Do you know the difference between Tax Planning and Tax Evasion?

TAX PLANNING Logical analysis of a financial situation or plan from a tax perspective, to align financial goals with tax efficiency planning. The purpose of tax planning is to discover how to accomplish all of the other elements of a financial plan in the most tax-efficient manner possible. Tax planning thus allows the other elements of a financial plan to interact more effectively by minimizing tax liability. Planning your incomes and expenses in such a manner so as to avail the various tax deductions and exemptions is called tax planning. In India, taxpayers commonly make use of Section 80C to reduce their tax liability. As per section 80C, if certain specified investments are made for a specified period, they can avail tax deductions for the same upto a limit of Rs. 100000/-. The most common tax saving instruments are PPF Account, Tax Saving Fixed deposits, National Saving Certificates, Provident fund, Mutual Funds etc. TAX EVASION Tax evasion involves breaking the law, not paying one’s taxes where the law clearly states that they must be paid. Tax evasion is the method by which a person illegally reduces his tax burden by either deflating their income or inflating their expenses. Both deflating the income and inflating the expenses have the same impact on profits i.e. it reduces. In India, people use the most primitive ways to evade their taxes. For example: by dealing in cash, and not disclosing the same in the books of accounts. To ensure that taxpayers don’t evade taxes, the government has a vigil eye on almost all transactions and income tax notices are being issued in case discrepancies are expected in the tax that should have been paid and the tax that has actually been paid by the taxpayer. Tax evasion is illegal and heavy penalties are levied if caught. Tax Planning vs Tax Evasion 1)      Long term Capital Gains If any Long term Capital Gain is arising to a taxpayer from sale of any long term capital asset, he can claim exemption from paying such capital gain tax if he invests the amount of gain from sale of property in specified instruments this is a method of tax saving prescribed by the government. However at the time of sale if the seller tries to inflate the cost of the asset so as to reduce the amount of capital gain virtually, this would be a case of tax evasion. 2)      Depreciation Depreciation is one of the best tax saving tool. If the assets are used for business purposes then we are eligible to claim depreciation on the same under the Income Tax Act, this would be tax mitigation. On the other hand, if we claim depreciation on personal assets just for the purpose of virtually reducing our taxable profits, becomes tax evasion. 3)      Business Expenses considered as Personal Expenses One of the oldest ways to evade tax is to claim personal expense as business expense. This is a very critical item, because the general public very often faces problem in categorizing the items as business expenses and personal expenses. We should be very careful in this regard as there may be some instances in which certain business related expenses are overlooked and categorized as personal expenses and are not claimed by the assessee. These things should be taken into account by the startup businesses so that they do not end up with big tax liabilities. 4)      Family of the actual owners being made a director of the company and given remuneration Now a days especially in closely held companies the spouse of the directors are also given a title such as director or manager etc. and given remuneration for the same. However in reality they do not participate in the affairs of the company. This is done just to inflate the expense and evade taxes. However there are some genuine cases where the family members of the directors or actual owners of the company contribute in the functioning of the company, hence draw salary or remuneration for the same. This would be completely legal and allowed for the sake of Income Tax benefit. 5)      Fake Cash Expenses Many organizations nowadays book fake cash expenses so that their tax liability gets reduced. They reduce cash by passing mere bookish entries and also charge fake cash expenses so that their profits gets reduced and ultimately tax liability gets reduced. More often than not people get away with these felonies. The above examples certainly cover different set of situations, but can be a bit confusing for a person who is not well versed in tax issues and legal matters.   Sometimes there is a very thin line between these two terms, and in view of the perceptions of tax authorities and tax payer, there may be confrontation as perception of tax authorities that it is matter of tax evasion and not tax or planning can lead to much higher taxes. Thanks for reading for this article. Please feel free to write to us, We want to hear it all!Suggestions? Complaints? Feedback? Requests?  at [] or call us at +91 88208208 11. We would be more than happy to assist you.