Difference between Tax Planning and Tax Avoidance

In our country, the government collects money in the form of taxes which in turn is utilised to provide public services. Taxes are collected both in the form of direct and indirect payments such as income tax vis-à-vis goods and services tax. The statutes of taxation law enable an assessee to manage their finances in a manner which helps in reducing their tax liability through completely legal methods.

Tax planning is one such practice of managing one’s finances in a manner which helps in procuring all tax benefits such as exemptions and/or deductions. Tax avoidance on the other hand is the immoral practice of managing finances in a manner enabling an assessee to abstain from paying taxes to the government.

The difference between the two concepts is very narrow, therefore it is important to understand both these concepts properly to better manage your finances.
 

What is Tax planning?

Tax planning is the strategic act of managing financial affairs in an educated manner which enables an assessee to derive maximum tax benefits made available by law in the form of deductions, allowances and/or exemptions. Tax planning aims at seeking out the most advantageous way to manage one’s finances to make an assessee eligible for as many tax benefits as possible. Tax planning is a well-recognised and completely legal practice utilised to ensure reduction in the tax liability of an assessee. Tax planning is made possible through the numerous incentives provided by the government and the legislature itself to help reduce the tax burden of an assessee and promote payment of taxes by the public at large.
 

What is Tax avoidance?

Tax avoidance is the practice of arranging and managing financial affairs by an assessee in a manner which traverses the loopholes in law and the legal system which in turn aids in evading tax liability. It is a mala fide act that is aimed at identifying and utilising the shortcomings of the law so that the assessee neither violates any law nor attracts the requisite tax liability. It is a deceptive practice which not only helps reduce the tax liability but also avoid the payment of taxes altogether in certain cases.
 

Difference between tax planning and tax avoidance

The following are the primary differences between tax planning and tax avoidance:

1.       Tax planning relates to the practice of managing one’s finances in a manner which enables an assessee to reap maximum tax benefits in the form of deductions, allowances and/or exemptions available in law. Conversely, tax avoidance is the planned and deliberate practice of managing one’s finances in a manner which helps in evading the payment of taxes by an assessee.
 

2.       Tax planning and tax avoidance are both lawful activities, however tax planning is considered moral while tax avoidance is considered an immoral practice.
 

3.       Similarly, tax avoidance is characterised by a mala fide intention and is carried out in bad faith. On the other hand, there are no mala fides associated with the practice of tax planning.
 

4.       Tax planning is understood as the practice of reducing one’s tax liability while adhering to the mandate of law. On the other hand, the practice of tax avoidance aids in evading tax payment by taking unfair advantage of the loopholes and defects in law and the legal system.
 

5.       Tax planning seeks out the benefits and advantages lawfully made available to an assessee under the law. On the other hand, tax avoidance is aimed at identifying and reaping undue advantage of the loopholes in the legal system and the letter of the law.
 

6.       Tax planning helps in returning benefits to an assessee in the long run, whereas tax avoidance only provides immediate short-term benefits.