The avid goal of every taxpayer is to minimize his Tax Liability. To achieve this objective taxpayer may resort to following Three Methods :
- Tax Planning
- Tax Avoidance
- Tax Evasion
It is well said that “Taxpayer is not expected to arrange his affairs in a such manner to pay maximum tax “ . So, the assessee shall arrange the affairs in a manner to reduce tax. But the question what method he opts for ? Tax Planning, Tax Avoidance, Tax Evasion !
Let us see its meaning and their difference.
5.1. MEANINNG OF TAX PLANNING
Tax Planning involves planning in order to avail all exemptions, deductions and rebates provided in Act. The Income Tax law itself provides for various methods for Tax Planning, Generally it is provided under exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief’s. Some of the provisions are enumerated below :
Investment in securities provided u/s 10(15) . Interest on such securities is fully exempt from tax.
Exemptions u/s 10A, 10B, and 10BA
Residential Status of the person
Choice of accounting system
Choice of organization.
For availing benefits, one should resort to bonafide means by complying with the provisions of law in letter and in spirit.
Where a person buys a machinery instead of hiring it, he is availing the benefit of depreciation. If is his exclusive right either to buy or lease it . In the same manner to choice the form of organization, capital structure, buy or make products are the assesse’s exclusive right. One may look for various tax incentives in the above said transactions provided in this Act, for reduction of tax liability. All this transaction involves tax planning.
5.1.1. Why Every Person Needs Tax Planning ?
Tax Planning is resorted to maximize the cash inflow and minimize the cash outflow. Since Tax is kind of cast, the reduction of cost shall increase the profitability. Every prudence person, to maximize the Return, shall increase the profits by resorting to a tool known as a Tax Planning.
5.1.2. How is Tool of Tax Planning Exercised ?
Tax Planning should be done by keeping in mine following factors :
The Planning should be done before the accrual of income. Any planning done after the accrual income is known as Application of Income an it may lead to a conclusion of that there is a fraud.
Tax Planning should be resorted at the source of income.
The Choice of an organization, i.e. Taxable Entity. Business may be done through a Proprietorship concern or Firm or through a Company.
The choice of location of business , undertaking, or division also play a very important role.
Residential Status of a person. Therefore, a person should arranged his stay in India such a way that he is treated as NR in India.
Choice to Buy or Lease the Assets. Where the assets are bought, depreciation is allowed and when asset is leased, lease rental is allowed as deduction.
Capital Structure decision also plays a major role. Mixture of debt and equity fund should be balanced, to maximize the return on capital and minimize the tax liability. Interest on debt is allowed as deduction whereas dividend on equity fund is not allowed as deduction
5.1.3. Methods Of Tax Planning
Various methods of Tax Planning may be classified as follows :
1. Short Term Tax Planning : Short range Tax Planning means the planning thought of and executed at the end of the income year to reduce taxable income in a legal way.
Example : Suppose , at the end of the income year, an assessee finds his taxes have been too high in comparison with last year and he intends to reduce it. Now, he may do that, to a great extent by making proper arrangements to get the maximum tax rebate u/s 88. Such plan does not involve any long term commitment, yet it results in substantial savings in tax.
2. Long Term Tax Planning : Long range tax planning means a plan chaled out at the beginning or the income year 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 ;
e.g. If an assessee transferred shares held by him to his minor son or spouse, though the income from such transferred shares will be clubbed with his income u/s 64, yet is the income is invested by the son or spouse, then the income from such investment will be treaded as income of the son or spouse. Moreover, if the company issue any bonus shards for the shares transferred , that will also be treated as income in the hands of the son or spouse.
3. Permissive Tax Planning : Permissive Tax Planning means making plans which are permissible under different provisions of the law, such as planning of earning income covered by Sec.10, specially by Sec. 10(1) , Planning of taking advantage of different incentives and deductions, planning for availing different tax concessions etc.
4. Purposive Tax Planning : It means making plans with specific purpose to ensure the availability of maximum benefits to the assessee through correct selection of investment, making suitable programme for replacement of assets, varying the residential status and diversifying business activities and income etc.