TAX PLANNING;TAX AVOIDANCE

AND TAX EVASION

WHAT DO YOU MEAN BY TAX PLANNING?

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 and rebates so that tax liability reduces to minimum.

KEY POINTS TO BE REMEMBERED

It is not avoidance to payment of tax.

Tax planning should not be done with an intent to defraud the revenue.

All transactions with respect to tax planning should be in correct form and substance.

Tax planning works within the framework of law and its not illegal.

RIGHT TO PLAN TAX LIABILITY

The Supreme Court held in case of McDowell & Co. v. CTO(1985) 154 ITR 148(SC) has said that it is true that planning may be legitimate provided it is within the framework of the law.

Using dubious methods to avoid the payment of tax is not permissible.

It is obligation of every citizen to pay taxes honestly without resorting to subterfuges

TAX AVOIDANCE AND TAX EVASION

Taxpayers generally plan their affairs so as to attract the least incidence of tax.

Taxpayer spares no efforts in maximising his profits and attracting the least incidence. The tax gatherer, on the other hand. Tries to break the plans whose sole objective is to save taxes.

Three common practice to save taxes:a) Tax Evasion;b) Tax Avoidance;c) Tax Planning.

a)TAX EVASIONTax evasion refers to a situation where

a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure which results into showing of income lower than the actual and resorting to various types of deliberate manipulations.

An assessee guilty of tax evasion is punishable under the relevant laws.

b)TAX AVOIDANCEThere is a thin line of difference between Tax

Avoidance and Tax Planning.Any planning done according to legal

requirements defeats the basic intention of Legislature behind the statute could be termed as Tax Avoidance.

Tax Avoidance is done in such a manner that no infringement of taxation laws and by taking full advantage of loopholes to attract least incidence of tax.

Earlier tax avoidance was considered completely Legitimate, but at present it may be illegitimate in certain situations.

c)TAX PLANNINGIt means arranging the financial activities in

such a manner that maximum tax benefits are enjoyed by making use of all beneficial provisions mentioned in the law.

Tax planning is permitted and not frowned upon by law.

Tax planning is different from Tax Avoidance and Tax Evasion as it is a systematic and scientific planning of company’s operation to attract minimum tax liability.

OBJECTIVES OF TAX PLANNING

a) Reduction of tax liabilityb) Minimisation of litigationc) Productive investmentd) Healthy growth of economye) Economic stability

IMPORTANCE OF TAX PLANNING

No tax planning would lead to least benefits.Tax planning is more reliable as Tax Evasion

and Tax Avoidance are wrong means to save taxes.

Government has provided companies with incentives in tax laws so planner gets the advantage to use such incentives.

With 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 non-repayable interest-free loan taken for government.

ESSENTIALS OF TAX PLANNINGUp to date knowledge of tax laws and

awareness of judgments made through various decisions of the courts.

The disclosure of all material information and furnishing the same to the IT department.

Tax Planning should not just comply legal provisions as stated but should be within the framework of law.

A planning must be capable of attainment of business objectives and be amenable to its possible future changes.

TYPES OF TAX PLANNING

a) Short-range and Long-range tax planning

b) Permissive tax planning

c) Purposive tax planning

AREAS OF TAX PLANNING IN CONTEXT OF INCOME TAX ACT, 1961

At the time of setting up of new business entity:

i. Form of organisation/ownership pattern;

ii. Locational aspects;iii. Nature of business.

AREAS OF TAX PLANNING IN CONTEXT OF INCOME TAX ACT,

1961For the business entities already in existence:i. Tax planning in respect of corporate restructing;ii. Tax planning in respect of financial management;iii. Tax planning in respect of employees

remunerations;iv. Tax planning in respect of specific managerial

decisions;v. Tax planning in respect of Foreign Collaborations

and Joint Venture Agreements;vi. Tax planning in the light of various Double

Taxation Avoidance Agreements.

Thank You

VARSHA DHANKANI

MANISH PUNJABI DHARIT GAJJAR