Tax avoidance refers to the legal act or strategy of minimizing one’s tax liability by taking advantage of deductions, credits, exemptions, and other provisions in the tax code.
It is a strategy employed by individuals and corporations to reduce the amount of taxes they owe while remaining within the bounds of the law.
Tax avoidance is often used interchangeably with the term “tax planning,” which refers to the process of arranging one’s financial affairs in a manner that minimizes tax liability.
The primary motivation for tax avoidance is to maximize after-tax income, profits, or wealth. It involves the use of various tax-saving strategies that exploit tax loopholes, interpret tax laws in the taxpayer’s favor, or use complex financial instruments to minimize the tax bill.
Examples of tax avoidance strategies include claiming deductions for business expenses, deferring income to a future tax year, investing in tax-advantaged retirement accounts, and using offshore tax havens to shield income from taxation.
While tax avoidance is legal, it has been the subject of much controversy, as it has negative impacts and contribute to income inequality, reduce government revenue, and erode public trust in the tax system.
It has also led to the implementation of stricter tax regulations, increased penalties for non-compliance with tax laws, and the closure of tax loopholes.
Tax Avoidance: Impact
Reduced Tax Revenue:
- Tax evasion results in a decrease in the tax revenue that the government receives.
- The ability of the government to fund social programmes and other initiatives as well as public services like healthcare, education, and infrastructure may suffer as a result.
Increased Inequality:
- By enabling affluent people and corporations to pay less in taxes, tax evasion can increase income inequality.
- As a result, there may be a concentration of wealth and power and an increase in the income disparity between the rich and the poor.
Reduced Public Trust:
- Tax evasion has the potential to reduce public confidence in both the tax code and the government as a whole.
- People may be less willing to pay their taxes or abide by tax regulations if they believe the tax system is unjust and mainly helps the wealthy.
Higher Compliance Costs:
- Small businesses and individual taxpayers, who might not have the finances or skills to engage in intricate tax planning tactics, may incur higher compliance costs as a result of tax avoidance.
- Taxpayers may be burdened by this, which will make it harder for them to follow the law.
Reduced Economic Growth:
- Tax evasion can hinder economic growth by decreasing tax revenue, which can result in less money being spent on infrastructure and other services.
- As a result, businesses may be less able to expand and add employees.
Tax Avoidance: Steps Taken
The Goods and Services Tax (GST):
- It was implemented in India in 2017 with the goal of establishing a streamlined and uniform tax system.
- By establishing a single tax on goods and services, the GST has aided in the simplification of the tax code and decreased potential for tax evasion.
The Benami Transactions (Prohibition) Act:
- The holding of property in the name of another person or business is forbidden under the Benami Transactions (Prohibition) Act, which was implemented in 2016.
- With this Act, the use of benami transactions to avoid paying taxes and launder money will be reduced.
Demonetization:
- In order to combat black money and tax evasion, the Indian government demonetized high-denomination banknotes in 2016.
- By promoting digital transactions, which are simpler to trace and monitor, this effort attempted to lessen the quantity of unauthorised currency in circulation.
Increasing Tax Compliance and Strengthening Tax Administration:
- The government has taken a number of steps to improve tax administration.
- This includes the development of specialised divisions to look into cases of tax fraud and evasion, as well as the use of technology to track tax payments and identify tax evasion.
Information Exchange:
- To make it easier to transmit information on tax evaders and their assets located overseas, India has signed into tax information exchange agreements with other nations.
- Additionally, the government has ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which establishes a framework for international exchange of data on taxes.
