TAX EVASION vs TAX AVOIDANCE

In my Tax Planning class, my assignment was to research about the differences between evading tax and avoiding tax and i would like to share a little information about that today...

Tax avoidance is a legitimate way of arranging an individuals tax affairs to reduce the incidence of tax while tax evasion on the other hand is illegally not paying one's fair share of tax. The Income Tax Act has provided various penalties, fine and periods of imprisonment for tax evaders. These penalties provide compensation to the Government for having been deprived of revenue due to the deferred tax payment.

Tax Avoidance: Tax avoidance is often used interchangeably with tax mitigation to refer to a person’s attempt to reduce or eliminate tax payable by him/her via legally acceptable means. There are cases when some of these practices may be considered illegal and it usually takes complex investigation and litigation procedures to arrive at a conclusion pursuant to Section 140 of the Income Tax Act 1967.Some of the legal practices include;

• Moving to a tax haven
• Keeping non-Malaysian derived income out of Malaysia
• Taking advantage of tax reliefs and rebates
• Offshore companies and trusts
• Offshore bank accounts
• Deferement of capital gains tax

Tax evasion: refers the practice of blatantly employing illegal means to reduce tax payable or not pay tax at all. There are various forms of evasion with varying levels of aggravation and punishment. These are innocent, negligent, reckless and wilful evasion. These are usually offences in contravention of Sections 77,112,113,114,115 and 116 of the Income Tax Act 1967.Some of tax evasion practices are:

• Claiming deductions for expenses that were not incurred or are not legally deductible
• Not submitting tax returns
• Submitting incorrect(undervalued) tax returns
• Hiding money or information
• Having a conscious plan whose purpose is to avoid paying taxes
• Using fraud, art or contrivance and/or incorporating anything illegal as part of the tax plan
• Falsifying accounts or other records
• Preparing, maintaining or authorising false records