Difference Between Tax Planning, Tax Avoidance And Tax Evasion
We've had a year of incredible financial innovation. With the pandemic and post-pandemic situation, the wealth management industry is facing multiple challenges at an unprecedented rate. The pace of digitization will have an impact on how wealth managers invest, think, and operate. We live in a fascinating world, whether it is about the future of digital currencies or the evolution of asset management. It is difficult to predict what the key trends for wealth management will be in 2023-2025 by looking at previous years, but you should be reassured, here are 5 important trends that will define the future of wealth management.
- Tax Planning
- Tax Avoidance
- Tax Evasion
Understanding the difference between these three terms is very important for every individual as it ensures that you are not unknowingly committing any illegal act. Let’s find out the meanings and differences between these three tax terms and find out why they are or are not good for your business.
Tax planning refers to the process of analysing an individual or business's financial situation to identify opportunities to reduce tax liabilities. It involves reviewing financial transactions and identifying strategies that can be used to reduce or defer tax obligations within the legal framework set by tax laws.
Effective tax planning involves taking advantage of all available tax deductions, credits, and exemptions to minimise tax liabilities while complying with tax regulations. The process involves various steps, including:
Understanding current tax laws: To effectively plan for taxes, it's important to have a good understanding of the tax laws and regulations that apply to your particular situation. This includes knowledge of deductions, exemptions, and credits that may be available to you.
- Reviewing financial transactions: This step involves examining all financial transactions, such as income, expenses, investments, and assets, to determine the tax implications of each.
- Identifying tax-saving opportunities: Once you have a clear picture of your financial situation and understand the relevant tax laws, you can identify opportunities to reduce or defer taxes. For example, you may be able to take advantage of tax deductions, make contributions to tax-advantaged retirement accounts, or time income or expenses to maximise tax benefits.
- Implementing tax-saving strategies: Once you have identified tax-saving opportunities, you can implement strategies to reduce or defer taxes. This may involve adjusting investment management strategies, taking advantage of tax credits, or making changes to your business structure or estate plan.
Overall, tax planning is an important tool for individuals and businesses to manage their tax liabilities and make the most of available tax benefits. By working with tax professionals or using tax software, you can ensure that you are taking advantage of all opportunities to reduce your tax bill while staying compliant with tax laws.
Tax avoidance is the act of reducing the tax liability without breaking the laws. This means that a taxpayer complies by the laws but take the advantage of loopholes to minimise the tax liability. In other words, a taxpayer uses legitimate methods to reduce the amount of tax payable.
Following are the methods a taxpayer uses to avoid paying taxes to the government:
- Tax deductions - for reducing the business expenses and bills.
- Tax deferral plan - for delaying the payment of taxes.
- Tax credits - for the benefits of Company’s legal purposes such as business purchases.
Though tax avoidance is a legal method of tax reduction, it should be done legitimately. Some taxpayers may cross the line to tax evasion which will be a violation of laws. Therefore, it is crucial to have a good knowledge of all tax strategies. You can also take the help of expert best financial advisor in india who may guide you on how to avoid taxes efficiently.
Tax evasion is an act of reducing the tax liability illegally. Taxpayers use illegitimate and illicit practices to show minimum profits and reduce tax liability.
Taxpayers use following illicit practices for tax evasion:
- Hiding the Company income and profits.
- Showing excessive expenses.
- False accounts and statements.
- Rules violation.
- Transferring assets illegitimately.
- Showing excessive tax credit.
Tax evasion is an act of using unfair and illegal actions deliberately to not pay taxes. Unlike tax avoidance which can be defined as legal, tax evasion is certainly described as a crime and any taxpayer found to be committing to tax evasion is subjected to rigorous punishments such as heavy penalty or imprisonment.
|Tax Planning||Tax Avoidance||Tax Evasion|
|The purpose of tax planning is to ensure tax efficiency.||The purpose of tax avoidance is to reduce tax.||The purpose of tax evasion is to not pay tax.|
|Tax planning involves legal methods to minimise tax liability.||Tax avoidance uses loopholes but within the law framework to minimise the tax liability.||Tax evasion involves using illegitimate methods for not paying tax.|
|It is done before the tax liability.||It is done before the tax liability.||It is done after the tax liability.|
|————||If rules are violated, the impact can be penalty or improvement.||The impact is penalty or imprisonment.|