Unit 1 Tax Planning tax evasion and tax
Tax planning
(Meaning)
Tax planning is an art and the exercise of arranging financial affairs in such a manner that,
without violating the legal provisions in any way under tax and other laws, full advantage is
taken of all tax exemptions, deductions, rebates, reliefs, allowances and other benefits under
the tax law so that the burden of taxation on the tax payer is reduced to the minimum.
Objective+need
1.Reduction of tax liability: The basic need of tax planning is to reduce tax
liability by arranging affairs in accordance with the requirements of law, as
contained in the fiscal statutes. In many a cases, a taxpayer may suffer heavy taxation
not on account of the dosage of tax administered by the Act, but, because of his lack
of awareness of the legal requirements
2.Minimization of litigation: There is always tug-of-war between taxpayers
and tax administrators. Tax payers try to pay least tax and the tax administrators
attempt to levy higher amount of tax. Where a proper tax planning is adopted by the
tax payer in conformity with the provisions of the taxation laws, the incidence of
litigation is minimised.
3.Healthy growth of economy - The tax planning plays an important role in the
development of backward states/districts and development of infrastructure facilities or in
other words, it takes the economy in the future direction. So, savings through tax planning
devices encourage the healthy growth of economy
4 Employment generation: Tax planning creates employment opportunities in
different ways.
1) efficient tax planning requires some sort of expertise that
creates job opportunities in the form of advisory services.
2), amount saved through tax planning is generally invested in commencement of new business or
the expansion of existing business. This creates new employment opportunities.
5. Productive investment: Channelization, of taxable income to the various
investment schemes is one of the prime purpose of tax planning as it is aimed to
attain twin-objectives of:
(i) harnessing the resources for socially productive projects,
and,
(ii) relieving the tax payer from the burden of taxation, converting the earnings
into means of further earnings.
6.Reduction in cost: The reduction of tax by tax planning reduces the overall
cost. It results in more sales, more profit and more tax revenue.
Tax planning is a legal and moral way of tax saving discuss
Above quoted statement is true tax planning is a technique by which a person can reduce his tax
liability without violating in anyway legal provisions of the act
It meams an arrangement of one's financial affairs in such a way that the tax burden on the tax
payer is minimised without violating the legal provisions of the act and also by taking full
advantage of all exemptions deductions rebates and relieves permitted under the act
In fact these reliefs are provided by the legislature to achieve certain social and economic goals.
The objective of tax concession is to develop the economy of backward districts or States
Avoidance of tax through tax planning is quite legitimate it it has to be done without any short
evaluation of any tax law
Violation of tax law is a criminal act for which the tax payer may be penalized or prosecuted the
burden is to be reduced without going beyond the various provisions of tax laws
If the income is increased by violating the tax laws such income is termed as a illegal income but if
the income is increased by adopting the tax planning devices then it is open to deductions and tax
relief provided in the Income Tax Act
If assessee spends in such expenditure or Investments specified in the law these exemptions
deduction and tax incentives encourage the taxpayer for tax planning. A taxpayer reduces his tax
liability by adopting these.
factors affecting tax planning
Types pf tax planning
1) Short-term tax planning - Short-term tax planning means a planning for current
year only. Under this, an assessee makes tax planning for the previous year and ascertains the
channels of investments so that his tax-liability for the previous year is reduced to the
minimum. Such tax planning is done by salaried assessees and assessees having income from
irregular sources.
2) Long-term tax planning - Long-term tax planning means a planning for future.
Under this, an assessee makes investments in such plans/schemes which help him in reducing his
future tax-liability.
An assessee plans for present and future both so that his liability for the current year as well for years to
come is reduced to the minimum.
Such tax planning is done by the assessees carrying on business or profession or whose future income
is likely to increase.
(b) Permissive tax planning: Permissive tax planning is tax planning under the
expressed provisions of tax laws. Tax laws of our country offer many exemptions
and incentives
) Purposive tax planning: Purposive tax planning is based on the measures
which circumvent the law. When a person reduces his tax liability by tax avoidance it is said that he is
resorting purposive tax planning
TAX MANAGEMENT
Tax management is such a suitable and timely management of financial operations
by which all legal formalities and statutory requirements for availing various deductions,
rebates, reliefs and incentives as given in tax laws are complied with, after careful and deep
study of tax laws, and, thus, escaped from penalties and prosecutions’.
Tax management refers to compliance with the income tax rules andregulations.
Tax management covers matters relating to
1) Taking steps to avail various tax incentives
2) Compliance with tax rules and regulations (including timely filing of return)
3) Protecting from consequences of non-compliance oftax rules and regulations.i.e.penalties,
prosecution etc
4) Review of departments orders and if need apply for rectification of mistake, filingappeal, tax revision
or settlement of tax cases
The importance of tax-management are as follows –
(i) Tax-planning is never possible without tax-management.
(ii) Tax-management has been considered an important part of tax-planning.
(iii) Tax-management helps the assessee to safe from interest, penalty and prosecution.
(iv) A good tax-management shall automatically reduce tax liability of the assessee.
Following operations are included
1. Deduction of tax at source [Sec. 203]
Every person deducting tax at source is required
as per Section 203 to furnish a TDS certificate to the payee to the effect that tax has been deducted
along with certain other particulars.
It is the duty of the deductor to deduct TDS as prescribed by Income Tax Act and will issue the
TDS certificate (Form 16/Form 16A).
Before filing income tax returns, it is necessary to possess Form 16, if working in an organisation or
Form 16A in case of payment other than salary.
Collection of tax at source (TCS) [Sec. 206C] – Every seller/person should collect tax at source from
the buyer/lessee at the time of sale/lease of goods/on transactions which are
specified under section 206C of the Income Tax Act, 1961.
The certificate of collection of tax at source has to be submitted in Form No-27D by persons
collecting tax at source within a week from the last day of the month in which the tax was
collected.
3. Advance tax [Sec. 208] – According to Section 208 of the Income Tax Act, Advance tax is
the income tax payable if the assessee’s tax liability exceeds Rs.10,000 in a Financial Year.
Salaried person,senior citizens are exempted from this.
4.Tax on self-assessment – The balance tax to be paid by the assessee is known as self-
assessment tax. In many cases Individual has not deposited full tax or, TDS has been short
deducted. It means there is a balance tax liability
5. Audit of accounts [Sec. 44AB] - Every person carrying on business, if his total sales or
gross receipts in business exceeds Rs.1 crore in any previous year; or every person carrying
on profession, if his gross receipts in profession exceed Rs.25 lakh in any previous year, then
audit of accounts is compulsory by a chartered accountant or by a qualified auditor before the
specified date.
6. Furnishing the return of income [Sec. 139(1)] - The tax manager must ensure that the
return of income is furnished on or before the due date of furnishing the return u/s 139(1),
otherwise the assessee will lose the right to carry-forward and set-off the losses and become liable to
punishing interest, penalty, prosecution or fine or both.
7. Documentation and maintenance of records - Documentation is an indispensable
ingredient of tax management. An assessee should keep reliable, complete and updated
documentation of all the relevant tax files so that the documentary evidence can be made
available at a short notice whenever it is required
available at a short notice whenever it is required.
Difference between tax planning and tax management
Tax avoidance and tax evasion
Tax avoidance
It is a method of reducing the incidence of tax by taking advantage of
certain loopholes in tax laws. Under this, all facts are brought through manipulation and
wrong way so that the real fact cannot be known. The Government can recover the tax saved
b th b ki d t i t l
by the assessee by making amendments in tax laws.
Tax evasion
It is a method of reducing or avoiding tax liability by dishonest, means
violation of tax laws intentionally. An assessee who is guilty of tax evasion may be punished
by the way of penalty. For example, an individual engaged in private tuition or a doctor
engaged himself in practicing privately, does not pay tax on his income from such source.
