What is Tax Avoidance and How it is Not Same as Tax Evasion?

Do you get confused between the terms’ tax evasion and ‘tax avoidance? If yes, you are at the right place to know the difference between the two terms. Here in this article, we will discuss tax avoidance and how it is not the same as tax evasion. Also, you will get to know about the causes of tax avoidance and tax evasion in detail.

What is Called Tax Avoidance

Tax avoidance is the act of avoiding legally paying taxes. Here, the taxpayers take dishonest advantages of the faults in the tax rules, which enables the taxpayers to discover new methods by which they can avoid their tax payment, which comes within the bounds of the legislation. Generally, taxpayers make accounting adjustments in their books to avoid their taxes. These adjustments are made within the legal provisions of the legislation. Although tax avoidance is fully legal, it is not advisable as the taxpayers have defeated lawmakers’ motives and used this way to make their own advantages.

Difference Between Tax Avoidance and Tax Evasion

Tax evasion majorly differs from tax avoidance because it is illegal to avoid taxes either fully or partially. The tax evasions incorporate breaking the law and not paying taxes where the legislation mentions that they must be paid. Here the taxpayers are engaged in doing dishonest trading practices. These trading practices consist of making a false statement, overemphasis of tax credits, under-estimation of income, the claim of making personal expenses, etc. After doing these unlawful practices, taxpayers can be punished under the law, and they are charged a massive penalty.

Reasons Responsible for Tax Evasion

• Any country’s tax structure plays the most crucial role in bringing up tax evasion. The more faults in the provisions, the more people will evade taxes.
• Higher rates of taxes will impose higher taxes on the taxpayers, and thus they will be encouraged to decrease the tax rates by evading them.
• The absence of commitment and integrity in citizens.
• Complex tax law structures will make higher possibilities of tax evasion as it would be easy for people to take advantage of it. Therefore the tax laws should be simple and precise rather than complex and faulty.
• Under-estimation of income from several sources. This will show a lesser total income and a lesser tax burden.
• As against the true expenditure, claiming an extra reduction in the returns lodged by the taxpayers.

Reasons Responsible for Tax Avoidance

• The country’s tax structure has many loopholes and enables taxpayers to take its unfair advantage by legally avoiding the taxes.
• The taxpayers want to pay lower taxes and thus attempt to tax avoidance.
• The taxpayers want notable deductions in their payment of tax.

Significant Effects of Tax Avoidance

1. The tax avoidance leads to a decrease in public revenue collection and thus influences the country’s growth.
2. Because of tax avoidance, there is a notable influence on black money, leading to needless inflation.
3. The government’s projects will be delayed because of the restrictions in spending amount.

Summing Up

Tax avoidance is a legal practice of avoiding taxes by taking dishonest advantages of the tax rules’ loopholes. Tax evasion is different from it as it is an illegal way of escaping from taxes, and taxpayers get punished if they practice tax evasion. In this article, we’ve come across the reasons responsible for tax evasion and tax avoidance. Also, we’ve discussed the effects of tax avoidance.

I hope this helped you understand tax evasion and tax avoidance and made you clear about the differences in these two terms which have often been used interchangebly.