TAX AVOIDANCE

AND

TAX EVASION

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BHAVANA.T.P

II-M.COM
 TAX AVOIDANCE

MEANING OF TAX AVOIDANCE:

Tax avoidance is the use of legal methods of reducing taxable income or tax owed.

DEFINITION OF TAX AVOIDANCE:

Tax avoidance is the use of legal methods to modify an individual’s financial

situation to lower the amount of income tax owned. This is generally accomplished
by claiming the permissible deductions and credits. This practice differs from tax
evasion which uses illegal methods, such as underreporting income, to avoid
paying taxes.

CHARACTERISTICS OF TAX AVOIDANCE:

Tax avoidance involved the legal exploitation of tax laws to one’s own advantages.

Every attempt by legal means to prevent or reduce tax liability which would
otherwise be incurred, by taking advantage of some provisions or lack of provision
in the statues of the country.

METHODS OF TAX AVOIDANCE

1. COUNTRY OF RESIDENCE:

A company may choose to avoid taxes by establishing their company or

subsidiaries in an offshore jurisdiction. Individuals may also avoid tax by moving
their tax residence to a tax haven, such as Monaco, or by becoming a perpetual
traveler. They may also reduce their tax by moving to a country with lower tax
rates.
2. DOUBLE TAXATION:

Most countries impose taxes on income earned or gains realized within that
country regardless of the country of residence of the person or firm. Most countries
have entered into bilateral double taxation treaties with many other countries to
avoid taxing nonresidents twice –once where the income is earned and again in the
country of residence, there are relatively few double taxation treaties with
countries regarded as tax heavens. To avoid tax, it is usually not enough to simply
move one’s assets to a tax haven. One must also personally move to a tax haven to
avoid tax.

3. LEGAL ENTITIES:

Without changing country of residence, personal taxation may be legally avoided

by the creation of a separate legal entity to which one’s property is donated. The
separate legal entity is often a company, trust, or foundation. These may also be
located offshore, such as in the case of many private foundations. Assets are
transferred to the new company or trust so that gains may be realized, or income
earned, within this legal entity rather than earned by the original owner.

4. LEGAL VAGUENESS:

Tax results depend on definitions of legal terms which are usually vague.eg.
Vagueness of the distinction between “business expenses” and “personal expenses”
is of much concern for taxpayers and tax authorities.

5. TAX SHELTERS:

Tax shelters are investments that allow, and purport to allow, a reduction in one’s
income tax liability. Although things such as home ownership, pension plans, and
individual retirement accounts (IRAs) can be broadly considered “tax shelters”,
insofar as fund in them are not taxed, provided that they are held within the
individual retirement account for the required amount of time, the term “tax
shelter” was originally used to describe primarily certain investments made in the
form of limited partnerships, some of which were deemed by the U.S. internal
revenue service to be abusive.

6. TRANSFER MISPRICING:

Fraudulent transfer pricing, sometimes called transfer mispricing, also known as

transfer pricing manipulation refers to grade between related parties at prices
meant to manipulate markets or to deceive tax authorities.

TAX EVASION

MEANING OF TAX EVASION:

Tax evasion is the illegal evasion of taxes by individuals, corporations, and trusts.
Tax evasion often entails taxpayers deliberately misrepresenting the true state of
their affairs to the tax authorities to reduce their tax liability and includes dishonest
tax reporting, such as declaring less income, profit or gains than the amounts
actually earned, or overstating deductions.

DEFINITIONS OF TAX EVATION:

Tax evasion means concealing income or information from tax authorities-and it’s
illegal. Tax avoidance means legally reducing your taxable income.
TYPES OF TAX EVASION:

The IRS recognizes two different forms of tax evasion:

 Evasion of assessment
 Evasion of payment

 EVASION OF ASSESSMENT:

The taxpayer must perform some action that is focused on defeating the
assessment of a tax. Requires more than a proof of nedligence.an intentional
under-reporting qualifies as an attempt to evade.

 EVASION OF PAYMENT:

Affirmative acts to evade payment generally involve concealment of money or

assets with which the tax could be paid. Such an act could also take the form of
removing the assets from the reach of the IRS, such as in a forging bank
account. Simply failing to pay taxes owned, is not evasion of payment.

TAX EVASION PENALTY:

 NOT FILING INCOME TAX RETURN:

If you do not submit for income tax return as required under the section
139,sub section(1) of income tax act then the assessing officer can penalize
with a penalty of rs.5,000 or more.
 NOT PROVIDING PAN OR QUOTING WRONG PAN:

If you do not provide your PAN number to your employment, 20%TDS will
be deducted from your salary instead of regular 10%. If the PAN you quoted
is incorrect, a penalty of RS.10,000 may be slapped on you.
 NOT CHECKING FORM 26AS BEFORE INCOME TAX RETURN
FILING:
You should check the details of form 26AS multiple times as any mismatch
in the details can lead to serve punishment. Similar punishment will be
levied mismatch in income, expenses and investments data.
 NOT PAYING TAX AS PER SELF- ASSESMENT:
As per section 140A(1) of income tax act, if the tax payer fails to pay either
wholly or partly self-assessment tax or interest then the tax payer will be
treated as a defaulter.
 CONCEALING INCOME TO EVADE TAX:
The penalty for not providing correct details of your income or concealing
income tax will be 100% to 300% of income tax act.