Tax Management & Tax Planning Rectified

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UNIT – I

INTRODUCTION TO TAX PLANNING AND MANAGEMENT


Taxes are the compulsory contribution by the citizens of a country for
meeting different government expenditures. There are three stages in the
imposition of tax by the government. First step is the declaration of the liability by
the Government i.e. what are all the incomes chargeable to tax, second one is the
assessment and tax payment by persons and the last one is the method of recovery
of tax if tax was not paid on time. Tax planning and management focuses efficient
administration of tax procedures and minimization of tax liability through
eligible schemes. Through this chapter we can discuss about the basic concepts of
Tax Planning, Tax Management, Tax Evasion and Tax Avoidance.

TAX PRACTICES

TAX PLANNING TAX EVASION TAX AVIODANCE

TAX PLANNING
Tax Planning is an exercise undertaken to minimize tax liability through the
best use of all available exemptions, deductions, rebates and reliefs to reduce
income. Tax planning can be defined as an arrangement of one’s financial and
business affairs by taking legitimately in full benefit of all deductions, exemptions,
allowances, reliefs and rebates so that tax liability reduces to minimum. In other
words, all arrangements by which the tax is saved by ways and means which
comply with the legal obligations and requirements and are not colourable devices
or tactics to meet the letters of law but not the spirit behind these, would
constitute tax planning.
The Hon’ble Supreme Court in McDowell & Co. v. CTO (1985) 154 ITR 148
has observed that “tax planning may be legitimate provided it is within the
framework of the law. Colourable devices cannot be part of tax planning and it is
wrong to encourage or entertain the belief that it is honourable to avoid payment
of tax by resorting to dubious methods.”
Actually the allowances, deductions, exemptions, rebates and reliefs were
given as per legal regulations to achieve social and economic goals. For instance
deductions as per 80C for individuals and HUF aim to encourage saving and
investment habits for the economic prosperity of the country.
Example of tax planning: where a person buys machinery instead of hiring it,
he is availing the benefit of depreciation. It is his exclusive right either to buy or

Tax Planning and Management


lease it. In the same manner to choice the form of organization, capital structure,
buys or make products are the assessee’s exclusive right. One may look for various
incentives in the above said transactions provided in Income Tax Act, for reduction
of tax liability. All this transactions involves tax planning.
TAX EVASION
It refers to a situation where a person tries to reduce his tax liability by
deliberately suppressing the income or by inflating the expenditure showing the
income lower than the actual income and resorting to various types of deliberate
manipulations. An assessee guilty of tax evasion is punishable under the relevant
laws. Under direct tax laws provisions have been made for imposition of heavy
penalty and institution of prosecution proceeding against tax evaders.
The tax evaders reduce his taxable income by one or more of the following steps:
(a) Non-disclosure of capital gains on sale of asset.
(b) Non-disclosure of income from ‘Binami transactions’.
(c) Willfully unrecording or partial recording of incomes. Eg: sales, rent, fees, etc.
(d) Charging personal expenses as business expenses. Eg: car expenses, telephone
expenses, medical expenses incurred for self or family recorded in business books.
(e) Submission of bogus receipts for charitable donations under section 80 G.
TAX AVOIDANCE
Tax avoidance is a method reducing tax incidence by availing of certain
loopholes in the law. The Royal Commission on Taxation for Canada has explained
the concept of tax avoidance as under: For our purposes the expression “Tax
Avoidance” will be used to describe every attempt by legal means to prevent or
reduce tax liability which would otherwise be incurred, by taking advantage of
some provisions or lack of provisions of law. It excludes fraud, concealment or
other illegal measures.
The line of demarcation between tax planning and tax avoidance is very thin and
blurred. Any planning which, though done strictly according to legal requirements,
defeats the basic intention of the Legislature behind the statute could be termed as
instance of tax avoidance. It is usually done by taking full advantage of loopholes
adjusting the affairs in such a manner that there is no infringement of taxation laws
and least taxes are attracted.
Earlier tax avoidance was considered completely legitimate, but at present it
may be illegitimate in certain situations. In the judgment of the Supreme Court in
McDowell’s case 1985 (154 ITR 148) SC, tax avoidance has been considered as
heinous as tax evasion and a crime against society. Most of the amendments are
now aimed at curbing practice of tax avoidance.

Tax Planning and Management


DISTINCTION BETWEEN TAX PLANNING, TAX AVOIDANCE AND TAX
EVASION
Basis Tax Planning Tax Avoidance Tax Evasion
Meaning Way of minimizing The assesse legally Illegal way reducing
tax liability by takes advantage of tax liability by
availing full loopholes in the tax deliberately
advantages of the laws suppressing
Act through incomes or hiking
exemptions, expenditures.
deductions, rebates
and relief.
Aim of Saving of tax Hedging of tax Concealment of tax
Practice
Nature Moral in nature Immoral in nature Illegal and
and bends the law objectionable.
without breaking it
Result Advantages arise in Advantages arise in Penalty and
the long run the short run. Prosecution
Legal Uses benefits of the Loopholes in the law Overrules the law
implications law
TAX MANAGEMENT
Tax management refers to compliance with the income tax rules and regulations.
Tax management covers matters relating to
(a) Taking steps to avail various tax incentives
(b) Compliance with tax rules and regulations (including timely filing of return)
(c) Protecting from consequences of non-compliance of tax rules and regulations. i.e.
penalties, prosecution etc.
(d) Review of departments orders and if need apply for rectification of mistake, filing
appeal, tax revision or settlement of tax cases.
AREAS OF TAX MANAGEMENT
Important areas of tax management are discussed below:
1. TDS (Tax Deducted at Source): Persons responsible for deducting tax at source
should deduct from the income and that should be paid to the central government
on time. Moreover he should issue deduction certificate to the deductee’s and file
it in the income tax website.
2. Collection of tax at source: In some special cases, some persons responsible for
collecting the tax at source from the buyers (sec 206C). They should comply with
those formalities.
3. Payment of tax: It includes
(a) Payment of advance tax
Tax Planning and Management
(b) Payment of tax on self-assessment.
(c) Payment of tax on demand (payment after receiving notice from authorities)
4. Maintenance of books of accounts: Every businessman or a professional must
maintain books of accounts and other relevant documents so that the tax can be
computed accurately and verified by the Assessing Officer. Maintenance of account
books, vouchers, bills, correspondence and agreements, etc. is a part of tax
management.
5. Audit of books of accounts: If the turnover of the business for the previous year
2015-16 exceeds one crore rupees, the audit of books of accounts is compulsory as
per income tax rules. (w.e.f P.Y 2016-17 – 50 lakh). In case of profession audit is
compulsory if the gross receipts more than 25 lakhs.
6. Furnishing the return of income: The tax manager must ensure that the return of
income is furnished on time otherwise the assesse will lose the right to carry
forward and set off the losses and become liable to pay interest, penalty,
prosecution or fine or both.
7. Documentation and maintenance of tax records: An assessee should keep
complete and updated tax files so that the documentary evidences can be made
available in case of all queries. Tax files include filed returns, Form 16,
documentary evidence in support of deductions, rebate and relief, court orders,
etc.
8. Review of orders of Income Tax Department: Review the assessment orders and
other orders received from the tax department is an important function of tax
management. If there is any mistake in the order, application for rectification can
be made. If the order is prejudicial to the interest of the assessee he can file an
appeal, revision or an application for settlement of case can be made.

DIFFERENCE BETWEEN TAX MANAGEMENT AND TAX PLANNING


TAX PLANNING TAX MANAGEMENT
It is a wider term than tax management It is the first step towards tax planning.
Aim of tax planning is to minimize tax Aim of tax management is compliance
burden. with legal formalities.
It is a guide in decision making It is a regular activity
It is not essential for every assesse. It is essential for every individual.
It looks at future benefits out of present It relates to the past, present and future.
actions

PROBLEM 1.1
Specify whether the following acts can be considered as an act of (a) tax
management; or (b) tax planning; or (c) tax evasion.
(a) Mr. A invests in Public Provident Fund so as to reduce tax payable.

Tax Planning and Management


(b) ABC Ltd maintains TDS register at the company to enable timely compliance.
(c) X Ltd installed an air conditioner at the residence of a director as per terms of his
appointment; but treats it as fitted in quality control section in the factory. This is
with the objective to treat it as plant for the purpose of computing depreciation.
Solution:
(a) Investment in PPF is a part of tax planning.
(b) ABC Ltd maintains TDS register in the company as part of legal compliance. So it is
tax management.
(c) Air conditioner is installed in the director’s residence. But by fraud the company
claiming depreciation of Air conditioner in the company’s books to reduce tax
burden. So it is tax evasion.

Tax Planning and Management


UNIT- II
TAX PLANNING
Tax planning is the analysis of one's financial situation from a tax efficiency point of
view so as to plan one's finances in the most optimized manner. Tax planning allows
a taxpayer to make the best use of the various tax exemptions, deductions and
benefits to minimize their tax liability over a financial year. This process varies from
person to person and depends, among many factors, taxable income, time schedule
for investments, risk bearing inclination, existing investment pattern, expected
returns etc. Over the years, tax planning scenario has become more dynamic and
complicated, due to constant changes in the tax laws and falling interest rates.
Further tax planning cannot be done in isolation; it should be a part of overall
Financial Planning.
NEED AND SIGNIFICANCE OF TAX PLANNING
Tax Planning is the honest and rightful activity to minimize tax burden of various
persons. Needs and significances of tax planning were discussed below.
(a) Reduction of tax liability: The basic need of tax planning is to reduce tax
liability by arranging his affairs in accordance with the requirements of law, as
contained in the fiscal statutes. In many a cases, a taxpayer may suffer heavy taxation
not on account of the dosage of tax administered by the Act, but, because of his lack
of awareness of the legal requirements
(b) Minimization of litigation: There is always tug-of-war between taxpayers
and tax administrators. Tax payers try to pay least tax and the tax administrators
attempt to levy higher amount of tax. Where a proper tax planning is adopted by the
tax payer in conformity with the provisions of the taxation laws, the incidence of
litigation is minimized
(c) Productive investment: Channelization, of taxable income to the various
investment schemes is one of the prime purpose of tax planning as it is aimed to
attain twin-objectives of: (i) harnessing the resources for socially productive projects,
and, (ii) relieving the tax payer from the burden of taxation, converting the earnings
into means of further earnings.
(d) Reduction in cost: The reduction of tax by tax planning reduces the overall
cost. It results in more sales, more profit and more tax revenue.
(e) Healthy growth of economy: The growth of a nation’s economy is
synonymous with the growth and prosperity of its citizens. In this context, a saving of
earnings by legally sanctioned devices fosters the growth of both. Tax-planning
measures are aimed at generating white money having a free flow and generation
without reservations for the overall progress of the nation. On the other hand tax
evasion results generation of black money, the evils of which are obvious. Tax
planning thus assumes a great significance in this context.

Tax Planning and Management


(f) Economic stability: Tax planning results in economic stability by way of: (i)
availing of avenues for productive investments by the tax payers and, (ii)
harnessing of resources for national projects aimed at general prosperity of the
national economy and (iii)reaping of benefits even by those not liable to pay tax on
their incomes.
(g) Employment generation: Tax planning creates employment opportunities in
different ways. Firstly, efficient tax planning requires some sort of expertise that
creates job opportunities in the form of advisory services. Secondly, amount saved
through tax planning is generally invested in commencement of new business or
the expansion of existing business. This creates new employment opportunities.
PRECAUTIONS IN TAX PLANNING
Successful tax planning techniques should have following attributes:
(a) It should be based on up to date knowledge of tax laws. Assessees must
have an up to date knowledge of the statute he must also be aware of judgments
of the courts, the circulars, notifications, clarifications and Administrative
instructions issued by the CBDT from time to time.
(b) The disclosure of all material information and furnishing the same to the
income-tax department is an absolute pre-requisite of tax planning the
concealment in any form would attract the penalty often ranging from 100 to 300%
of the amount of tax sought to be evaded. Section 271(1)(c) read together with
explanations there to.
(c) Foresight is the essence of a business and the tax planning should also
reflect this essence. Tax regimeis flexible in nature and tax planning model must
also be flexible so that it could be scrutinized in relative situations.
(d) Tax planning should not be based on tax avoidance.
(e) Tax planning cannot be attempted in isolation. While doing tax planning we
have to consider the violation of other laws.
TYPES OF TAX PLANNING
The tax planning exercise ranges from devising a model for specific
transaction as well as for systematic corporate planning. These are:
(a) Short-range and long-range tax planning.
(b) Permissive tax planning.
(c) Purposive tax planning.
(a) Short-range planning & Long-range planning: Short-range planning refers to
year to year planning to achieve some specific or limited objective. For example,
an individual assessee whose income is likely to register unusual growth in
particular year as compared to the preceding year, may plan to subscribe to the
PPF/NSC’s within the prescribed limits in order to enjoy substantive ax relief. By
investing in such a way, he is not making permanent commitment but is
substantially saving in the tax. It is one of the examples of short-range planning.

Tax Planning and Management


Long-range planning on the other hand, involves entering into activities, which
may not pay-off immediately. For example, when an assessee transfers his
equity shares to his minor son he knows that the Income from the shares will be
clubbed with his own income. But clubbing would also cease after minor attains
majority.
(b) Permissive tax planning: Permissive tax planning is tax planning under the
expressed provisions of tax laws. Tax laws of our country offer many exemptions
and incentives.
(c) Purposive tax planning: Purposive tax planning is based on the measures
which circumvent the law. The permissive tax planning has the express sanction
of the Statute while the purposive tax planning does not carry such sanction. For
example, under Sections 60 to 65 of the Income-tax Act, 1961 the income of the
other persons is clubbed in the income of the assessee. If the assessee is in a
position to plan in such a way that these provisions do not get attracted, such a
plan would work in favour of the tax payer because it would increase his
disposable resources. Such a tax plan could be termed as ‘Purposive Tax
Planning’.
TAX PLANNING IN RESPECT OF RESIDENTIAL STATUS
The income tax will be applicable or not on an income source depends on
the residential status of the assessee. The persons which are outside India for a
major of time during the year and preceding year can keep some points in mind
so that if they are capable of adjust their schedule they can save a lot of tax.

I. Individuals who are visiting India on a business trip or in some other


connection should not stay in India for more than 181 days in the year and no
more than 364 days in preceding four years to enjoy non-resident status.
II.If individual is in India for more than 364 days during the preceding four years
then he should avoid staying in India for more than 59 days in a year. If he wants
to stay more than 59 days then he may come in such manner that not more than
59 days comes in a previous year. For example, he may come after 2ndFebruary
and leave before 29 May. So that not more than 59 days period is covered in
both previous years.
III.Similarly Indian citizen or person of Indian origin should plan their trip such that
not more than 181 days will fall in one year.
IV.A non-resident should not receive any income directly in India even if the
business is controlled directly from India. He should first receive income outside
India and then remit it to India, by such way no tax is leviable on such income.
V.Similarly a not ordinarily resident should receive his income outside India which
is earned outside India and from a business controlled outside India.

Tax Planning and Management

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