BLOG on Income Tax Management for - AY 2022-23 & 2023-24

Tax Planning , Tax Avoidance and Tax Evasion

Meaning of Tax Planning

INTRODUCTION

The main 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.

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.

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.

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

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.

Tax Avoidance

It is an act of dodging tax without breaking the Law. It means when a taxpayer arranges his financial activities in such a manner that although it is within the four corner of tax law but takes advantages of loopholes which exists in the Tax Law for reduction of tax a liability. In other words though he has complied the letter of law but not the sprit behind the law.

Following transactions are held as Tax Avoidance which are :

Where tax law is complied with by using colorable devices which means that use o dubious method or a method which is unfair for reduction of tax liability.
Where the fact of the case is presented in a false manner.
Where the sprit behind the law is avoided.
There is a malafide intention.

It means that method adopted for reducing tax liability should be within the framework of law. If it is not within the framework of law, it amounts to tax avoidance and not Tax planning.

Tax Evasion

Any illegal method which leads to reduction of tax liability is known as Tax Evasion. The Tax Evasion is resorted to by applying following dishonest means :

Concealing the Income
Claiming excessive expenditure
Falsification of accounts.
Willful violence of Rules

E.g. Claiming depreciation where no asset exist in the Business or claiming depreciation on the assets which is used for residential purposes. It Is basically a fraudulent method of reduction in tax liability.

The Difference Between ‘Tax Planning’ And ‘Tax Management’

THE DIFFERENCE BETWEEN ‘TAX PLANNING’ AND ‘TAX MANAGEMENT’ .

Tax Planning	Tax Management
(i) The Objective of Tax Planning is to minimize the tax liability	The objective of Tax Management is to comply with the provisions of Income Tax Law and its allied rules.
(ii) Tax Planning also includes Tax Management	Tax Management deals with filing of Return in time, getting the accounts audited, deducting tax at source etc.
(iii) Tax Planning relates to future.	Tax Management relates to Past ,. Present, Future. Past – Assessment Proceedings, Appeals, Revisions etc. Present – Filing of Return, payment of advance tax etc. Future – To take corrective action
(iv) Tax Planning helps in minimizing Tax Liability in Short-Term and in Long Term.	Tax Management helps in avoiding payment of interest, penalty, prosecution etc.
(v) Tax Planning is optional.	Tax Management is essential for every assessee.

The Difference Between ‘Tax Avoidance’ And ‘Tax Evasion'

THE DIFFERENCE BETWEEN ‘TAX AVOIDACNE’ AND ‘TAX EVASION’

TAX AVOIDANCE	TAX EVASION
(i) Where the payment of tax is avoided though by complying with the provisions of law but defeating the intension of the law is known as tax Avoidance.	Where the payment of tax is avoided through illegal means or fraud is termed as tax evasion.
(ii) Tax Avoidance is undertaken by taking advantage of loop holes in law	Tax evasion is undertaken by employing unfair means
(iii) Tax Avoidance is done through not malafied intention but complying the provision of law.	Tax Evasion is an unlawful way of paying tax and defaulter may punished.
(iv) Tax Avoidance looks like a tax planning and is done before the tax liability arises.	Tax evasion is blatant fraud and is done after the tax liability has arisen.