Meaning of Tax Planning

Meaning of Tax Planning
INTRODUCTION The avid goal of every taxpayer is to minimize his Tax Liability. To achieve this objective taxpayer may resort to following Three Methods :
o o o
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 underexemptions u/s 10, deductions u/s 80C to 80U and rebates and reliefs. 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 assesses 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.
Every assessee liable to pay tax needs to manage his/her taxes. Tax management relates to management of finances for payment of tax, assessing the advance tax liability to pay tax in time. Tax management has nothing to do with planning to save tax it is just related with operational aspect of payment of tax i.e. while managing his taxes a person ensures that he/she is making timely payment of taxes without running out of the money and he is complying with all the provisions of the law
Tax avoidance and evasion is the practice of underminig or not showing your taxable income properly or through illegal means.It is an illegal act which amounts to payment of penalty and imprisonment. Tax planning on the other hand is the proper investment of various sources of income to enjoy tax exemption U/s 10,deductions U/s 80 and rebates U/s 88.It is an legal practice.
Tax avoidance is the practice of taking advantage from the loopholes in the income tax law and it is not liable to penalty and imprisonment. Tax evasion is the practice of evading tax by flouting the income tax laws and regulaions.It is illegal and tax evader is liable to penalty and imprisonment. Tax planning is the proper planning for investing various sources of income to take tax advantange.It is a legal practice. Tax management on the other hand requires tax planning in an efficient way to take advantage of exemptions,deductions and rebates etc.
Definition of 'Tax Avoidance'

The use of legal methods to modify an individual's financial situation in order to lower the amount of income tax owed. This is generally accomplished by claiming the permissible deductions and credits. This practice differs from tax evasion, which is illegal.
Investopedia explains 'Tax Avoidance'

Most taxpayers use some forms of tax avoidance. For example, individuals who contribute to employer-sponsored retirement plans with pre-tax funds are engaging in tax avoidance because the amount of taxes paid on the funds when they are withdrawn is usually less than the amount that the individual would owe today. Furthermore, retirement plans allow taxpayers to defer paying taxes until a much later date, which allows their savings to grow at a faster rate.
Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions. Tax evasion is an activity commonly associated with the informal economy. One measure of the extent of tax evasion (the "tax gap") is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax authorities and the actual amount reported. In contrast, tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system, although such classification of tax avoidance is not indisputable, given that avoidance is lawful, within self-creating system

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Meaning of Tax Planning

Tax Planning Tax Avoidance Tax Evasion

MEANINNG OF TAX PLANNING

Why Every Person Needs Tax Planning ?

How is Tool of Tax Planning Exercised ?

Tax Planning should be done by keeping in mine following factors :

Methods Of Tax Planning

Definition of 'Tax Avoidance'

Investopedia explains 'Tax Avoidance'

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