Key Differences Between Tax Planning, Tax Avoidance and Tax Evasion
# Differences between Tax Planning and Tax avoidance:-
Basis of difference | Tax Planning | Tax Avoidance |
Meaning | It refers to the arrangement of a person's financial affairs in such a way that assessee gets full benefit of all permissible deductions and exemptions as per law. | Tax Avoidance is an exercise of reducing tax liability by exploiting some loopholes of the taxation laws. |
Intention | It involves fear of obedience of law with an honest attitude. | It involves foul play with the law by dodging the tax authorities. |
Nature | Legal and moral | Legal but immoral |
What is it | It is the saving of tax | It is the dodging of tax |
Nature of transactions | In tax Planning, transactions are real and natural. | Transactions are Sham and are fabricated artificially. |
Time horizon | Tax planning is long term | Tax avoidance is a short term measure |
Motive | Tax Planning has a Bonafide motive | Tax avoidance has a malafide motive |
Objective | To reduce tax liability, by complying to the letter and spirit behind the law. | To reduce the tax liability by complying to the letter of the law only. |
Permissible by law | Tax planning is permissible by law | Tax avoidance is not permissible under law |
Legal implication | It uses the advantages provided under the tax laws | It uses the shortcomings of the tax laws |
Examples | 1. Claiming various deductions under section 80c to 80u. 2. Investments in SEZ undertakings. | 1. Use of colourable devices. 2. Mis-representation or manipulation of facts. |
# Differences between Tax Avoidance and Tax Evasion:-
Basis of difference | Tax Avoidance | Tax Evasion |
Meaning | Tax avoidance is an attempt to reduce tax liability by exploiting some loopholes of the taxation laws. | Tax evasion is an illegal method of saving tax by: ¡. Disclosing less income than actual ¡¡. Concealing the sources of income and, ¡¡¡. Claiming deductions that are not allowed. |
Legal implications | Tax avoidance may be within the framework of law but it is against the basic intent of the legislative provisions. | Tax evasion is gross violation and respect of law. |
Dealing | Tax avoidance can be curbed by introducing anti-avoidance provisions or clubbing provisions. | Tax evasion can be curbed by implementing law effectively. |
Intention | Tax avoidance is done through malafide intention but by complying the provisions of law. | Tax evasion is wilful non-compliance with law and the evader attracts heavy penalties. |
Time of execution | It looks like Tax Planning and is done before the tax liability arises. | Tax evasion is a huge fraud and is done after the tax liability has arisen. |
Methods | Tax avoidance involves:- 1. Use of colourable devices. 2. Mis-representation or manipulation of facts etc. | Tax evasion involves:- 1. Smuggling 2. Fake documentation 3. Storing black money etc. |
Example | Transfer of income, arising out of house property by a husband to his spouse with an intention to avoid tax liability (or to reduce taxes). | Failing to pay the the due taxes, submitting false income tax returns etc. |
# Differences between Tax Planning and Tax Management:-
Basis of difference | Tax Planning | Tax Management |
Objective | The objective of tax planning is to minimise the tax liability using fair means. | The objective of tax management is to comply with the provisions of income tax laws and its allied rules. |
Scope | Tax Planning also includes tax management. | Tax management deals with filing of returns on time, getting the accounts audited, deducting TDS etc. |
Dealing | Tax planning relates to future. | Tax management relates to past, present and future. Past- Assessment proceedings, appeals, revisions etc. Present- Filing ITR, payment of advance tax etc. Future- Taking corrective action. |
Motive | Tax Planning helps in minimising the tax liability in short term and in long term. | Tax management helps in avoiding payment of interest, penalties, prosecutions etc. |
Necessity vs. optional | Tax planning is optional. | Tax management is essential for every assessee. |
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