Tax is the compulsory public contribution and primary source of government revenue. Tax evasion is an unlawful action which results in inequality of income distribution and brings the economic growth to a halt, leading to economic instability. The act of tax evasion is usually associated with informal economy. Tax Avoidance is defined as a practice of using all the legal means to pay the least amount of tax possible.
‘Tax avoidance’ and ‘tax evasion’ are terms so frequently referred to in economic and business relationships today that they constitute part of our conversational language and people in general use these terms even without knowing their exact meaning and difference. Whereas tax avoidance implies a situation in which the taxpayer reduces his tax liability by taking advantage of the loop-holes and ambiguities in the legal provisions, in the case of tax evasion, facts are deliberately misinterpreted and the tax liability is understated. Thus, while tax avoidance is perfectly legal and is, at times, referred to as ‘tax planning’, tax evasion is illegal and, therefore, carries with it the risk of penalties and prosecutions under the tax laws. As such, the black economy comprises the sum total of all the various methods of tax evasion but does not include tax avoidance. Accordingly, whereas the consequences of the two phenomena are different for the taxpayers, both reduce the revenue of the Exchequer and consequently need to be checked to the greatest extent possible.
Tax Evasion:
Tax evasion is a crime in which an individual or a business entity intentionally underpays or hide their certain amount of income in order to save more amount of taxes. It is illegal in all the countries.
Activities relating to Tax Evasion
Tax evasion is primary cause of low government revenue. This is due to the fact that there exists corrupt tax collectors, inefficient tax structure that the most of the developing countries around the world suffer tax evasion. This results in accounted money and creation of a parallel economy. The tax structure and collection tiers are to be changed if there needs to be change in a country’s economy. Tax relaxation is required for reducing the amount of tax evasion and stricter punishments are to be enforced for the crimes of tax evasion to reduce the gap. People do consider paying taxes, even if the person is economically sound. It may be due to the fact that their tax money doesn’t reach the government for social welfare measures.
Tax Avoidance:
Any person who is able to avoid taxes is considered to be a wise guy. It is believed Tax Avoidance is a term which signifies a situation in which a taxpayer reduces his tax liabilities by taking advantage of the loop holes and ambiguities in the legal provisions. Since it is not illegal, tax avoidance is some sort of a legally allowable way to reduce the tax burden. It is not completely defined under Income Tax Act 1961.
Tax avoidance is the legitimate minimizing of taxes, using methods included in the tax code. Businesses avoid taxes by taking all legitimate deductions and by sheltering income from taxes by setting up employee retirement plans and other means, all legal and under the Internal Revenue Code or state tax codes.
