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Tax avoidance is one of the most common methods used by taxpayers, as they attempt to exploit loopholes in the tax law, which may exist in the form of a lack of proper jurisdiction to hear cases, a lack of proper stringent and vigil mechanisms for its implementation, or liberal penal provisions, or any other such loopholes, and this is noticed by taxpayers, and they tried to utilise such gaps, and therefore use legitimate mechanisms to reduce their own tax liability required to be paid.
For e.g: Using tax deductions to reduce business expenses and the resulting tax bill/ Protecting revenue from tax liability by establishing a proper employee retirement plan/ When a person transfers income from an asset without actually transferring the asset, the income is included in the transferor’s income.
As a result, while it is legal, it is also illegal, which is why it is also known as loopholes tax planning.
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Tax planning is the most commonly used method by taxpayers, in which individuals or businesses attempt to maximise the benefit of legal provisions in the form of deductions, exemptions, or any other mechanism found in the Income Tax Act of 1961, in order to reduce their respective tax liability, and this method of lowering tax liability is 100% safe.
Using various deductions authorised under Section 80 of the 1961 Act/ Investing in Special Economic Zones/ Investing in fixed deposits, mutual funds, provident funds, or any other funds where a tax exemption or rebate is provided or supplied either spontaneously or over time.
Tax avoidance is defined as a totally criminal or illegal way of avoiding one’s tax duty in which all taxpayers, whether individuals, businesses, or corporations, have the primary goal of displaying less profit through different criminal tactics in order to reduce their tax responsibility, or they may also show higher expenditure in order to qualify for specific exemptions and so on
For example, showing false and fabricated books of accounts and financial statements/ inflation deductions without sufficient evidence/ claiming more and more expenditure/ illegally transferring assets/ hiding legal documents showing real income earned or generated and then claiming exemptions by showing less income/ transferring black money to foreign bank accounts such as Swiss accounts
Tax management is essentially finance management for the express purpose of paying tax, and is thus a considerably broader word than tax planning, as the former’s main goal is to comply with the relevant income tax laws and other allied standards.
For example, avoiding prosecution or penalties by filing an income tax return on time, etc.