Tax Planning

Tax Planning is taking the advantage of all eligible tax exemptions, deductions,
concessions, rebates allowances permitted under the law. Reduction in tax by tax
planning is called tax saving in hand of taxpayer without violating any law which is
desirable and moral. Tax planning is investing in available permissible avenues eligible
for deduction u/s 80C of Income Tax Act or investment in SEZ units. It is legitimate as
our legislature intends proper utilization of these deductions and exemption for the
promotion of economic activities of our country. The Supreme Court, in M/s McDowell
and Co Ltd Vs Commercial Tax officer, 1985, (154 ITR 148(SC), held that for tax
planning to be legitimate it must be within the legal framework and colourable devices
cannot be part of tax planning.
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Tax Avoidance
Tax avoidance is reducing tax liability in legally permissible ways by structuring ones
affairs, valid only if it has commercial substance and is not a colourable device. Tax
avoidance is taking the advantage of any loopholes in the law. To identify whether a
transaction is a colourable device tax authorities can go behind the transaction to
examine the substance and not only the form. The Vodafone controversy is an
attempt of tax authorities to identify whether the sale of shares of a foreign company by
one non-resident to another non-resident is genuine or colourable device where the only
principal asset of foreign company was shareholding in the underlying Indian company.
In brief Tax avoidance is complying with the provisions of law but defeating the
intention of the law. There is a thin line separating Tax Planning and Tax Avoidance
which results in lots of litigations and government takes measures to remove that
loophole in law. Dividend Stripping is an example of Tax avoidance which was restricted
or curbed by the government by introducing section 94(7) of Income Tax Act in Finance
Act 2001.
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Tax Evasion
In Tax evasion tax is illegally avoided through unacceptable means, by deliberately
suppressing the income or by inflating the expenditure, recording fictitious transactions,
etc. Tax evasion is reducing tax liability by applying unfair means. It overrules the law,
its concealment of tax, objectionable, immoral in nature. It is blatant fraud and done
when tax liability arises. Defaulter is get punished with penalty. Tax evasion is reduction
in tax with malafide intention.
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Difference between Tax Planning, Tax avoidance and Tax Evasion

Particulars Tax Planning Tax Avoidance Tax Evasion

Illegally reducing tax
deliberately suppressi
Taking full advantage Taking advantage of income or enhancin
Definition provided by Law. loopholes of Law. expense.
Object Reducing tax by applying Reducing tax liability by Reducing tax liability
script and moral of law. applying script of law applying unfair mean
 only.
Treatment Uses benefit of law Uses loophole Overrule the law
Practice Tax Saving Tax hedging Tax concealment
Causes penalty and
Benefit Arises in long run. Arises in short run. prosecution.
Need Desirable Avoidance Objectionable
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