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Saturday, October 26, 2013

UGC - NET: Commerce (08)

Methods adopted to reduce tax Liability

The methods adopted to reduce the tax liability can be broadly put into four categories: "Tax Evasion";”Tax Avoidance”, "Tax Mitigation", "Tax Planning".  The difference between these four methods sometimes become blurred owing to the perception of the tax authorities and / or tax payer.

Tax Evasion : Tax Evasion term is usually used to mean 'illegal arrangements where liability to tax is hidden or ignored i.e. the tax payer pays less than he is legally obligated to pay or by hiding income or information from tax authority.   Thus, here the tax liability is reduced by "illegal and fraudulent"  means. For example: understatement of income.
Tax Avoidance : Tax Avoidance refers to the legal means so as to avoid or reduce tax liability, which would be otherwise incurred, by taking advantage of some provision or lack of provision in the law.   Thus, in this case tax payer tries to reduce his tax liability but here the arrangement will be legal, but may not be as per intent of the law.   Thus, in this case, tax payer does not hide the key facts but is still able to avoid or reduce tax liability on account of some loopholes or otherwise. For example: misinterpreting the provisions of the IT Act.

Tax Mitigation : "Tax Mitigation" is a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails.  A good example of tax mitigation is the setting up of a business undertaking by a tax payer in a specified area such as Special Economic Zone (SEZ).


Tax Planning : Tax Planning is defined as "arrangement of a person's business and / or private affairs in order to minimize tax liability". For example: availing deduction.