Overview: Difference Between Tax Planning And Tax Avoidance And Tax Evasion
The terms tax planning, avoidance, and evasion are pretty common and would’ve been heard by you before. But do you know what is the difference between Tax Planning And Tax Avoidance And Tax Evasion? Knowing about them all will be beneficial for your business. It will help in ensuring that you aren’t committing any illegal act unknowingly. Let’s take a look at the points related to these tax principles and explore why they are or aren’t the best fit for your corporation.
Tax Planning: Providing future-benefits
Just like tax avoidance, tax planning is completely legal too. In general, tax planning is the method of expanding your tax advantages under eligible guidelines of the tax structure. It lowers your tax obligation by several means like credits, deductions, exemptions, and rebates offered as per the corresponding tax laws or the Income Tax Act.
For example, by saving through retirement plans one can take incentives through tax planning. One can also put funds in mutual funds, fixed deposits, provident funds, or other types of accounts for lowering tax obligations. The main property of tax planning is its relationship with the future, be it long-term or short-term.
To bring out the best results for tax planning, one must consider these important factors:
- Income timing
- Choice of corporate entity
- Preparation for purchases and expenditures
- Size of business
- Capital framework
- Shareholder’s residency status
Amongst all the three tax methods, tax planning is said to be the best approach as it meets all the guidelines of the tax laws. There are several tactics for planning a good tax approach for your business. The main strategy is to start an offshore firm because of its amazing tax efficiency benefits.
Offshore financial centers or tax havens are the best methods to fulfill tax planning purposes, providing an effective tax routine and a good degree of secrecy for your company.
Tax Avoidance: Completely Legal
When talking about all the tax methods, the terms tax avoidance and tax evasion can sound confusing because of the few similarities they share. But the reality is that they are completely different from each other. The main point that highlights the difference between them is that tax evasion is not legal, while tax avoidance is.
Tax avoidance is the process of minimizing tax obligations within the law limits or without going against the law. One can make use of authenticated approach to lower the remaining payable tax associated with your business operations.
The process to avoid submitting tax to the authorities may comprise of the following:
- Utilizing tax deductions to lower financial expenses and corporate tax bill.
- Avoiding tax payment till a later date accompanied by a proper tax deferral structure.
- Using perks of tax credits to fulfill legal needs like getting the firm workers with family and sick leave, corporate purchases, etc.
- Covering profits from tax obligation by the incorporation of worker retirement plans.
One must also note that looking to reduce tax liability by tax avoidance is completely legal, but it should stay within the provisions of the tax law structure. In certain situations, it might lead you to take a leap toward tax evasion, which is a violation of government laws.
Therefore, you should get a good grip on your knowledge before taking up any tax approaches for lowering taxes. Additionally, one must consult business experts to get legal advice on how can tax avoidance be used in the best possible way.
Tax Evasion: Tax fraud
It is an unlawful or illegal approach to lower the tax obligation of taxpayers. It is referred to as unlawful practices or techniques that render fewer results when it comes to lowering the firms or individual tax burden.
Here are some examples of tax evasion:
- Generating false information and statements
- Making deductions without any legal evidence
- Hiding important documents to demonstrate the corporate revenues like cash income reports or transaction reports.
- Transferring or concealing properties unlawfully
- Expanding tax credit
- Alleging maximum expenditure
Tax evasion is a type of tax fraud that represents deliberate and unlawful outcomes for not submitting taxes. Because using such illegal means is equal to fraud, any tax-submitter irrespective of being an individual or a corporation, who commits tax evasion would be charged for the offense and would be subjected to strict punishments of imprisonment or a hefty fine.
Points Of Difference Between Tax Planning And Tax Avoidance And Tax Evasion
Corporations looking to save tax usually come up with these tax terms. Every term has been explained quite elaborately in the sections above.
Below are now given the main difference between Tax Planning and Tax Avoidance and Tax Evasion to help you understand the topic better:
- Need: Usually all the 3 terms are to save tax, but tax avoidance works to minimize tax, and tax evasion means not paying tax at all. Whereas tax planning assists corporations to achieve tax efficiency.
- Legality: Tax avoidance and tax planning are both legal terms. But tax evasion which is termed tax fraud is an unlawful approach to lower taxes.
- Exercising process: Tax avoidance is framed as tax planning before tax obligation occurs. This process usually gives short-term advantages. Just like tax avoidance, the term tax planning must also be performed before tax obligation emerges, but it is associated with the future and usually serves either short or long-term benefits. Quite opposite, tax evasion is generally done after tax obligation emerges.
- Nature: Tax avoidance is done by exploring gaps in the law but also meeting the law provisions. But tax evasion is referred to using illegal means to avoid paying taxes. And lastly, tax planning utilizes current laws to get rid of the tax liabilities.
- Outcomes: Tax planning is a legal approach, tax avoidance can lead to imprisonment or penalty when tax laws are violated, and tax evasion being an illegal process, leads to penalties and other types of punishments.
Difference Table: Tax Evasion, Avoidance & Planning
| Category | Tax Evasion | Tax Avoidance | Tax Planning |
|---|---|---|---|
| Purpose | No tax payment | Lowering tax | Ensuring tax efficiency |
| Legality | Unlawful | Lawful | Lawful |
| Exercising process | After tax obligation | Before-tax obligation | Before-tax obligation |
| Nature | Use unlawful means | Determine gaps in the law, but also follow the provisions | Lower tax obligations with the help of law |
| Outcomes | Imprisonment or penalty | Imprisonment or penalty when laws are violated | – |
The taxes you submit largely depends on your corporate laws. You should know the tax system of the nation you’re establishing your business in, to make the most of and expand your tax advantages.
Points To Consider Before Picking The Right Method To Reduce Tax
Here are two main tips that one should follow to reduce tax in the right way:
- Gain knowledge about tax methods and laws: The first tip is to gain all the knowledge about tax methods and laws to reduce tax obligations in the best way. One should know how to differentiate all the terms based on their legality, purpose, outcome, nature, etc. This will help you stay away from penalties and other troubles.
- Professional advice: Consider taking professional advice from a tax specialist or firm. This is helpful advice as an expert knows how to imply tax laws in the right way to reduce the tax burden and expand the benefits.
Conclusion
Concluding it, three main tax approaches are picked by taxpayers for lowering their tax obligation. The approaches are tax planning, avoidance, and evasion. Every method offers a distinct approach to reducing tax. It should be noted that tax avoidance and planning are legal approaches, but tax evasion is not and is seen as a fraudulent method in certain cases.
FAQ’s
The 3 methods to reduce tax are tax planning, tax avoidance, and tax evasion. One basis on which you can decide which term to pick is that tax avoidance and tax planning are both legal, while tax evasion is not.
Ensure that you have acquired all the knowledge about the tax laws and methods followed in different nations, and also consult a tax expert to make the right choice.
