When the subject is perceived to be dry, it is imperative to have a catchy headline. In this knowledge bite, we are focusing on the concept of juggled words and meaning between tax planning, evasion, avoidance and the newly coined term ‘Aggressive tax planning’
What is tax evasion?
Tax evasion is a complete disregard of taxation law. The taxpayer is aware that the taxes and the related compliance needs to be respected, yet a decision is taken to go against such provisions and not abide by such rules. This is called as tax evasion. Evasion is generally easy to identify and occurs at smaller levels, although the cumulative impact could be large, if not controlled; for example generation of black money through a transaction
What is tax avoidance?
Tax avoidance occurs at considerably large levels and are schemes developed by professionals and corporates that are legal and match the wordings of the law but in interpretation may not meet the intent of the law. There are firms in the world which specifically advertise that tax avoidance is legal, however, what they do not tell you that despite being legal it could lead to future litigations and are not in healthy spirit of the law. Tax avoidance measures are responsible for profit shiftings and base erosions for a particular nation. Tax avoidance schemes are unfair, immoral and unethical means of interpreting tax laws. The impact of tax avoidance on an economy is large and significant. For example – a holding company regime and structure without substance
What is tax planning?
Tax planning avenues are following the provisions of the law, which are specifically designed by the government of the country to promote trade and business and have certain tax sops attached to it. They are perfectly legal and moral. For example Tax holidays for exports
What is aggressive tax planning?
If one wants to summarise the difference between tax planning and tax avoidance, it is the intent of the activity combined with the actual occurrence of the event. So, in case the reality and the legality speak the same language, it could be considered as a tax planning tool. However, in the case where both reality and legality does not match, and yet things are considered legal, the scale would e tilted more towards tax avoidance.
The above-mentioned differences are essential to understanding the application of taxes at a macro level. Tax avoidance and evasion are both not considered appropriate to the company and at an individual or a corporate level should not be encouraged.
For additional details on the topic, you may like to read book titles ‘General Anti-Avoidance Rules (GAAR) – Establishing Substance Over Form’ written by CA. Akshay Kenkre and CA. Uday Ved.