The Marginal Distinction Between Tax Evasion And Tax Avoidance

The concept of taxation is a general principle practised by countries of the world.

Thus it is a globally accepted principle, which is defined as “a statutory levy on taxpayers, corporate organizations, properties and other items stated in the law for the purpose of generating revenue for government at all levels to fulfil its annual budget estimation”

Most countries of the world if not all, either developing or developed make use of one form of a system of taxation for the purpose of generating revenue as this is one of the major reasons for taxation.

For this reason, countries in the world today have for the purpose of generating revenue developed different fiscal policies that enable them to explore various types of taxation and impose on their citizens’ forms of tax at whatever rate is deemed appropriate.

Taxes are essential contributions levied by the government on citizens and corporate institutions for the provision of public revenue.

However, the goal of generating revenue is hindered from being achieved due to certain acts or omissions. These acts or omissions have a negative effect on the whole of the tax system, as regards tax assessment, tax collection and tax administration. Certain acts or omissions include tax evasion and tax avoidance, these two concepts are quite similar, however, they are not the same and shall be discussed in this essay.

TAX EVASION

This refers to either the deliberate unwillingness to pay taxes or the purposeful underpayment of taxes. It further refers to the illegal behaviour of a person, organization, or company wilfully attempting to avoid paying the amount of tax that is legally required of them. Tax evasion usually involves the use of deception, dishonesty, concealment and other illegal means to escape liability to tax.

Tax evasion is the deliberate and dishonest avoidance of one’s legal obligation to pay taxes to the relevant authorities. Criminal charges may be brought against taxpayers who are found guilty of evading taxes at the federal level. This is one of the challenges that the country of Nigeria is facing when it comes to achieving economic growth and development.

The intentional misrepresenting of one’s genuine financial situation to the tax authorities in order to lower one’s tax liability is the criminal act known as tax evasion. Some examples of tax evasion include the following:

Making a misleading declaration of the amount of income, earnings, or gains that were actually earned;
Making misrepresentations as deductions to which an individual is entitled;
Failing to provide the Appropriate Tax Authorities with any Required Tax Returns;
Maintaining two separate sets of monetary records;
False accounting entries;
Personal spending is claimed as business expenses.

There is a wide variety of factors—including social, economic, political, and religious that might contribute to tax evasion. Unfair distribution of facilities (amenities), bad administration and misuse of tax collected, absence of essence of civic responsibility, and taxpayer inaccessibility to government services are just a few of the issues that have arisen in recent years. Particularly in Nigeria, the verbose tax regulations and difficult computing process impose a restriction on the capabilities of the layman.

TAX AVOIDANCE

When an individual or a company uses legitimate strategies to reduce the amount of income tax that they are responsible for paying, this practice is known as “tax avoidance.” In most cases, this objective can be achieved by claiming the maximum number of deductions and credits that are available. In other words, tax avoidance assists people and corporations in legally avoiding their tax obligations by adopting various tax avoidance strategies. This is made possible by the deductions and credits that a country’s tax system grants to its taxpayers.

Every nation has its own tax legislation, which specifies the parameters for tax avoidance that are allowed by the law. Individuals and organizations make decisions regarding how to reduce their tax responsibilities according to the requirements contained in the law. The majority of the time, individuals refrain from investing any money into savings or other philanthropic causes such as corporate social responsibilities (CSR), therefore the purpose of creating these tax loopholes is to encourage people to spend money in these areas, which they typically ignore.

In the UK case of Ayrshire Pullman Motor Services and David M. Ritchie v. Commissioner of Inland Revenue, the judgement of Lord President Lord Clyde outlines the notion of “tax avoidance” by holding as follows: “No man in this country is under the smallest obligation moral or otherwise so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow and quite rightly to take every advantage, which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket and the taxpayer is in like manner entitled to be astute to prevent so far as he honestly can the depletion of his means by the Revenue.”

The preceding judgement provides more justification for the legitimacy of tax evasion. It highlights the equality or justice in permitting a citizen to be clever in the decrease of his income or in taking full advantage of the tax laws just as the tax administrative body is allowed to take advantage of the tax laws for the purpose of depleting the taxpayer’s income.

It does this in the same way that it emphasises fairness or justice in allowing the tax administrative body to take advantage of the tax laws for the purpose of depleting the taxpayer’s income.

Tax avoidance, on the other hand, is not illicit because it entails using the tax regulations to decrease tax responsibility under the same laws that were used to create the tax laws. Some ways that people try to get around paying their fair share of taxes are:

Deducting the costs associated with earning a living and, as a result, lowering the amount of money that needs to be taxed; and
Having a larger family in order to take advantage of more tax breaks;
Consulting with qualified experts in the field.

SIMILARITIES BETWEEN TAX EVASION AND TAX AVOIDANCE

Although both concepts are different they do share some characteristics or features which we shall be looking to bring to light.

Tax avoidance is a legal strategy for lowering one’s overall tax burden, but it results in decreased revenue generation for the governments of the countries in which it is practised. Tax evasion has the same detrimental effect on the government.
Both concepts involve the taxpayers refraining from paying taxes to the government.
Tax avoidance when misused would amount to tax evasion, It’s possible that some people would take unfair advantage of tax avoidance by developing new techniques to avoid tax liabilities with respect to the legal restrictions, which is the equivalent of tax evasion.

MARGINAL DISTINCTION BETWEEN TAX EVASION AND TAX AVOIDANCE

The borderline distinction between the two concepts is one that lies in legality. In other words, one is a legally acceptable means of not remitting taxes due to the government while the other is illegal and is a crime against the government. However, tax avoidance becomes tax avoidance when it is misused so as to continuously avoid payment of tax owed to the government.

In conclusion, tax avoidance and tax evasion are both harmful to the progress and development of any economy. To our relief, the new 2020 Finance Act has addressed the loopholes that fraudulent taxpayers are likely to use in order to reduce their tax obligations. Because the laws have been spelt out explicitly and are no longer confusing, the practice of tax avoidance and evasion has been significantly reduced as a result.