Tax Planning

Introduction: Tax may be defined as a financial charge or other levy imposed on an individual or a legal entity by government in pursuant to its legislative authority. Indian taxation system is one of the world's largest systems in terms of its wide application on large number of individuals. In India there are two types of taxes.                                                                               Taxes 

• Direct Tax (Income Tax)
• Indirect Tax (Goods and services Tax)

The main goal of every taxpayer is to minimise his tax liability. So, under tax planning and management, an assessee arranges his financial affairs in such a way that the burden of taxation on assessee is reduced to the minimum. To achieve this objective coma the taxpayer may Resort to following three methods:-

                                   Methods

•  Tax Planning
•  Tax Avoidance
•  Tax Evasion

               An assessee can reduce his tax liability, by legitimate means in two ways -Tax Planning and Tax Avoidance.

Tax Planning:- It refers to the arrangement of the financial affairs in such a way that benefit of all eligible provisions of the Income-Tax law can be availed effectively so as to reduce tax liability.

           Under tax planning, maximum advantage is taken of all tax concessions like exemptions, deductions, rebates, allowances and other reliefs permitted under the act.

:- some examples of tax planning are -

• By claiming various deductions under section 80C to 80U.
• By making investment in an SEZ unit.
• Exemptions under section 10A, 10B and 10BA.
• Choice of accounting system, location of business, form of organisation etc. by considering the tax incentives available in such decisions.

Features of tax planning are:-

1. It aims at reducing tax liability of a taxpayer.
2. It is legal and moral.
3. It complies with the provisions of law in letter and in Spirit.
4. It is the legitimate right of the taxpayer.
5. It is based on the principle of disclosure.
6. Tax Planning helps in encouraging savings and investment, thus plays important role in capital formation (which leads to economic development).
7. It is permissible by law and accepted by judiciary.
8. It is a stressless device.
9. Tax planning is long term in nature.
10. Tax Planning does not use colorable devices, transactions are real and natural.
11. Text planning aids business owners in making tax conscious business decisions, which includes revenue planning, expense planning, investment planning and financial planning.

Implications of tax planning:-

1. Reduction in tax liability.
2. Minimization of litigation.
3. Economic development of nation.
4. Helps in capital formation.
5. Source of working capital.
6. Helps business owners to take tax conscious business decisions.
7. Provide boost to capital markets.
8. Brings cost-effectiveness and economic stability.

Methods of tax planning:-various methods of tax planning may be described as under:

•  Short term tax planning
•  Long term tax planning
•  Permissive tax planning
•  Purposive tax planning

                         

1. Short term tax planning:- It refers to the planning which is initiated and executed at the end of the income year to reduce taxable income of that year, in a legal way. such  planning do not involve any long term commitment, yet it results in substantial savings in tax.

Example: claiming tax rebate under section 88.

2. Long term tax planning:- It refers to the plan chalked out at the beginning of the year, which is to be followed around the year. This type of planning does not help immediately as in the case of short range planning, but is likely to help in the long run.

Example: Investment of a part of income in 5 year term deposits is eligible for deduction under section 80C.

3. Permissive tax planning:- It involves consideration of various provisions of law which allows tax planning. Such planning aims at taking advantage of different incentives and deductions, planning for availing different tax concessions etc.

Example: Earning income covered by section 10, specially by section 10(1).

4. Purposive tax planning:- It involves making plans with specific purpose in mind to ensure the maximum benefits to the assessee through correct selection of investment avenues, making suitable program for replacement of assets, varying residential status and diversifying business activities and income etc. so that the desired purpose is also achieved as well as full benefit of tax laws is also availed.

Example: Premium paid on Life insurance schemes of LIC serves dual benefit, first it is eligible for deduction under section 80C, secondly it also covers risk of life and provides a medium of savings.

Precautions for requisites of successful tax planning:- In order to implement Tax Planning effectively, one should have the knowledge of the following:-

1. Thorough knowledge of the present law:

• Income Tax act, 1961
• Income Tax rules, 1962
• Annual finance act
• Circulars and notifications issued by CBDT
• Judicial decisions / case laws.

2. Preparedness for the retrospective amendments.

3. Knowledge of other allied laws:

• Goods and services tax
• Companies act, 2013
• Transfer of property act
• Interest act
• Foreign exchange management act etc.

4. Knowledge about methods of tax planning:

• Determination of residential status.
• Selection of suitable form of organisation.
• Capital structure decisions.
• Diversification of the business activities.
• Own or lease decisions.
• Optimum claim of expenses to reduce tax liability.

5. Proper documentation.

Limitations of tax planning:-

1. Limited and defined scope.

2. Dynamic in nature: Due to frequent changes in tax laws, Tax Planning can be done only for a very short period.

3. Procedural difficulties: Certain pre conditions are imposed for claiming deduction, as such Tax Planning becomes limited to the extent of fulfillment of these conditions.

4. Necessity of hiring professional tax experts: Indian tax law is very complicated tax law. understanding its intricacies requires services of tax professionals, this acts as a limitation in successful tax planning.

5. Tax planning has a broad dimension that requires thorough knowledge of various laws.

6. Time consuming.

7. It results in the increased cost for the assessee.

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