Tax Avoidance means the tax regime's legal use for one's own personal advantage so as to lessen the tax amount that is payable to the government by ways that are legal. The Avoidance of Tax is usually done by the people who desire to keep their money with themselves and not give it to the government.
Avoidance Tax includes situations when people eliminate or reduce tax by following a transaction or many transactions that are legal. The income tax department provides many provisions through which the people can go for Tax Avoidance such as refunds, credits, benefits, and many other kinds of entitlements. The various methods of Tax Avoidance are:
- Legal entities
- Country of residence
- Double taxation
Legal entities are a method that people follow when they want to go for Tax Avoidance. Under this method of Avoidance Tax, people legally defer paying personal taxes by creating a legal separate entity to which they donate their property. The legal separate entity that is set up is often a foundation, company, or trust. The properties are transferred to the trust or company, as a result of which the income that is earned belongs to this entity and not by the owner. Usually, people are taxed personally on earnings and property that they own and thus by transferring property to a legal separate entity, individuals can avoid personal taxation although certain taxes such as corporate taxes are still applicable. In order to go for Tax Avoidance, the foundation, company, or trust can also avoid corporate taxes if the entity is set up in a jurisdiction that considered offshore.
Country of residence is another method that people adopt when they go for Avoidance of Tax. Under this method of Tax Avoidance, the company or person changes the tax residence to a place that is a tax haven in order to lower the amount of taxes that they pay. Under this method, the person may also become a regular traveler so that taxation can be avoided. Double taxation means that many countries charge taxes on the income that has been earned inside that country without taking into consideration, the resident country of the firm or person. So that people do not have to pay double taxes, once in the country where the income has been earned and then again in the resident country, many countries have gone for bilateral treaties of double taxation with other countries. This helps tax-payers as they are able to avoid paying double taxes.
Tax Avoidance reduces the revenue of the government and also brings into disrepute, the tax system. Ideally, Avoidance of Tax should not be encouraged and the government should also take measures in order to prevent it.
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