Difference between tax evasion and tax avoidance

There are two terms while dealing with online filing of Income tax returns which are often misunderstood or even misused “tax avoidance” and “tax evasion”. A person avoiding tax is considered to be wise where as a person evading tax while filing ITR online if caught is deemed as culprit in the eyes of law.

The definition:

Tax avoidance: It could be understood as the art of saving taxes, thelegalway using the provisions mentioned in the law books

Tax evasion: the theft of taxes, which is done by hiding a part of income details from the income tax department or skipping certain essential like not submitting the filled service tax registration form thereby rendering the hidden money as black money.

The history:

It all started in 1930’s in England when there was no provision of income tax return registration; it all started from the judgement of case of IRC v. Duke of Westminster (1936) in which the final judgment meant that if a person abiding by the law could make his business orders is way to save his taxes then he could not be compelled to pay any extra income tax .On a different occasion the court also appreciated the efforts of those gentlemen who are knowledgeable enough to assist the general unaware good citizens to adopt the practice of tax avoidance .

In India, the law has been continuing since the British era hence, the legal terms are quite similar in both the countries. The key methods of avoiding income tax in India while online filing of ITR are investing in insurance policies, donations etc. The gift tax in India under the income tax act could also be used as a means to avoid tax. With all these provisions there has always been a debate amongst the legal fraternity regarding the limits of tax avoidance.

The landmark case in this regard in India is McDowell & Co., Ltd., vs. Commercial Tax Officer- 1997-(069)-ECR -0029 &endash on which the judgement was taken by justice Reddy, who clearly stated to be aware of the thin line between tax avoidance and tax evasion and quoted the following aftereffects of evil tax avoidance

• In a welfare state, such activities lead to financial loss of the general public who need subsidy and aids of the government
• Misbalance the economy of the country at international level , due to the piling of black money
• Misuse of best brains who represent the side of tax evader and indirectly causing large amount of loss of the community

People evading the tax should be aware as well as sensitive towards the fact that their evil act is unethical and might harm the lives of good citizens of the country.