Page 194 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 11: Taxation Planning

d. Sense of injustice and inequality which tax avoidance arouses in the breasts of those who Notes
are unwilling or unable to profit by it.
e. Ethics (or lack of it) of transferring the burden of tax liability to the shoulders of guideless,
good citizens from those of artful dodgers.
As to the ethics of Taxation, the learned judge observed: We now live in a welfare State whose
financial needs, if backed by the law, have to be respected and met. We must recognise that there
is behind taxation laws as much moral sanction as behind any other welfare legislation and it is
pretence to say that avoidance of taxation is not unethical and that it stands on no less moral
plane than honest payment of taxation.
The Table 11.2 lists the key differences between the tax evasion and tax avoidance.

Table 11.2: Difference between Tax Avoidance and Tax Evasion

Tax Avoidance Tax Evasion
Tax avoidance means planning for minimisation Tax evasion means avoiding of tax liability
of tax according to legal requirements but it illegally.
defeats the basic intention of the legislature.
Tax avoidance takes into account various lacunas Tax evasion involves use of unfair means.
of law.
Tax avoidance is lawful but involves the elements Tax evasion is unlawful.
of mala fide intention.
Tax avoidance is planning before the actual Tax evasion involves avoidance of payment
liability for tax comes into existence. of tax after the liability of tax has arisen.

Avoidance Tax includes situations when people eliminate or reduce tax by following a transaction
or many transactions that are legal. The income tax department provides many provisions
through which the people can go for Tax Avoidance such as refunds, credits, benefits, and many
other kinds of entitlements.
The various methods of Tax Avoidance are:

(a) Legal entities
(b) Country of residence
(c) Double taxation
(a) Legal Entities: Legal entities are a method that people follow when they want to go for Tax
Avoidance. Under this method of Avoidance Tax, people legally defer paying personal
taxes by creating a legal separate entity to which they donate their property. The legal
separate entity that is set up is often a foundation, company, or trust. The properties are
transferred to the trust or company, as a result of which the income that is earned belongs
to this entity and not by the owner. Usually, people are taxed personally on earnings and
property that they own and thus by transferring property to a legal separate entity,
individuals can avoid personal taxation although certain taxes such as corporate taxes are
still applicable. In order to go for Tax Avoidance, the foundation, company, or trust can
also avoid corporate taxes if the entity is set up in a jurisdiction that considered offshore.
(b) Country of residence: Country of residence is another method that people adopt when
they go for Avoidance of Tax. Under this method of Tax Avoidance, the company or
person changes the tax residence to a place that is a tax haven in order to lower the amount
of taxes that they pay. Under this method, the person may also become a regular traveler
so that taxation can be avoided.

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