- Date : 31/01/2023
- Read: 4 mins
The legal practice of lowering the amount of taxes due through the use of legal strategies is known as 'tax avoidance'. It shouldn't be confused with tax evasion, which is prohibited by law. The goal of tax avoidance is to maximize earnings while minimizing taxes, and it has become a fairly popular strategy among both organizations and individuals.
Tax evasion, which relies on unethical practices like fabricating exemptions and undercounting income, does not refer to tax avoidance. To learn more about tax avoidance and the way it operates, continue reading.
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Tax Avoidance
The utilization of legal strategies to reduce an individual's or a company's income tax liability is referred to as "tax avoidance." It can also be done by giving investments which has tax benefits and a higher priority, such as purchasing tax-free municipal bonds.
Tax avoidance is a major issue in India. It is estimated that the amount of revenue lost due to tax avoidance is close to one trillion rupees every year. This amount is enough to finance the development of infrastructure and social welfare programs in the country. Tax avoidance is the practice of legally taking advantage of loopholes and exemptions in the tax system in order to reduce one’s taxable income. Taxpayers use tax avoidance strategies to reduce their tax liability and increase their disposable income. This is done by taking advantage of deductions, credits, exemptions, allowances, and other tax benefits.
Tax avoidance in India is rampant and is facilitated by a complex and outdated tax code, lack of enforcement of tax laws, and a large informal economy. Tax avoidance is particularly rampant in the corporate sector. Companies often use aggressive tax planning strategies such as transferring profits abroad, setting up shell companies, and using tax havens to avoid paying their fair share of taxes.
The government of India has been trying to tackle the issue of tax avoidance through various measures. These include introducing new laws to close loopholes in the tax code, expanding the tax net to include the informal sector, and increasing enforcement of existing laws. The government has also put in place measures such as enhanced transfer pricing rules and the General Anti- Avoidance Rule (GAAR) to dissuade companies from avoiding taxes. In order to further address the issue, the government must continue to implement measures to make the tax system simpler and easier for taxpayers to understand and comply with. It must also increase the enforcement of existing laws, and make sure that companies pay their fair share of taxes. This will help the government generate more revenue and reduce the burden on taxpayers.
How does tax avoidance works?
Tax avoidance in India is generally defined as any action taken to reduce tax liability without breaking the law. It is important to note, however, that while legally accepted forms of tax avoidance do exist, they are often subject to certain conditions and restrictions. In India, the Indian Income Tax Act (ITA) and the Direct Taxes Code (DTC) provide the primary rules and regulations related to taxation. These laws set out various provisions for minimizing tax liability, such as deductions, exemptions, and credits. For example, deductions are allowed for certain expenses, such as educational expenses, medical bills, and charitable contributions. Exemptions are given for certain income categories, such as capital gains and long- term investments. Credits are given for taxes already paid, such as property taxes, sales taxes, and other taxes.
In addition to these provisions, the ITA and DTC also provide certain rules regarding tax avoidance. For example, the ITA prohibits certain actions that are intended to reduce tax liability. Similarly, the DTC prohibits certain tax avoidance schemes, such as artificial transactions and sham trusts.
Tax avoidance is a complex issue, and the rules and regulations related to it are constantly changing. It is important for taxpayers to stay informed on the latest developments in tax law and to consult with a qualified tax professional before taking any action that could potentially reduce their tax liability.
Also read: Things to avoid during an economic recession!
Final words
Tax avoidance in India is the practice of minimizing one's tax liability within the legal limits of the Indian Income Tax Act. It involves utilizing deductions and exemptions to reduce taxable income. Common methods include taking advantage of tax deferment, investing in tax-exempt securities, and using tax-advantaged investments.
