Lord Tomlin has well said “Every man is entitled to order his affairs so that tax attaching under the appropriate Acts is less than it otherwise would be” (IRC v Duke of Westminster). However, people adopt various methods so that they can reduce their total tax liability.
The methods adopted to reduce their tax liability can be broadly put into four categories : “Tax Evasion”; “Tax Avoidance” , “Tax Mitigation”, “Tax Planning”. The difference between these four methods some times become blurred owing to the perception of the tax authorities and / or tax payer.
Tax Evasion :
Tax Evasion term is usually used to mean ‘illegal arrangements where liability to tax is hidden or ignored i.e. the tax payer pays less than he is legally obligated o pay hy hiding income or information from tax authority. Thus, here the tax liability is reduced by “illegal and fraudulent” means.
Tax Avoidance :
Tax Avoidance refers to the legal means so as to avoid or reduce tax liability, which would be otherwise incurred, by taking advantage of some provision or lack of provision in the law. Thus, in this case tax payer tries to reduce his tax liability but here the arrangement will be legal, but may not be as per intent of the law. Thus, in this case, tax payer does not hide the key facts but is still able to avoid orreduce tax liability on account of some loopholes or otherwise.
Tax Mitigation :
“Tax Mitigation” is a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislationby actually submitting to the conditions and economic consequences that the particular tax legislation entails. A good example of tax mitigation is the setting up of a business undertaking by a tax payer in a specified area such as Special Economic Zone (SEZ).
Tax Planning :
Tax Planning is defined as “arrangement of a person’s business and / or private affairs in order to minimize tax liability”.
The above four terms certainly cover four different set of situations, but can be a bit confusing for a person who is not well versed in tax issues and legal matters. Sometimes there is a very thin line between these two terms, and in view of the perceptions of tax authorities and tax payer, there may be confrontation as perception of tax authorities that it is matter of tax avoidance and not tax mitigation or planning can lead to much higher taxes. In view of such thin line, GAAR has been under fire from the tax payers as tax authorities could misuse the provisions to harass the tax payers by including even the genuine cases of tax mitigation / planning to be methods for tax avoidance.