What is Tax Planning and Management?

 

Tax Planning: Know What is Tax Planning and its Types

What is Tax Planning?

Tax planning refers to financial planning for tax efficiency. It aims to reduce one’s tax liabilities and optimally utilize tax exemptions, tax rebates, and benefits as much as possible. Tax planning includes making financial and business decisions to minimize the incidence of tax. This helps you legitimately avail the maximum benefit by using all beneficial provisions under tax laws. It enables one to think of their finances and taxes at the beginning of the fiscal year, instead of leaving it to the eleventh hour.

Why should you do Tax Planning?

There are some fundamental objectives of tax planning. Tax planning diminishes tax liability by saving the assessee the maximum amount of tax by arranging their financial operations according to tax decisions. It also conforms to the provisions under taxation laws, thereby minimizing any litigation. One of the biggest benefits of tax planning is that the returns can be directed to investments. It is the most productive way to make smart investments while fully utilizing the resources available due to tax benefits. Investing tax money generates white money to flow through the economy, aiding in the country's economic development. Tax planning hence contributes to the economic stability of the individual as well as the country.

What are the Types of Tax Planning?

Now that you know what tax planning is, let us look at three types of tax planning.

1. Short and Long-range Tax Planning

Tax planning done every year for specific objectives is called short-range tax planning. On the contrary, long-range tax planning refers to practices undertaken by the assessee, which are not paid off immediately. Simply put, short-range planning usually occurs towards the end of a fiscal year while long-range planning occurs in the beginning.

2. Permissive Tax Planning

Tax planning is deemed permissive when carried out under the provision of a country’s taxation laws.

3. Purposive Tax Planning

It is a tax planning method for a particular objective. It may include diversification of business and income assets based on residential status and replacing assets if necessary.

Objectives of Tax Planning

• Reduction of Tax Liability: An assessee can save the maximum amount of tax, by properly arranging his/her operations as per the requirements of the law, within the framework of the statute.
• Minimization of Litigation: There is a war-like situation between the taxpayers and tax collectors as the former wants the tax liability to be minimum while the latter attempts to extract the maximum. So, proper tax planning aims at conforming to the provisions of the tax law, in such a way that the incidence of litigation is minimized.
• Productive Investment: One of the major objectives of tax planning is the channelization of taxable income to different investment plans. It aims at the optimum utilization of resources for productive causes and relieving the assessee from tax liability.
• Healthy Growth of Economy: The growth and development of the economy greatly depend on the growth of its citizens. Tax planning measures involve generating white money that flows freely and results in the sound progress of the economy.
• Economic Stability: Proper tax planning brings economic stability by various techniques such as mobilizing resources for national projects or availing ways for investments that are productive in nature.

Importance

They can have some great benefits for any business regardless of nature and size; a few of them are listed below:

• The main core is to reduce the amount of tax you pay by taking full benefit of all available deductions.
• It helps in saving some extra bucks out of your monthly earnings, which you can use to invest in other lucrative investment opportunities and generate a handsome amount of returns over that surplus money.
• Eliminate unnecessary stress and uncertainty by knowing just what your tax liability will be and making informed decisions, ultimately obtaining peace of mind.
• The earlier in your professional/business journey you start tax planning, the more strategies you can explore to maximize the effects.
• They help in learning about the tips and tricks of tax laws, different tax minimization techniques, which ultimately help in tax compliance and effective adherence to tax laws as stipulated by the government.
• Tax planning, when clearly distinguished from tax avoidance/tax evasion, leads to lesser interaction with tax authorities and unnecessary litigations as well.

Disadvantages

The only minor disadvantage is that it could lead to blockage of your money into buying tax saver products such as ULIPS, Mutual funds, Life insurance, bonds, etc. which could impact your short-term liquidity and buying these products just for the sake of tax savings and ignoring other aspects such as annual returns.

Limitations

Some of the limitations are as follows:

• There is a sort of distrust between the tax authorities on one side and the business or professional community on the other. The income tax department thinks that the taxpayers sometimes are unable to distinguish between tax planning and tax evasion/avoidance and misinterpret tax laws as intended by the government, whereas the taxpayers think that their money is not being spent appropriately on infrastructure development and sanitation.
• For the salaried class of taxpayers, the responsibility of correct deduction of tax at source is thrown on employers. While in the case of a business or profession, they are responsible for declaring correct income. So, an employee may hide his other income and not declare it to his employer in order to avoid taxes, and business owners also claim excess expense claims and deductions to reduce their tax burden. So in these cases, it takes backstage, and tax evasion/avoidance takes center stage.

Changes in Tax Planning

• The consequences of tax changes should be anticipated and considered as you evaluate choices for financial strategies. You can usually be aware of any tax law changes well in advance to incorporate them into your planning.
• Tax deductions, allowances, and slab rates tend to frequently change every year as per the economic scenario and take into government fiscal targets. These changes must be kept in mind while doing tax planning as a ready reckoner.
• Changes in tax laws are brought in sometimes to boost the economic scenario, infrastructure growth, and industrial development. For example, recently, the scope of capital gains tax in the UK for Non-UK residents was extended to include all disposals of UK property. These are just the first in the line of reforms coming down the track in the next few years that will have a significant impact on landlords.

Conclusion

Tax planning has numerous advantages and lesser disadvantages. They should be done within the applicable limits of tax laws and clearly distinguished with tax evasion or tax avoidance, both 

What is Tax Evasion?

Tax evasion is an illegal activity in which an individual or company avoids paying the tax liability. It involves hiding or false income, without proof of inflating deductions, not reporting cash transactions, etc. Tax evasion is a serious offense that comes under criminal charges and substantial penalties.

Rooting for taxes is never an easy thing because most people question the concept of giving away part of their earnings to a government but the fact is that taxes are an important source of income for the government. This is the money that is invested in various development projects that are meant to improve the company's situation. But the country has been facing a massive problem with tax evasion. People who should be paying taxes have found ways not to pay them and, as a result, it may be said that the income of the country has been suffering. So let's take a look at what are the ways in which people are avoiding taxes and what are the penalties for it.

 Tax Management

• It means planning affairs in such a manner so that the tax obligation is managed properly.
• The objective of Tax Management is to comply with the provisions of Income Tax Law and its allied rules.
• Tax Management helps in avoiding payment of interest, penalty, prosecution, etc.

Example:-

1. Tax Management deals with filing Returns in time.

2. Getting the accounts audited.

3. Deducting tax at source etc.

Tax Avoidance

• Tax avoidance means taking undue advantage of the loopholes, lacunae, or drafting mistakes for reducing tax liability and thus avoiding payment of tax that is lawfully payable.
• Generally, it is done by twisting or interpreting the provision of law and avoiding the payment of tax.
• Tax avoidance is an activity of taking unfair advantage of the shortcomings in the tax rules by finding new ways to avoid the payment of taxes that are within the limits of the law.
• Tax avoidance can be done by adjusting the accounts in such a manner that there will be no violation of tax rules.
• Tax avoidance is lawful but in some cases, it could come in the category of crime.

Example:-

1. Taking legitimate tax deductions to minimize business expenses and lower your business tax bill.

2. Taking tax credits for spending money for legitimate purposes etc.