TAX PLANNING

Tax planning is concerned with an arrangement of one’s financial and tax matters in a way so
as to reduce or avoid the tax burden without violation of law of the land. Such planning
is legitimated, provided it is within the provisions of law. Colorable devices cannot be part of
tax avoidance through tax planning. Tax reduction or avoidance trough proper planning is
not illegal, what constitutes a crime is tax evasion by resorting to dubious methods.

Tax planning lies in taking maximum advantage of the exemption, deductions, rebates, reliefs
etc. by the tax payer so as to achieve his goals of tax reduction or avoidance. One can and is
entitled to arrange his affairs as not to attract taxes imposed by the state. Tax planning is an
important arrangement of tax management. Following are the main points in the concept of
tax planning and management for your consideration.

(1) Compliance of tax laws by minimizing tax incidence.

(2) Taking advantage of tax concession.
(3) Keeping the incidence of tax or paying zero tax by planning location, nature of
business, form of business organization and availing maximum advantage of various
exemptions , deductions etc.
(4) Avoiding penalties and prosecutions.
(5) Creating a cell n the organization which is entrusted with the job of tax planning.
(6) Maintenance of tax records.

Scope of tax planning:

Tax planning being before setting up of an organization .It is integral part of tax management
broadly speaking, the area of tax planning covers the following.

(1) Choice of form of organization by considering the benefit available to each type of
person.
(2) Taking advantage of location and availing exemptions and deductions under section
10A, 80 1A etc.
(3) Tax planning s exercised while raising finance through shares or debentures or other
source of finance.
(4) Planning of capital structure also depends upon tax consideration. Debt equity ratio
in an structure depends upon tax advantage
(5) Other areas tax planning includes dividend policy, M&A. Many decisions taken by
management are based on tax considerations.

Importance of Tax Planning:

1. Reduction in tax liability:

The first and foremost unction of tax planning is reduction in tax liability and tax planning
helps the tax payer to reduce his tax liability by enabling him to claim the various exemptions
and all. Since tax constitutes cash outflows therefore tax planning helps tax payer to make
savings and to feel a lesser pinch of taxation.
2. Minimization of litigation:

Taxation laws being so complicated and cumbersome have always been a cause of litigation.
By resorting to tax planning a tax payer can avoid litigation and also save a considerable
amount of money and time which otherwise get wasted in litigation cases.

3. Healthy growth of nation:

As we know that tax revenues constitute a major portion of government revenues. Any effort
by the government to provide deduction, exemption etc. to tax payer leads to the fall n the
revenue of the government. But in spite of this government deliberately provides such
exemptions to the tax payers. As most of the times these deductions or exemptions are for the
socio-economic development of the economy of the country. For example deduction for
investment in Infrastructure bonds.

4. Helps in the capital formation:

Tax Planning helps a lot in capital formation of a nation. Most of the times tax laws
encourage tax payers to invest money in government instruments. Many tax benefits can be
availed by investing money in the government owned undertakings or by depositing money
in the state sponsored saving schemes. For example deduction for Investment in NSC’s.

5. A source of working capital:

As we know cash balance is the main constituent of working capital and is regarded as life
blood of business. It is required for meeting day to day expenses purchasing assets etc.
Effective tax planning helps in conserving this important constituent of working capital. In
the absence of proper tax planning much of the cash will go out of business thus leaving
lesser cash for other important purposes.

6. Other Implications:

Boast to capital markets, coat effectiveness, employment generation etc.

TAX AVOIDANCE

In the words of Justice Chinnapa Reddy, “Tax Avoidance is an act of dodging tax
authorities without breaking the law”

The Institution of Taxation in U.K. has defined Tax avoidance as:

-the transaction that are designed to avoid or reduce the liability of tax or

-the transaction that are brought into existence solely for tax avoidance and not to achieve a
commercial purpose and

-the transaction that are clearly outside the purview of the intentions of the law makers.
Thus tax avoidance is an attempt to manage financial affairs by using colorable devices with
the intention of reducing the tax liability. Many a time tax avoidance involves an attempt to
reduce tax burden by taking advantage of certain loopholes or weaknesses in tax laws.

In India before the decision of Supreme Court in McDowell & Co. Ltdvs. CTO, Tax
avoidance was regarded as a lawful act. But after the pronouncement of the case it was held
that tax avoidance is illegal because of following reasons:

(1) There is substantial loss of public revenue required for the economic development of
the nation
(2) It Results in the creation of black money economy which results into inflation
(3) It results into lot of litigation which results into huge amount of tax arrears busy
courts and wastage of time and money
(4) It results into injustice and inequality caused by the tax avoidance for the honest tax
payers
(5) It results into an unethical practice of transferring the incidence of tax liability from
the tax dodgers to the honest tax payers who have to pay tax at higher rates.

Till now the rules settled under above case act as guiding principle for unpinning cooked tax
planning.

TAX EVASION

It is an illegal method of saving tax and makes the person liable to penalties and prosecution.
“Tax evasion” refers to an exercise by a tax payer for not paying the tax legally becoming
due. It is the general term for efforts by assesses to evade taxes by illegal means. Tax evasion
usually involves assesses deliberately misrepresenting or concealing the true state of their
economic affairs to the tax authorities to reduce their tax liability and includes dishonest tax
reporting. Tax evasion typically involves failing to report income or improperly claiming
deductions that are not allowed or authorized. The methods of tax evasion are:-

(1) Under disclosure of income

(2) Inflating the expenses and thus reducing the real income
(3) Manipulation of accounts to reduce the real income
(4) Violation of rules and regulations of laws with the intention to save the tax
(5) Benami transactions

Although tax evasion leads to lower cash outflow on account of taxes yet such saving of
money may not be real and absolute. In fact tax evaded remains liability of the evader. If
trapped he will have pay the tax evaded along with penalties.

Difference between Tax Planning and Tax Evasion:

Tax Planning Tax Evasion

1) It is an exercise aimed at reducing tax
liability by availing maximum benefits of
various deductions, exemptions, rebates,
reliefs etc. provided under tax laws.
2) It is completely within the framework of
1) It is an exercise of reducing tax liability
either (a) by showing lesser income than the
actual or (b) by hiding the very source of any
income.
2) It is willful disobedience of law and
law. involves an element of deceit.
3) It is legal and accepted by Judiciary. 3) It is illegal and is prohibited.
4) It is based on principle of disclosure. 4) It involves hiding the facts regarding
incomes and expenditures.
5) It is deliberate creation of law for wealth 5) It is a white collar crime and is seen as an
creation trough encouraged savings and offence.
investments.
6) Tax planning is an honest effort of the tax 6) It requires a dishonest nature and courage
payer to benefit him and economy as a to violate the law.
whole.
7) Tax Planning lead to socio economic 7) It leads to generation and accumulation of
development of the economy. black money which is great hurdle in the
progress of an economy.
Difference between Tax Planning and Tax Avoidance:

Tax Planning Tax Avoidance

1) It is an exercise of reducing tax liability by
staying within the four corners of law.
2) It involves fair obedience of law with an
honest attitude.
3) It is legal and acceptable by judiciary
4) Transactions are real and natural.
5) It is dependable.
Difference between Tax Avoidance and Tax Evasion:
1) It is an exercise of reducing tax liability by
exploiting some loopholes of the law.
2) It involves foul play with law.
3) It is unethical, illegal and is prohibited.
4) transactions are sham and fabricated
artificially
5) It is not dependable because as and when
the ingenuity is exposed tax avoider has to
pay tax retrospectively.

Tax Avoidance Tax Evasion

1) Act of minimizing tax liability by locating 1) An act of bringing down the tax liability by
some weaknesses of law. disclosing less income than the actual or by
concealing the source of income or by
claiming deductions that are not allowed
otherwise.
2) It may be within the framework of law but 2) The evasion is gross violation and
it is against the basic intent of the legislative disrespect of law.
provisions.
3) It can be curbed by introducing anti 3) It can be curbed by implementing the law
avoidance provisions or clubbing provisions. effectively.