It is very important that one understands the meaning of tax avoidance or tax evasion to avoid being on the wrong side of the income tax authorities.
Tax avoidance is the means to reduce the tax liability by using the legal means. To make it simpler to understand, we can say that it is a methodology whereby one regulate the affairs in such a manner that individual or company pays the minimum tax imposed by the Act as opposed to the maximum.
Tax Avoidance Example
The example for tax avoidance can be seen in the light that a person forms a company and sell his products and pays 20% tax by virtue of claiming the depreciations and had the same person be selling the goods by himself without forming a company, he would have had been paying 30% as the income tax.
Tax Evasion gets you on the wrong side of the income tax authorities as one is using the illegal means to reduce tax liabilities. This action can be undertaken by using methods like falsification of books, suppression of income and overstatement of deductions, etc and thus one pays lesser tax.
How to Counter Tax Evasion?
In an effort to curb such acts, Govt of India has introduced GAAR proposal to be effective wef 01 Apr 2012.