Difference Between Tax Avoidance And Tax Evasion With Comparison Chart
Tax is a mandatory contribution by individuals or businesses to the government, which is used for the development of the country. However, many people often confuse tax avoidance with tax evasion. Both terms refer to reducing tax liability, but the difference between them is significant.
What Is Tax Avoidance?
Tax avoidance is the legal method of reducing tax liability by taking advantage of tax deductions, exemptions, and credits provided by the government. It involves structuring financial transactions in a manner that reduces the amount of tax payable. Taxpayers use various tax planning strategies to minimize their tax burden.
For instance, individuals can reduce their tax liability by investing in tax-saving schemes like Public Provident Fund (PPF), National Pension Scheme (NPS), and Equity-Linked Savings Scheme (ELSS). Similarly, businesses can claim tax deductions for expenses incurred in the production of goods and services.
What Is Tax Evasion?
Tax evasion, on the other hand, is the illegal act of deliberately concealing or misrepresenting income to avoid paying taxes. It involves hiding income, inflating expenses, or falsifying documents to reduce tax liability. Tax evasion is a criminal offense that can result in fines, penalties, and even imprisonment.
For instance, if an individual fails to disclose income earned from a side business, it is considered tax evasion. Similarly, if a business inflates expenses to reduce tax liability, it is also considered tax evasion.
The Key Differences Between Tax Avoidance And Tax Evasion
The following table highlights the key differences between tax avoidance and tax evasion:
| Tax Avoidance | Tax Evasion | |
|---|---|---|
| Definition | The legal method of reducing tax liability | The illegal act of deliberately concealing or misrepresenting income to avoid paying taxes |
| Legality | Legal | Illegal |
| Penalties | No penalties | Fines, penalties, and imprisonment |
| Intent | No intent to deceive | Intent to deceive |
| Disclosure | Full disclosure of transactions and income | Concealment of income or transactions |
Conclusion
In conclusion, tax avoidance is legal and involves taking advantage of tax deductions, exemptions, and credits, while tax evasion is illegal and involves concealing or misrepresenting income to avoid paying taxes. Taxpayers should be aware of the difference between the two and ensure that they comply with the tax laws of their country. Non-compliance can result in severe penalties and consequences.
