Difference between Tax Avoidance and Tax Evasion

Difference between Tax Avoidance and Tax Evasion:

Tax Avoidance

Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that although it is within the four corners of the taxation laws an the advantage is taken by finding out loopholes in the laws.

The tax avoidance is defined as ‘’it is the art of dodging tax without breaking the law’’.

Royal Commission on Taxation for Canada has explained the concept of ‘avoidance of tax’ as under:

The expression “Tax Avoidance” will be used to describe every attempt by legal means to prevent or reduce tax liability, which would otherwise be incurred, by taking advantage of some provision or lack of provision in the law. It excludes fraud, concealment or other illegal measures. In other words, ‘’tax avoidance’ is a device that technically satisfies the legal requirement of the law but in fact, it is not in accordance with the legislative intent.

Tax Evasion

When a person reduces his total income by making false claims or by withholding the information regarding his real income, so that his tax liability is reduced, is known as Tax Evasion. It is not only illegal but it is also immoral, anti-social and anti-national practice. Therefore under the direct tax laws provisions have been made for the imposition of heavy penalty and institution of prosecution proceeding against tax evaders.

                            Tax Avoidance

                       Tax Evasion

1. Tax avoidance means planning for minimization of tax according to legal requirement but it defeats the basic intention of the legislature. Tax evasion means avoiding tax liability illegally.
2. Tax avoidance takes into accounts various lacunas of law Tax evasion involves the use of unfair means.
3. Tax avoidance is lawful but involves the element of mala-fide intention. Tax evasion is unlawful.
4. Tax avoidance is planning before the actual liability for tax comes into existence. Tax evasion involves avoidance of payment of tax after the liability of tax has arisen.