Distinguish between 'Tax Evasion and Tax Avoidance" having regard to the tax practices followed by Tax payers to reduce the tax liability.

Distinction between Tax Evasion and Tax Avoidance Basis Tax Evasion Tax Avoidance Meaning It refers to reducing tax liability by dishonest means, often involving illegal activities. It refers to reducing the tax liability by finding out loopholes in the law, without violating the letter of the law. Legality It is a clear violation of law and unethical in nature. It includes an element of deceit. It complies with the legal language of the law but not necessarily the spirit of the law. Example An enterprise inflating its expenses by showing fake invoices to claim more deductions. An enterprise shifting its income by transferring its assets to another person (e.g., family members) to reduce the overall tax burden. Acceptance This is clearly prohibited as it is wholly illegal and punishable. This concept can be considered heinous to tax evasion. Governments often bring amendments to curb such practices and to plug the loopholes. Penalties and Prosecution It results in stringent penalties and prosecution against the person engaged in it, including imprisonment. It may result in disregarding the transaction done to avoid tax and may/may not result in penalties and prosecution against the person engaged in it, depending on the specific facts and legal interpretation. Time Period It aims at evading the payment of tax after the liability to tax has arisen. It is retrospective in nature. It is futuristic in nature, planning transactions in advance to minimize future tax liability.