Tax Phrases: the Good, the Bad, the Ugly

We come across these phrases tax planning, tax avoidance and tax evasion in the news and in conversations. Here is a crash course on what these terms mean and the differences.?

Tax Planning: This is the method used by taxpayers to save taxes. The law allows citizens to reduce their tax burden by claiming permitted exemptions and deductions. This is done by investing income in instruments that provide tax benefits. For example, money saved for retirement, taking a loan and receiving certain exemptions on the payment, health care plan, etc.

Most people and legal entities try to minimize the amount paid in taxes using tax planning methods.?

Tax Avoidance: Tax planning is often confused with tax avoidance. It involves using all legal means available to citizens in order to pay the least amount of tax possible or to dodge tax completely.?

Tax avoidance is achieved by claiming as many deductions as possible. This can be achieved by prioritizing investments with tax benefits. Tax avoidance is considered unfair as it involves taking advantage of gaps in the tax laws.

- Taking advantage of tax laws for personal gain

- Making use of legal provisions or taking advantage of a lack of legal provisions

Tax Evasion: This refers to using illegal means to not pay taxes. The method employed to do so makes all the difference between tax avoidance and tax evasion. Tax avoidance is legitimate and is done by leveraging all the loopholes in the legal system, whereas tax evasion is illegitimate and happens when due taxes are not paid.

Tax evasion is the intentional concealment of income or underpayment of taxes. Tax evasion happens when all taxable income is not reported. This is considered illegal everywhere in the world.

Tax evasion includes activities like under-reporting of income, withholding information while reporting taxes, misrepresenting deductions, or expenses, keeping money in accounts belonging to other people, using counterfeit documents for false claims, etc. and is considered illegal in nature.

- A fraudulent practise in which taxpayers fail to pay their taxes

- Penalties or imprisonment may be imposed

In short, Tax planning is entirely legal. Tax avoidance, even though not illegal, is considered unfair, whereas tax evasion is undoubtedly considered illegal.?

Contributed by Anisha Dsouza