Concept of Tax Planning
Tax Planning can be defined as an arrangement of one’s financial and economic affairs by taking complete legitimate benefits of all deductions, exemptions, allowances, and rebates so that tax liability reduces to a minimum.
“Tax Planning may be legitimate provided it is within the framework of the law. Colorable devices cannot be part of tax Planning and it is wrong to encourage or entertain the behalf that it is honorable to avoid payment of tax by resorting to dubious methods”.
Features of Tax Planning
- Tax Planning is Legally Recognized: A taxpayer resorts to tax planning in such a way that laws are not vile, and Avoidance of the tax through tax planning is quite legitimate provided it is done without any fraud or violation of any tax law.
- Tax Planning is Moral: Tax planning is moral and fair as it in accordance with the Law. Tax planning is done without violating the provisions of law and therefore, it is well accepted by law, the society and the nation.
- Levy: It is levied on person and property within the jurisdiction of the state. Generally, it is levied for a public
- Payment: It is proportionate in character, usually based on the ability to pay. It is generally payable in money and it is commonly required to be paid at a REGULAR INTERVALS.
- Transactions: All legal obligations and transactions are met. Transactions do not take the form of colorable There is no intention to deceit the legal spirit behind the tax law, it is enforced contribution.
Scope of Tax Planning
- Location of business,
- Nature and size of business,
- Forms of business organization and pattern of its ownership,
- Specific management decisions like make or buy, own or lease, capital structure, renew or replace, etc.
- Employee’s remuneration,
- Mergers/Amalgamation of companies,
- Double taxation relief,
- Non-residents, and
- Advance Rulings.
Objectives of Tax Planning
- Reduction in Tax Liability: The basic need of tax planning is to reduce the tax liability so that enough surpluses out of profits remain with the earner of it for his personal and social need also for future investments in his business. This is only possible by planning his tax affairs properly and availing the deductions, exemptions and relieves, etc., which are admissible, under the acts. He can succeed in doing so by updating his knowledge about the various concessions available in the taxation laws and the conditions to be fulfilled to avail them.
- Minimization of Litigation: There is always a tug-of-war between taxpayers and the tax administrators. The taxpayers try their best to pay the least tax and the tax administrators attempt to extract the minimum. This sometimes results in prolonged litigation. Actually, the main reason of litigation lies in tax avoidance and not in tax planning. Whenever a taxpayer wants to reduce his tax liability by finding a loophole in the Act and the tax administrator does not agree with the interpretation of the assessee under which he is demanding exemptions, deduction or relief, it results in litigation. A good tax planning is always based on clear words of the statute or in conformity with the provisions of the taxation laws. In such a case the chances of litigation are minimized.
- Productive Investment: A proper planning brings fiscal discipline in the functioning of a taxpayer and reduces the transfer of money, from the person who has earned it by hard labor, to the government for waste and ostentation and growth which in turn increase the tax revenue of the government.
- Reduction in Cost: Incidence of tax forms a part of the cost of production. The reduction of tax planning reduces the overall cost. It results in more sales, more profit, and more tax revenue.
- Healthy Growth of Economy: The growth of a nation’s economy depends upon the growth of its citizens. Saving through tax planning devices foster the growth of economy while savings through tax evasion lead to the generation of black money, the evils of which are obvious.
- Employment Generation: The amount saved by next planning is generally invested in the commencement of new undertaking or expansion of the business. This creates new employment opportunities in the business. Further, taxation laws are so complicated that by and large taxpayers cannot plan their affairs efficiently. Hence, such people need services of chartered accountants, financial advisor, and Such persons join the business concern either as employees or provide their services as private professionals. Thus tax planning is not only the need of the taxpayers but also of the society as a whole and the Government.
Types of Tax Planning
- Tax Evasion: Working cash in hand, taking from the bloke in the pub and keeping things ‘’off the books’’ are quite rightly illegal.
- No Tax Planning: This is what many businesses do by default. They simply complete their tax returns and send them off to the taxman, having taken no prior action to arrange affairs in such a way to legally pay less tax.
- Basic Tax Planning: Most businesses do this since it is what most of the accountants advising them are good at. Basic tax planning such as incorporating the business, taking dividends rather than salaries and timing when they spend money can often reduce tax bills by 5% to 20%.
- Advance Tax Planning: Historically this has really only been available to the richest entrepreneurs. Indeed it has helped them become even richer as it can reduce tax bills by 50% to 100%. In recent years this has changed, and now all good accountants can access a range of advanced tax planning solutions on behalf of their clients.
Importance of Tax Planning
- No tax planning would lead to least benefits.
- It is more reliable as Tax Evasion and Tax Avoidance is wrong means to save taxes.
- The government has provided companies with incentives in tax laws so planner gets the advantage to use such incentives.
- With the increase in profits, the quantum of corporate tax also increases and it necessitates the devotion of adequate time on tax planning.
- It helps to deal with the burden of direct and indirect taxation during inflation.
- Helps in proper expense planning, capital budget planning. Sales promotion planning etc.
- Availability of accumulated profits, reserves and surpluses and claiming such expenses as revenue expenditure are possible today because of tax planning.
- In these days saving tax can be seen as a non-repayable interest-free loan taken for the government.
Limitations of Tax Planning
- When an assessee has not claimed exemptions, deduction or relief for which he is entitled to, before the assessment is completed, he is not allowed to claim it as rectification of mistake or in appeal or revision.
- Tax planning cannot be done in isolation. Other economic factors, other direct tax law apart from the Income Tax Act and other economic laws have to be considered before taking any decision in respect of reducing tax liability. This puts a limitation on the scope of tax planning.
- Sometimes a decision taken for tax advantage leads a favor some of the family members at the cost of others in terms of individual property or income rights. This may cause irritation and imbalance in the family. Hence, social, moral and psychological implications force not to go beyond a certain level for tax reduction.
- The direct tax laws are amended frequently either by the Direct Tax Laws Act or by the Finance Act. This puts a hindrance in making along term planning.
- The tax incentives are allowed on the fulfillment of certain conditions Sometimes, it is very difficult to fulfill those conditions and the taxpayers are not in a position to avail the incentives.