidance. Where  the payment of tax is avoided through illegal means or fraud is termed as tax evasion.
(ii) Tax Avoidance is undertaken by taking advantage of loop holes in law Tax evasion is undertaken by employing unfair means
(iii) Tax Avoidance is done through not malafied intention but complying the provision of law. Tax Evasion is an unlawful way of paying tax and defaulter may punished.
(iv) Tax Avoidance looks like a tax planning and is done before the tax liability arises. Tax evasion is blatant fraud and is done after the tax liability has arisen.

 

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