Tax Planning, Tax avoidance and Tax evasion

Tax is a mandatory fee placed by the government on an individual or company in order for the government to collect revenue for public works, and we are all aware of the necessity of tax for any country's development.

However, we frequently hear news in our communities regarding tax evasion or non-payment of tax by entities or people, etc., through the use of illegal or legal methods. We recently learned that the Dainik Bhaskar group reportedly avoided paying taxes on Rs. 700 crores in profits over a six-year period.

Actually, any business or person in search of saving tax often comes up with these terms viz, Tax Planning, Tax Avoidance, and Tax Evasion. The tax liability of a person/entity can be reduced through these ways, and in common parlance, these terms are used interchangeably, but technically these terms are different from each other.

So, let us understand these techniques in brief

Tax Planning vs. Tax Avoidance vs. Tax Evasion

Tax planning Tax planning is a legal process and an art of lowering one's tax liability by using various legal options. Tax planning helps people minimise their income or lower their tax liability in a variety of ways. For example, by using tax deductions, credits, rebates, and exemptions available under the legislation. In general, tax planning should be done after considering the following factors: -

• Nature of the entity
• Nature of product to be produced
• Size of the entity
• Owner residency status
• Expenses nature
• Capital structure

Tax planning is 100% legal and all taxpayers should use this technique to reduce their tax burden.

Tax Avoidance: - Tax avoidance is a process in which taxpayers reduce their tax liability by following loopholes of the Tax Act. This is the process of reducing one's tax liability as much as possible while staying within the confines of the law or without infringing it. This is extremely similar to tax planning, with the exception that taxpayers utilise the practise to lower their tax due, which the government finds undesirable. Any of the following or a similar method can be used to accomplish this: -

• Use of tax deduction for reducing business expenses
• Delaying in tax payment until the last due date with some deferral plan

Tax Evasion: – Tax evasion is a process to reduce tax liability by following illegal ways like inflating expenses or understating the income. Tax evasion is performed by the taxpayers to evade profits and avoid tax burden. The taxpayers evade their taxes by using below mentioned illegal practices: -

• Making false statements
• Hiding relevant documents
• Not maintenance of proper records and statements
• Charging personal expenses as a business expense
• Charging bogus expenses

In India, people usually evade their tax liability by dealing in Cash without having any presentation of those transactions in the books of accounts. Tax evasion is an illegal way to save the tax and taxpayers can penalize heavily for this action.

Following our analysis of the above facts, we discovered that tax planning and tax avoidance are completely legal, though taxpayers should have a thorough understanding of these techniques before engaging in any tax avoidance, as an improper application of tax avoidance may lead to tax evasion, which would result in a violation of jurisdiction regulations.