What do you understand by tax avoidance, tax evasion and tax planning? Objectively discuss various methods involved in the same.
Tax Avoidance means an attempt to reduce tax liability through legal means, i.e. to regulate one’s financial affairs in such a way that one pays the minimum tax imposed by the law. Tax Evasion is an illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability. It is subject to criminal charges and substantial penalties. Similarly; Tax planning is an accepted practice, whereby the taxpayer uses provisions of law to minimize his tax liability.
Methods of Tax- avoidances
This implies to route profits through subsidiaries located in tax havens.Tax havens refers to the countries or territories where either very low tax is levied on certain items or not taken at all.
Treaty shopping refers to taking undue advantage of a tax treaty between two countries by a resident of a third country.
In Round Tripping, money goes out of country through illegal channels and is routed back into the country by local investors through tax havens like Mauritius.
Transfer Price is the price of the goods and services sold between related entities such as – parent company and daughter (subsidiary) company.
Thin capitalization is when most part of company’s capital is made of debt instead of equity. When most of the capital is debt, the company has solvency risk.
Methods of Tax Evasion
Tax evasion involves illegal and unfair ways to get away without paying. Evasion of tax takes place when the people report dishonest tax.Falsifying the accounts, smuggling, false invoicing etc. are common methods of tax evasion. (260 words)