Difference between Tax Evasion and Tax Avoidance

The upcoming discussion will update you about the difference between tax evasion and tax avoidance.

Difference # Tax Evasion:

Tax evasion implies an intention to avoid payment of tax where there is actual knowledge of liability. It usually involves deliberate concealment of the facts from the revenue authorities, and is illegal.

Evasion does not generally require an intention to evade, but a willful intention or tax fraud is essential to establish a criminal offence. Unintended evasion, unless due to gross negligence, normally leads only to tax payments with interest and penalties.

Some common examples of tax evasion include:

i. The failure by a taxable person to notify the tax authorities of his presence or activities in the country if he is carrying on taxable activities;

ii. The failure to report the full amount of taxable income;

iii. The deduction claims for expenses that have not been incurred, or which exceed the amounts that have been incurred but not for the purposes stated;

iv. Falsely claiming relief that is not due;

v. The failure to pay over to the tax authorities the tax properly due;

vi. The departure from a country leaving taxes unpaid with no intention of paying them;

vii. The failure to report items or sources of taxable income, profits or gains, where there is either a general obligation in the law to volunteer such information or the tax authorities have made general or specific enquiries; etc.

Difference # Tax Avoidance:

Tax avoidance is not tax evasion. Unlike tax evasion, which is relatively easy to describe, avoidance is not a criminal violation. It is also more subjective and its definition varies widely. For many commentators, tax avoidance includes any transaction, the purpose of which is to avoid tax or to gain a tax advantage.

They are generally legal but disliked by the tax authorities and sometimes also by the Courts. However, they may be acceptable when fully disclosed to the authorities, and not disputed by them. Justice Reddy defined tax avoidance as “the art of dodging tax without breaking the law”. It is the avoidance of tax payment without the avoidance of the tax liability.

Black’s Law Dictionary defines tax avoidance as “the minimization of one’s tax liability by taking advantage of legally available tax planning opportunities. Tax avoidance may be contrasted with evasion, which entails the reduction of tax liability by using illegal means”. It is not fraudulent but contrary to the judicial or statutory anti-avoidance rules.

Tax avoidance occurs when persons arrange their affairs in such a way so as to take advantage of weaknesses or ambiguities in the tax law. Although the means are legal and not fraudulent, the results are considered improper or abusive. Some commentators call it “loophole tax planning”.

OECD defines tax avoidance as an arrangement of a taxpayer’s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal is usually in contradiction with the intent of the law it purports to follow. Tax evasion is an illegal arrangement through or by means of which liability to tax is hidden or ignored.

The taxpayer pays less tax than he is legally obliged to pay by hiding income or information from the tax authorities. The European Court of Justice (ECJ) defined tax avoidance as “artificial arrangements aimed at circumventing tax law”.