Question

1. Discuss the differences between tax planning, tax avoidance, and tax fraud.
2. Discuss various penalties that a taxpayer may be imposed. Which penalty is more serious to the taxpayer?
3. Discuss the general rule for the statute of limitations on tax returns and the important exceptions to the general rule.

Answer 1

Tax planning is done to reduce the liability of tax by applying the provision and moral of law.

Tax avoidance is done to reduce tax liability by applying the script.

Tax fraud is done to reduce tax liability by exercising unfair means.

The difference between them are:

Tax Planning	Tax Avoidance	Tax Fraud
It is planned before tax liability arises.	It is planned before the liability of tax arise.	It is planned after the liability of tax has arise.
It is legal	It is legal	It is illegal
Ethical	Unethical	Unethical
It does not have any intention to defeat legal spirit.	It has intentions to defeat legal spirits.	It has intentions to defeat legal spirits.
No litigations in court	It leads to litigations in court.	It leads to litigations in court.
No penalty or prosecution.	No penalty or prosecution.	Attracts penalty or prosecution.

A penalty is a punishment imposed on the taxpayer for being non compliant.

Following are the penalties imposed on taxpayer :

1) Default in making payment of tax - The amount of penalty leviable will be as determined by the Assessing officer. However the amount will not exceed the amount of tax in arrears.

2) Under-reporting of income - Penalty at 50% of tax payable on such under reported income shall be levied.

200% of the tax is payable if under reporting results from misreporting of income.

3) Failure to maintain books of accounts and other documents : Normally the amount of penalty leviable is RS. 25000

In case, the assessed is a person who has entered into international transaction, the penalty will be 2% of the value of such international transactions or specified domestic transactions.

4) Penalty for false entry such as fake invoices :

It contains forged or falsified documents like fake invoice or false piece of document

It included an invoice in respect of supply or receipts of goods or services issued by any person without the actual supply of any goods or services.

Also the invoice of a supply 0r receipt of goods from a person who doesn't exist.

An omission of any entry which is relevant for computation of total income.

5) Undisclosed income : where the income determined includes undisclosed income, a penalty of 10% is payable.

6) Audit and audit report : A penalty leviable at 150000 of total sales if the assessed fails to get his account audited or furnish report.

7) TDC/ TCS : When a person fails to deduct tax at source, he will be liable to pay a penalty equal to the amount of tax which he has failed to deduct or pay.

8) Penalty for using modes other than Account payee/ draft/ cheques /ECS

9) Failure to furnish statements/ information

10) Others that may include failure to apply or quote false pan attracting penalty of 10000 and TAN also attract a penalty of 10000.

Penalty for filing late ITR is most serious for the taxpayer's among all the penalties.