In order for any nation to be run efficiently, governments need to collect taxes from its citizens. Tax is a fee that needs to be paid mandatorily, it is a charge that is levied on any individual or organization by the government. The word ‘tax’ originates from the Latin term ‘taxo’ which roughly translates to an estimate.
Taxation has been in practice since the dawn of civilization, kings, and heads of communities were paid taxes and in return, they provided security and other basic civic amenities. As the system of taxation slowly developed, taxpayers too found ways to avoid or evade paying taxes. This is where the terms tax avoidance and tax evasion come into consideration. It is important to understand the difference between these two terms.
Tax avoidance can be generally understood as employing legal methods and mechanisms to reduce the amount of tax that needs to be paid. This is generally done through the way of deductions and such other allowances provided under the law. One of the most significant differences between tax avoidance and tax evasion is that the latter is completely illegal.
Any individual who is able to decrease his tax liability, by employing all allowances in the law and by taking advantage of all ambiguities and loopholes is said to be ‘avoiding taxation’. But everything that is done under tax avoidance usually employs legal means. In essence, it is the legal exploitation of the taxation system. A case often cited under tax avoidance, Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. In this case, it was opined by the judge Lord Tomlin that, every man is entitled to order his affairs so that the tax payable under appropriate acts is less than what it would otherwise be.
Tax evasion, on the other hand, is an illegal activity. Here an assessee deliberately avoids payment of all tax liability. Anyone who evades tax liabilities is criminally punishable under the law. It is not uncommon when a certain amount of income is hidden in order to pay lesser taxes. Non- payment of taxes by not reporting complete taxable income is illegal.
Submission of inaccurate financial statements, false tax returns, using illegal methods such as providing illegitimate documentation to claim exemptions, under-reporting of income, and storing wealth outside the country are all examples of tax evasion.
In India, tax evasion is a serious criminal offense. Chapter XXII of the Income Tax Act, 1961 provides penalties for various tax evasion offenses. For instance, failing to file Income Tax Returns as under Section 139(1) of the Income Tax Act, 1961 allows an assessing officer to impose a penalty of Rs.5000 or more.
Section 276C provides for punishment in the case of a willful attempt to evade tax, penalty, or interest or under-reporting of income, and Section 276CC providing for failure to furnish returns of income.
Tax avoidance has not been expressly encouraged or outlawed, but it is understandable that tax evasion is a serious crime in all countries. It is essential to understand that the line between tax avoidance and tax evasion is very thin. There are many ways through which one can escape tax liability, but the consequences faced depends on the means employed.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.
