Submitted by: Ketan Gupta UM 8907 Mechanical

TAX EVASION VERSUS TAX AVOIDANCE AND TAX PLANNING

Tax evasion is defined as The illegal nonpayment or underpayment of tax; Whereas Tax avoidance is defined as the minimization of tax liability by lawful methods. Tax planning (tax avoidance) is fundamentally different from tax evasion. It is a legal right of the tax payer, there is no obligation on the tax payer, legal or moral, to pay more taxes than prescribed. You have all the rights to take all the legitimate deductions and also to structure your business to minimize taxes, Avoidance often takes place because of a lacuna in the law. But tax evasion on the other hand is a crime. It involves fraud, misreporting income, or taking deduction that you do not qualify for. Cant the government stop tax avoidance by changes in the tax laws? The discussion regarding tax avoidance and tax evasion has been going on for ages now. It was stated by Lord Reid in Britain in 1930s We seem to have travelled a long way from the general and salutary rule that the subject is not to be taxed except by plain words. But I must recognize that plain words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes, which are constantly being devised to evade taxation" The crux of the above sentence is that plain words are not adequate to define the tax a person is supposed to pay. There are various complications in the type of income a person may have and people often work overtime to find loopholes in the system until those are corrected or rectified.

Cant the government stop tax evasion? Like the tax avoidance, tax evasion is also really hard to detect. In a country like India where majority of the transactions take place on paper and pencil records, there is hardly any proof of the amount involved. As a result tax payers deliberately conceal the true state of affairs to reduce the tax liabilities, which unless looked on carefully by the IRS is really hard to detect. Effects of tax avoidance: Since unlike tax evasion, tax avoidance isnt an illegal activity, hence there arent much severe effects of tax avoidance on the Indian economy. It encourages the person to avoid tax evasion and rather file his taxes intelligently. It encourages people to seek interesting ways to avoid excessive taxes

Effects of tax evasion: There is a huge loss in the public revenue . A disturbance is caused in the countrys economy because of piling of black money. There is a hidden loss to the society as the productivity of the person (looking for various tax evasions) takes a hit. There is a sense of injustice among the tax payers who feel that they have been cheated