Tax planning vs Tax evasion

Most of the times , these words ‘Tax Planning ‘ and “Tax Evasion’ are used interchangeably.However ,both of these terms are different , with a fine line between them.In this article, we will understand the meaning of these terms and their scope.We will also look into some cases and their implications.

What is Tax Planning?

Tax Planning refers to actions taken by the taxpayer to meet his tax obligations by availing the exemptions , deductions and reliefs , as allowed under Income Tax Act.
This is a legitimate way to manage and reduce the incidence of tax on the taxable income. For e.g. As per provisions under section 80IA ,certain type of eligible units can avail profit based deductions. These deductions stretch upto 100% of the profits.If any taxpayer starts such eligible unit to avail such deduction , then it would be called as Tax Planning.

What is Tax Evasion?
Where taxpayer consciously tries to
– Furnish incorrect or inaccurate information
– Conceal material information
– Suppress income
– Inflate the expenditure
– Fictitious transactions which results in diversion of income
– Claiming the deductions wrongfully and without complying with the restrictions

Then such practices will result in Tax Evasion. This is because all these activities will lead to decrease in income or increase in expenses , which finally results in no or little tax liability.

Tax Avoidance
While we are analyzing Tax planning and Tax Evasion , we need to look at one more concept.There is one more concept of Tax Avoidance. It refers to carrying out the activities within legal framework, but defeating the very purpose of law.This can be termed as variant of Tax Evasion, but taxpayer will exploit loopholes in law to take undue advantage of the situation.

In short , Tax Avoidance is Tax Evasion , presented as Tax Planning.

Lets have an example which will clear the concepts

Mr. A who has estimated taxable income of Rs 100000 including salary and rent of the new house.He opens an HUF for tax purposes , to which certain taxable income could be shown as HUF income.he purchased the house in the name of HUF and showed the rent received as HUF income.This saves tax on rent income , which otherwise would have been taxed as Mr. A ‘s taxable income. This is known as Tax Planning.

Mr. B. is a businessman who carries on retail outlet.He fraudulently signs fake vouchers for expenses and claims them as business expenses. This will result in inflating of expenses which will reduce the tax liability.This will be recognized as case of Tax Evasion.Hence the taxpayer will be liable to penalty and prosecution , if any.

Mr. C is HNI (High Net Worth Individual) who has huge income which comes under tax he decides to open a company in one of tax heavens like Panama.These countries have secrecy of transactions and little or no tax impact on the income.This is a legitimate way to divert the taxable income to generate tax free income. The income from company incorporated outside would be foreign income , hence not taxable for resident.Also most of the part of taxable income is also waived as it is used for incorporating company in Panama.Hence there will be unethical tax evasion , but within legal framework, Hence this tax avoidance.


Tax PlanningTax evasion or Tax Avoiadance
Ethical way to save taxUnethical way to save tax
Taxpayer does not inflate expenses or decrease incomeTaxpayer inflates expenses or decreases income or diverts the income
The income Tax Act allows various deductions or exemptions , hence tax planning is legitimate way to save taxThe taxpayer either takes undue advantage of the legal framework or avoids the tax by devising mailiciuos activities.
Tax Planning involves disclosure of material informationTax evasion involves non disclosure of material information or presentation of misleading information.
Tax planning rewards the taxpayer in terms of tax savingsTax evasion gives rise to black money and is punishable by law as prescribed in the Income Tax Act.

Overall situation 

Tax evasion cases came strikingly forward when Vodafone case came before the Income Tax department.This case basically involved indirect transfer of shares in Indian company from One NRI (Non Resident Indian) to another NRI.This transaction resulted in huge capital gain which was contended as Non taxable by the company.

This transaction is actually an indirect transfer of an Indian asset by , which was not regulated by Income Tax Act.It also involved retrospective tax issue , which is still pending in Supreme Court.

Cases like this, have reduced and diverted the tax revenue actually belonging to Indian government .However government is taking firm steps by preferring appeal as in Vodafone Case.The government will be encouraging to bring in predictable tax regime which will ensure no retrospective tax issues.This will certainly bring down the cases of tax evasion to a certain extent.


Offshore structures (disclosed in Panama Papers ) and unpredictable tax regime is followed byTax Evasion.This is because the tax law have certain major loopholes which can be easily exploited by criminal masterminds.However it is the choice of the taxpayer whether to go for tax planning – the ethical way or Tax Evasion – the illegitimate way.

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