Difference Between Tax Evasion and Tax Avoidance
Tax Evasion refers to the adoption of illegal methods for reducing liability of payment of taxes such as manipulation of business accounts, understating of incomes or overstating of expenses etc., whereas, Tax Avoidance is the legal way to reduce the tax liability by following the methods that are allowed in the income tax laws of the country such as taking permissible deductions etc.
When one consults a tax attorney and seeks legal advice to avoid an assessee tax is what we call tax avoidance, whereas one using illegal methods to avoid taxes can be termed as tax evasion. So, you can see both Evasion and Tax AvoidanceTax AvoidanceTax avoidance is the process of reducing the income tax liability of an individual or firm by adopting the lawful methods. The taxpayers can claim exemptions and deductions as allowed under the nation's tax provisions. Such as investments in municipal bonds and deductions for business loss. serve the purpose of reducing the taxes.
In this article, we provide you with the detailed difference between tax evasion vs. tax avoidance.
Tax Evasion vs. Tax Avoidance Infographics
Here we provide you with the top 4 difference Tax Evasion vs. Tax Avoidance.
The key differences are as follows –
- The primary key difference tax planning is within the four pillars of the law, and if a person is saving the tax by using the methods that are made available by its local law, it is termed to be tax planning, but if not then its tax evasion.
- While assessee can get punishment, which may not be bailable for tax evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. , whereas there is no such punishment for tax avoidance as one is taking legal methods.
- Tax avoidance can be termed as an ethical way of reducing taxes, and tax evasion can be called an unethical way of reducing the tax burden.
- Falsification of accounts, manipulation of accounts, overstating expenses, or understating income, conducting black market transactions are all examples of tax evasion.
- Tax avoidance and planning both are permissible, whereas evasion is not at all permissible under any local laws.
Tax Evasion vs. Avoidance Comparative Table
|Basis||Tax Evasion||Tax Avoidance|
|Basic Definition||It can be termed as a crime in which a business entity or individual intentionally hides or underpays their particular amount of income to save a massive amount of taxes.||Tax Avoidance in a legal manner is the way of reducing the assessee taxes through the medium, which is provided by the local government.|
|Ways to conduct||It is undertaken by using unfair means.||It is undertaken by taking advantage of the loopholes in the local laws.|
|Repercussions||As it is performed through an illegal way of paying taxes, and therefore the defaulter may be liable for punishment.||It is not performed through wrongful intention but only after studying and by complying through the provision of law.|
|Examples||Hiding your true income by understating the same.|
Overstating expenses in your return.
Using offshore accounts to hide interest income;
Keeping transactions unrecorded.
|Using a legal way of avoiding tax like by investing in certain schemes as provided by local laws; E.g., Opening Public Provident Fund (PPF) account and investing in the same regularly to reduce taxes.|
Creating other legal entities and splitting revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. between them to be eligible for tax slab benefits.
So, every individual has their ethics and way of conducting and acting to circumstances. Choosing the right way matters the most.
- Tax avoidance is using loopholes in tax law, but again at the end of the day, that should not be advisable, although it’s 100% legal as that defeats the main purpose and the intent to bringing in the law by the government. Hence, we witness almost every year that the government tries to bring amendments in its annual budget to avoid and reduce all the loopholes to misunderstanding and misuse of the law, which is done legally.
- Further to catch the tax evaders, the government keeps a vigil eye on almost all the filings, transactions that are conducted by the assessee. They try to reconcile the same received from different sources. E.g., Banks report all the interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. and taxes deducted by them to the government; local authority reports all the real estate property transactions conducted during the financial year, also government keeps on building up relationships with other countries by signing a treaty where both the countries agree to share the details and all the income of their local residence earned in that country which helps in reducing tax evasion.
- Now the question arises how do we avoid the conflict? So, the best way would be to get rid of being charged with tax evasion – is to know all the tax laws for employment taxes and income taxes. For example, knowing what all are the deductions that are considered legal and what are the recordkeeping requirements for deductions are the big factor in avoiding an audit. For employers, it would be knowing the payroll taxPayroll TaxPayroll taxes are statutory deductions made by the employer from an employee’s regular salary and wages, and usually, such withholdings mostly have both employer and employee equal contributions. These taxes are collected by tax authorities from respective employers and paid for human welfare schemes, infrastructure development. payment and reporting requirements, which will help keep them out of trouble.
- Both are meant to reduce the liability of assessee tax ultimately but what makes the difference as stated earlier that the former is justified in the eyes of the law as it does not make any offense or breaks any local law. However, it appears to be biased as the honest taxpayers’ assessee are not fools as they can also decide for postponing the unnecessary tax. If we talk about the latter, it is 100% unjustified as it is fraudulent activity, because it involves those acts which are forbidden by the local law, and hence they are punishable.
This article has been a guide to Tax Evasion vs. Tax Avoidance. Here we discuss the top difference between them along with infographics and comparison table. You may also have a look at the following articles –