Claiming allowed tax deductions and tax credits are common tactics, as is investing in tax-advantaged accounts such as IRAs and 401(k)s. The concept of business purpose has also had implications for tax policy and legislation. It has influenced the development of anti-avoidance provisions and rules aimed at curbing aggressive tax planning strategies.

Plus, you’ll also be responsible for covering the costs of prosecution. Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments. If you’ve made an error on your return, the best thing to do is correct it as soon as possible.

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It is here that a responsible tax approach is particularly important in setting a framework and changing behaviours. When there is transparency and clarity about the criteria used to judge tax planning, it is easier to understand why certain actions are taken and to explore what is and what is not acceptable. No one wants to pay a higher income tax; to reduce tax liabilities, every taxpayer looks for legal or illegal ways. This high rate of taxation gives rise to emotions among taxpayers in terms of tax avoidance and evasion.

Although a legal method, it is not advisable as it ultimately aims to reduce the amount of tax that is payable by one for their own personal advantage, which is unfair exploitation of law. Tax avoidance is taking unfair advantage of the lacunae in the tax law by finding ways to avoid the payment of taxes. Tax avoidance is usually done by adjusting the accounts so that there will be no violation of tax laws or by finding loopholes in the law. Though lawful, it could be categorized as an offense in some cases.

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 tax evasion vs tax avoidance 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.

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1. Consult a tax or financial professional about how to ensure that you’re following the letter of the law if you’re in doubt.
2. 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.
3. Any person who is able to avoid taxes is considered to be a wise guy.
4. The Income Tax Act of India is a comprehensive piece of legislation that governs the levy and collection of income tax in India.
5. 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.

Some taxpayers are guilty of tax evasion by not filing their tax returns or not paying their taxes due even if they’ve filed returns. In summary, the CIT v. McDowell & Co. case established the concept of “business purpose” in tax avoidance transactions. It held that a transaction cannot be treated as tax avoidance if it has a genuine business purpose, even if it also results in tax savings. This decision has had a significant impact on tax law and jurisprudence, shaping the distinction between legitimate tax planning and tax avoidance. But before applying any method, you have to be very careful, as selecting an illegal method can cause some serious trouble for you. Let’s understand the two methods to reduce your tax liabilities, i.e., tax avoidance and tax evasion and how a taxpayer can use these methods to minimise their tax burden in a legal and right way.

They can do so by using the tax credits, deductions, and exclusions that are part of the tax code to their advantage. Using these strategies can help them either avoid paying taxes altogether or lower their tax liability. Tax avoidance can be illegal if a taxpayer abuses these strategies and doesn’t follow tax laws. For example, John owns a small business and generates significant cash income from his business activities. Instead of reporting the full income and paying the appropriate taxes, John engages in tax evasion to evade his tax obligations.

Corporate tax

Tax evasion can result in fines, penalties, levies, and even prosecution. Tax avoidance can be illegal, however, when taxpayers deliberately make it a point to ignore tax laws as they apply to them. Doing so can result in fines, penalties, levies, and even legal action.

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.

Q- How can individuals ensure they engage in legal tax planning rather than tax evasion?

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.

Tax planning, like tax evasion/avoidance, is also done to reduce tax liability. However, it involves legal planning regarding investments, expenses, etc., to avail various exemptions and deductions provided under the tax laws. The CIT v. McDowell & Co. case, decided in 1985, is a significant precedent in the realm of tax law.

In contrast, tax planning involves legitimate business transactions that also result in tax savings as a secondary benefit. Tax avoidance is a legal method used by taxpayers to reduce their tax liabilities, using the loopholes in the rules and regulations under the act. In other words, tax avoidance is a method to avoid payment of tax by taking advantage of a situation, where rules and regulations are not clearly defined or precise in the act. Although tax avoidance is legal, as there is no violation of the act, it is not advisable as a good practice because taxpayers try to gain an unfair advantage to avoid paying tax. There is in fact a wider dispute about what avoidance actually means. There are also debates about whether or not there is a difference between tax planning, tax mitigation, avoidance and “aggressive” avoidance.

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.