Tax planning vs Tax Avoidance

Tax Planning vs Tax Avoidance

Home » Learn » Income Tax » Tax Planning vs Tax Avoidance

Tax Planning vs Tax Avoidance

Tax Planning and tax evasions are legal jargons that often confuse a layman. When it comes to tax savings there are a couple of terms which you should know. Tax planning and Tax avoidance are some of them. Many times they are used as interchangeable terms though there is a big difference between them. Let us find the difference between these two terms.

Assessee can reduce his/her liability by legal means in two ways- tax planning and tax avoidance. Tax planning is described as the arrangement of financial activities in a way that the assessee can avail maximum tax benefits by making the best possible use of the benefits,i.e, deductions, exemptions, etc.

On the contrary tax avoidance is a technique of refraining from tax liability by fair means but the intention here is to defeat the fundamental motive of the legislature. The dividing line amidst these concepts is very thin. The difference between  planning  the taxes and tax avoidance primarily is dependent on the difference in the benefits that are availed to minimize the burden of the tax.

What is tax planning?

 Tax planning means the arrangement of one’s financial affairs in such a way that the best tax benefits can be availed.  It can be done by applying the major advantageous provisions that are permissible by law and entitles the assessee to obtain the benefit of the deduction, exemptions, credits, concessions, rebates, and relief so that the effect of taxation would be minimum.

Tax planning involved logically planning one’s financial affairs, in this manner the benefit of all the eligible provisions of the taxation law can be availed effectively to reduce or defer the tax liability. As an  honest approach is followed confirming these provisions happens within the taxation law. 

What is tax avoidance?  

Tax avoidance implies any arrangement of the financial activities though it is done within the legal framework, overpowers the basic intention of the law. Tax avoidance involves taking benefits of the shortcomings by deliberately parking the financial affairs in a way that neither violates the tax law nor it attracts more tax.

Tax avoidance includes cases where the assessee is misleading the law, without making an offense. To do so the taxpayer uses any scheme or arrangement that reduces defers and completely prevents the payment of tax. This may be done by shifting the tax liability to another person to minimize the incidence of tax.

Difference

 

Basis of Comparison Tax Planning Tax Evasion
Meaning Refers to a person’s planning of financial affairs in such a way that that the assessee gets the full benefit of all permissible deductions and the exemptions as per the law. Tax avoidance is the practice of purposely adjusting one’s financial affairs to prevent the payment of tax.
Nature Legal and Moral Legal but immoral
Brief Savings of tax Is the dodging of tax
Objective To lessen the tax liability by application of the provisions and the morals of law. To reduce the tax liability by applying the provisions of law only.
Legal implication Uses the advantages of  tax law Uses the shortcomings of tax law
Benefits Emerge in the long run Occurs in the short run

Both tax planning and tax avoidance require proper and up-to-date knowledge of the tax laws. Tax avoidance is considered legal but with time tax avoidance is as bad as tax evasion and there is a penalty when discovered. On the contrary planning taxes is completely legal because it does not involve taking any advantage of the drawbacks in the law.

 

Post by Mansi Sawant

Mansi Sawant seeks higher interests in financial services, taxation, GST, I-T, etc. Writes articles with depth knowledge and is extensive for the same. The resources provide effective articles for the products of IndiaFilings which provides taxation and Licensing. Writing from observations and researching makes her articles virtuous.