The principle established in the Ramkanth Gandhi case is important as it provides a safeguard against the arbitrary imposition of penalties and prosecution for tax evasion. It ensures that only those who have knowingly and deliberately evaded tax are held liable. It has made it easier for businesses to do business across state borders, and it has led to a reduction in the cost of doing business. GST has also helped increase tax compliance and reduce tax evasion.
Are tax avoidance and tax evasions completely different phenomena with different solutions?
This definition sets a high threshold for establishing gross negligence, requiring a level of culpability beyond mere carelessness or oversight. They are governed by various statutes, rules, and regulations issued by the Central Board of Direct Taxes (CBDT). These laws cover a wide range of taxes, including income tax, corporate tax, and goods and services tax (GST). Tax avoidance and tax evasion have become common factors in higher revenue losses for India.
- Tax Avoidance and Tax Evasion both are meant to reduce the tax liability ultimately but what makes the difference is that the former is justified in the eyes of the law as it does not make any offence or breaks any law.
- There is in fact a wider dispute about what avoidance actually means.
- Tax evasion relies on illegal methods such as underreporting income and falsifying deductions.
- You can accomplish it by claiming tax credits, deductions, and exclusions to your advantage.
In addition, corporate tax can be complex and time-consuming to comply with, which can be a burden for small businesses. 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. Corporate tax can also be used to discourage companies from engaging in certain activities, such as polluting the environment or exploiting workers. Corporate tax is a significant source of revenue for governments, and it is levied on the profits earned by companies.
Tax evasion is an offense for which the assessee could be punished under Chapter XXII of the Income Tax Act, 1961. One common way people adopt to evade taxes is by transacting in cash without accounting for the same in books. However, to track and tax such transactions and the means utilized to evade tax, the government keeps a vigilant watch and picks the cases for assessment. “Tax avoidance is structuring your affairs so that you pay the least amount of tax due.
Typically, only the last three years of your tax returns are eligible for audit. “If you omit 25% or more of your gross income [from a tax return], that extends the statute of limitations to six years,” Miller says. This interpretation of gross negligence has been consistently applied by courts in India in subsequent cases. It has ensured that penalties for tax evasion are imposed only when there is a clear and deliberate disregard of the law, and not for mere mistakes or inadvertent errors. However, corporate taxes can also have a negative impact on businesses. High corporate tax rates can make it difficult for companies to compete with their international rivals, and they can also discourage investment and job creation.
Penalties fines
Tax evasion means illegally trying to pay less tax by using fraudulent methods. E.g., Section 80C allows a deduction of up to INR 1,50,000 if specified investments are made. The most popular ways of saving tax through planning are investing in Life insurance policies, PPF accounts, National Saving certificates, Sukanya Samriddhi Scheme, term deposits, Provident Funds, etc. Tax planning involves planning the financial affairs to entitle the taxpayer to the benefits of deductions, exemptions, concessions, and rebates.
Methods of tax avoidance and evasion
Also, the penalties and prosecution procedures are liberal, which result in gaps for tax avoidance and tax evasion. Tax avoidance is a legal strategy that many taxpayers use to lower their tax bills. Millions of individuals and businesses use some form of tax avoidance to legally and legitimately cut down how much they owe the Internal Revenue Service (IRS).
Tax evasion is lying on your income tax form or any other form,” says Beverly Hills, California-based tax attorney Mitch Miller. Tax shelters are the instruments and entities where money is invested to generate losses and set-offs from another source of income. While in a tax haven, taxpayers enter into a transaction with a country where rates of tax are lower.
Common Tax Avoidance Tricks
While tax evasion and tax avoidance sound similar, they’re far from interchangeable. One is a legitimate strategy to reduce your tax burden, while the other could land you in serious trouble with taxing authorities. If you want to hand over less money to the IRS without the risk of going to prison, start by understanding what the two terms mean. An illegal act, made to escape from paying taxes is known as Tax Evasion. This will result in the disclosure of income which is not the actual income earned by the entity. Tax avoidance and evasion are both downgrading our Indian economy, which impacts our budget, borrowings, public debts, economic stability, and foreign direct investment.
For example, in the case of CIT vs. Hindustan Coca-Cola Beverages Pvt. It tax evasion vs tax avoidance helps to ensure that the government has the resources it needs to provide essential services to its citizens. The act also promotes equity by ensuring that individuals and businesses pay their fair share of taxes. The Income Tax Act is a complex piece of legislation, and taxpayers are advised to seek professional advice to ensure that they are complying with all the requirements of the law.
Tax evasion and tax avoidance are often used interchangeably to describe these actions. However, they are distinct terms with the same goal which is to reduce taxes or avoid paying them. This blog explains to you the difference between tax evasion and tax avoidance. Tax evasion is an illegal method adopted by a taxpayer to escape the liability of paying taxes to the government. It is an unlawful and prohibited activity, and indulging in it can result in penalties, fines, criminal charges, and imprisonment for the taxpayer involved.
Tax planning is a genuine approach to applying all the provisions within the tax law framework to the taxpayer’s benefit. Some of the most common tax evasion cases involve people running cash businesses who pocket money from the cash register without reporting the income, Miller says. As a lawyer and a tax adviser I have always taken it as axiomatic that tax avoidance and tax evasion are different things. In this blog I would therefore like to explore in more detail to what extent there really is a difference between the two. The case involved the taxpayer, McDowell & Co., which purchased a series of life insurance policies for its key employees. The premiums paid for these policies were substantial and resulted in significant tax deductions for the company.
In India, people try to find many ways of not paying or avoiding taxes. Tax evasion and tax avoidance are used interchangeably to describe such acts. But they are different terms that serve the same purpose- to provide means for reducing taxes or avoiding paying taxes. However, such avoidance is considered a serious offense if it is done using unfair means or by concealing information/income from tax authorities. Every assessee wants to escape from paying taxes, which encourages them to use various means to avoid such payment.
Landmark case laws on tax evasion
And when it’s about savings if taxes, the two most common practices that can be seen all around the world are tax avoidance and tax evasion. Tax avoidance is an exercise in which the assessee legally tries to defeat the basic intention of the law, by taking advantage of the shortcomings in the legislature. Every individual or assessee in a country dreams about to find a way in which he can avoid tax.
