TAX SAVING, TAX AVOIDANCE, AND TAX EVASION: ARE THEY THE SAME?

In common parlance the terms saving, evasion and avoidance may be used interchangeably but for the Income Tax Department each of these terms has a different meaning associated with it and some are taken more seriously than others!

Let’s end this confusion of words once and for all by breaking them down one by one and understand how to avoid getting on the bad side of the law when planning your taxes.

 

Tax saving is as docile as it sounds. It is the way in which one saves taxes by using the provisions specified in the law. Whenever you pay the premium of your life insurance policy or pay for your kid’s education or donate to a charity, you are essentially saving your tax. At the time of filing your return, you can proudly claim these exemptions and deductions from the IT Department. These provisions are provided by the government to incentivize savings and investments in the economy.

Tax savings is completely legal and encouraged by the government.

 

Tax avoidance means the saving of taxes by finding a loophole in the provisions of the Income Tax Act. It also includes structuring your income in a way to get around paying too many taxes.

Tax avoidance techniques are generally within legal boundaries but may be controversial in nature. Therefore, tax avoidance is treated as a gray area and is a constant subject of dispute among taxpayers, authorities, and judiciary.

Tax avoidance is practiced in many forms like establishing offshore units in tax havens and channeling profits through them or carrying out transactions through offshore subsidiaries to avoid attracting tax in India.

A classic example of tax avoidance happened in 2007 when Vodafone plc took over Hutchinson Essar to create a stronghold in the Indian telecom industry. Vodafone, through its subsidiary company, acquired Hutchinson Essar Ltd.’s stake from Hutchinson’s holding company. This indirect transaction took place far away in the Cayman Islands. Instantly, the question of the Indian Income Tax Department’s jurisdiction over this transaction arose. In 2012, the Supreme Court passed the judgment in favor of Vodafone and all the government saw were Rs. 20,000 cr. in lost taxes and fines that they would’ve eventually charged from Vodafone.

Tax avoidance, as you can see, is within the boundaries of the law but it defeats the purpose of laws and regulations by killing their very spirit.

 

Tax evasion is reducing your tax burden illegally by not disclosing a part of your income or over charging your expenses. Dealing in cash without proper disclosure in books of accounts or avoiding tax payments where the law specifically states that they must be paid are some other forms of tax evasions.

Sometimes there is a very thin line between meticulous tax planning and tax evasion so below are some general pitfalls that you should keep in mind when saving your taxes this year.

  1. Interest on savings bank accounts is chargeable to tax over the exemption limit of Rs. 10,000. The assesse may have this income generating from different accounts, but even then it is taxable as a common PAN number is associated with these accounts.

  2. HRA claim and Housing Loan benefits don’t go together! This is a common mistake done by salaried individuals. You cannot claim both HRA as an exemption and repayment of housing loan as a deduction when filing your return. This is only allowed under certain conditions and is not allowed for everyone.

  3. When transferring your investments in the name of a minor or spouse keep in mind that any income generated out of such investments will eventually be clubbed in your hands when filing your yearly ITR. The IT department makes sure that one cannot avoid paying taxes by transferring income generating instruments to his children or wife.

We advocate the use of Tax Saving as it’s legal and ethical. To know how you can maximize your tax savings feel free to contact us.

CA Abhishek Soni

By CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.

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