Both tax avoidance and tax evasion refer to the efforts to minimise the tax payment in various ways: read on to learn the difference between them.
Tax avoidance and tax evasion both are means of reducing tax liability, but there is a significant difference between them – tax avoidance is legal and tax evasion is a crime.
Tax avoidance is the lawful way of minimizing taxes. Businesses avoid taxes by taking all legitimate deductions and by sheltering income from taxes. This can be done by adjusting the accounts in a manner that it will not violate any tax rules – this way, the tax liability will also be minimized.
The arrangement for tax avoidance is made prior to the occurrence of tax liability. Tax avoidance involves taking benefit of the loopholes in the law. However, it is important to note that it does not fall in the category of crime.
Tax evasion, on the other hand, is the illegal practice of not paying taxes. It involves the deliberate concealment of material facts by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed. This obviously means that the arrangements for tax evasion are made subsequent to the occurrence of the tax liability. Tax evasion is illegal and it is punishable by tax laws.
