This document discusses tax evasion, tax avoidance, and tax planning in India. It defines each term and explains the differences between them. Tax evasion is illegal and involves failing to report income or improperly claiming deductions. Tax avoidance uses legal loopholes to reduce tax liability but still defeats the intention of tax laws. Tax planning is the recommended approach, as it involves legitimate strategies like maximizing deductions, investments, and year-end planning to minimize tax burden. The document also outlines some common penalties for tax non-compliance in India.
2. ❑ Tax is compulsory contribution to state revenue levied by the government on
workers income and business profits or added to the cost of goods, services and
transactions. It may be direct tax or indirect tax. In simple words tax is a money
that people have to pay the government.
❑ Direct tax is tax which is levied on the income or profits of the persons who pays it,
rather than on goods (or) services for example income tax.
❑ Indirect tax is levied on goods and services rather than on income (or) profits for
example goods and service tax.
PAYING TAXES IS OUR RESPONSIBILITY
What is tax ?
3. ❑ A taxpayer is an individual or corporation who pay taxes annually on their
earnings as per the provisions of the income tax act 1961. Once you file income tax
return and disclose your earnings, it becomes legal.
❑ The goal of a taxpayer is to minimize his tax liability.
To achieve this goal 3 methods are commonly used
they are,
1) TAX EVASION – VERY BAD
2) TAX AVOIDANCE – OK
3) TAX PLANNING – VERY GOOD
-Methods commonly used by the tax
payers to minimize tax liability
4. ❑ Tax evasion refers to avoidance of tax payment / tax liability illegally, it is a fraud.
❑ In other words tax evasion is illegal way of reducing tax liability by suppressing
income. The unaccounted income is known as black money.
❑ Tax evasion is unethical and has to be condemned. The court also does not favor any
such means. Tax evasion once proved not only attracts heavy penalties but may also
leads to prosecution.
❑ Tax evasion typically involves failing to report income or improperly claiming
deductions that are not allowed or authorized. The methods of tax evasion are
1. Under disclosure of income
2. Inflating the expenses and thus reducing the real income
3. Manipulation of accounts to reduce the real income
4. Violation of rules and regulations of laws with the intention to save the tax
5. Benami transactions
TAX EVASION
5. ❑ In the words of Justice Chinnapa Reddy.” Tax Avoidance is an act of dodging tax
authorities without breaking the law”.
❑ Thus tax avoidance is an attempt to manage financial
affairs by using colorable devices with the intention of
reducing the tax liability. Many a time tax avoidance
involves an attempt to reduce tax burden by taking
advantage of certain loopholes or weaknesses in tax laws.
❑ In India before the decision of supreme court in McDowell & Co. Ltdvs.CTO, tax
avoidance was regarded as a lawful act. But after the pronouncement of the case it
was held that tax avoidance is illegal because of following reasons:
1. There is substantial loss of public revenue required for the income development of
the nation.
2. It results in the creation of black money economy which results into inflation.
3. It results into injustice and inequality caused by the tax avoidance for the honest tax
payers.
Till now the rules settled under above case act as guiding principle for unpinning coocked
tax planning.
TAX AVOIDANCE
6. TAX AVOIDANCE TAX EVASION
▪ It means planning for minimization
of tax according to legal requirement but it
defeats the basic intention of legislature.
▪ it meansavoidingof tax liabilityillegally.
▪ It takes in to accountsvarious loopholes
of the law.
▪ It done by unfair means likefraud
suppressionof facts etc
▪ Tax avoidanceis done with in the legal
framework.
▪ Tax evasion is not legal and assessewho
is guilty under the provisionsofthe law.
▪ It is planningbeforethe actual liabilityfor
tax comes into existence.
▪ It is avoidanceof payment of tax after the
liabilityoftax has arisen.
TAX AVOIDANCE VS TAX EVASION
7. ❑ Tax planning means working out a plan to take maximum benefits of exemptions
deductions and rebates etc., allowed by law and reducing the tax liability i.e. Tax
planning is the technique of avoidance of tax of higher rate of tax planned in advance
before the income is earned.
❑ It is basically a technique to reduce tax burden
or tax liability. This is a legal measure to reduce
the tax liability. Tax planning is applicable for
every head of income say salary, business, house,
property and other long term incomes.
❑ The income tax act itself provided certain planning measures to reduce the tax burden to
the assesse. For example house property income can be reduced by availing loan for
construction or purchase of house. The interest paid is tax deducted and the principle
amount is allowed for calculating rebate under section 88 of IT act.
❑ So, while purchasing the house do not purchase the house with own money. Avail
housing loan to reduce the tax burden on house property income.
TAX PLANNING
8. For implementing tax planning one can use different ways to save his tax
money. There are some areas where we can plan to reduce our tax liability—
❑ Reducing taxable income: one can use government schemes and programs to
reduce his taxable income, it will directly reduce his tax liability.one should try to
minimize his taxable income to reduce his tax amount.
❑ Deduction planning: there are many deductions provided by a taxation law. One
should implement and plan those deductions. The major area of deduction is
available under Sec 80C where one can claim a deduction for life insurance, mutual
funds, home loan interest and many more
❑ Investment in tax planning: assesse can invest in policy for future plans and save
his money from tax.
❑ Year – end planning strategies: one can reduce his tax liability for the next year by
prepaying those expenses which will be imposed next year and can make a strategy
before starting the new financial year.
AREAS OF TAX PLANNING
9. Tax planning is an arrangement to reduce tax liabilities. How can an individual reduce
his tax liability by planning at the beginning of the financial year? Let’s take a look at
some examples—
1) Mr. W who is an individual of age 45 years, whose taxable income is rs.5,00,000
and except a premium of medical insurance of rs.10,000 he has invested no money
in any scheme. After calculating all his income details and deductions his gross tax
amount will be rs.16,224.
2) Mr. Y who is an individual of the same age as Mr.W and all the income details are
similar to Mr.W But Mr.Y invested his money in scheme offered by the
government under Sec 80C , his gross tax amount will be rs.0
This is how one can reduce his tax liability by investing in the right schemes and
programs or otherwise has to pay high tax rates.
Tax planning examples
10. Income tax evasion is a crime and can attracts severe penalties in India. With
advancement in technology, the compliance with respect to income tax payment is
being tracked more accurately by the income tax department.
❖ Failure to pay tax as per self assessment: as per section 140 A (1) if the tax payer
fails to pay either wholly or partly self assessment tags or interest then the tax payer
will be treated as a default person. If the assesse declare as a default person then as
per sec 221(1) penalties amount will be imposed by the assessing officer. The
criterion for penalty is that it can not exceed the arrear amount.
❖ Failure to pay tax as per demand notice: if a demand notice sent to the tax payer
asking for the payment of tax then the tax payer has to pay the amount in 30 days to
the department and person mentioned in the notice. Failure to make the payment
will incur further penal provisions as well as the tax payer will be treated as default
assesse for defaulting in the payment of tax.
❖ Penalty for non filing income tax return: if the return of income is not furnished
as required under sec 139(1) then the assesse officer can penalize the tax payer with
a penalty of rs.5000/-
Penalties for income tax in India
11. ❖ Failure to comply with income tax notice: if the tax payer to comply with the
notice issued under section 142(1) or 143(2) then the assessing officer can issue a
notice to the tax payer asking (a) to file the return of income (b) ask the tax payer
to furnish in writing all the details of assets and liabilities.
❖ Failure to comply with TDS regulations: every person who deducts tax at source
or collects tax at source is also required to collect the tax deduction account
number or the tax collection account number (TAN). The failure to obtain this tax
deduction or collection number calls for a penalty of rs. 10,000. failure to obtain the
numbers could also mean quoting incorrect tax deduction or collection number.
❖ Failure to pay dividend distribution tax : as per section 115-0 if a company pays
dividend distribution tax on the dividends it has shared then the penalty incurred
would be the amount equal to the tax that was not deducted or paid.
❖ Failure to furnish accurate information: if a tax payer does not furnish accurate
information or finds out about inaccuracy of the furnished details after submission
but does not get it corrected with in ten days of submission or knows about the
inaccuracy during submission but does not inform the income tax authority then
the penalty could be a payment of rs. 50,000/-. Penalty revisions are being done to
make rules stringent for inaccurate detail submissions and will soon be notified.
There are also relaxation on penalties for genuine and deserving cases. The
commissioner of income tax has power to completely forego or reduce the penalty if
the all the facts are clearly presented.
