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Tax Avoidance

Reviewed by Anjaneyulu | Updated on Sep 30, 2020

Catalogue

Introduction

Tax is a source of revenue for a government of a country through which it endeavours to provide better infrastructure, the standard of living, and security to its residents. The taxpayers approach various ways to reduce tax liability. Usually, there are three ways to reduce taxes:

1. Tax planning: Tax planning means analyzing one's financial position and legally planning one's income to avail various exemptions and deductions.

2. Tax avoidance: Tax avoidance is an activity of taking unfair advantage of the shortcomings/loopholes in the tax rules to avoid the tax payments.

3. Tax evasion: Tax evasion is an illegal way to reduce one's tax burden through fraudulent techniques, such as the deliberate understatement of taxable income or inflating expenses.

What is Tax Avoidance?

Tax avoidance is an act to minimize tax liability through legal methods. In other words, it is the legal usage of the tax law to reduce the tax amount by means that are within the law. Tax avoidance is not advisable as it could be used for one's advantage to reduce the amount of tax payable.

Tax avoidance is considered immoral because it involves dodging of tax, and it leads to the deferment of tax liability. One of the ways to do tax avoidance is to adjust the accounts in such a manner where there will be no violation of tax rules. Tax avoidance is lawful, but, in some cases, it could be considered as a fraud.

How to Control Tax Avoidance?

Tax avoidance can be controlled through the implementation of stringent laws and regulations. The Government of India is trying to remove shortcomings/loopholes in existing laws by bringing amendments to ensure that people don't avoid tax payment by manipulating law. With the regular amendments implemented by the government through the tax budget, it is becoming difficult for the taxpayer to do tax avoidance.

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