Module 2
Tax Planning and Management
Tax
.A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal
entity) by a governmental organization in order to fund government spending and various public expenditures.
According to Taylor, “Taxes are compulsory payments to the government without expectation of the direct
return or benefit to the tax payer.”
Objectives of Tax
The basic objective of taxation is to raise resources for the State and Central. It can be used to reduce inequalities,
to accelerate economic development, as a tool to regulate consumption, imports and exports, in addition to its
basic objective of raising revenues.
• Objective of raising revenue
• Regulatory objectives
• Developmental objectives
• Objectives of reducing inequalities
Types of Tax
• Direct Tax: is tax that are to be paid directly to the government by the individual or legal entity. Direct taxes are
overlooked by the Central Board of Direct Taxes (CBDT). Direct taxes cannot be transferred to any other
individual or legal entity.
• Following are the sub-categories of direct taxes:
(a) Income tax
(b) Capital gains
(c) Securities transaction Tax
(d) Prerequisite Tax
(e) Corporate tax
• Indirect tax: Taxes that are levied on services and products are called indirect tax. Indirect taxes are collected
by the seller of the service or product.
• The tax is added to the price of the products and services. It increases the price of the product or service.
• There is only one indirect tax levied by the government currently. This is called GST or the Goods and Services
Tax.
• Other taxes: These are minor revenue generators and are small cess taxes. The various sub-categories of other
taxes are as follows:
(a) Property tax
(b) Professional tax
(c) Entertainment tax
(d) Registration fees, stamp duty, transfer tax
(e) Education cess
(f) Entry tax
(g) Road tax and toll tax
Methods Used By Taxpayers To Reduce Tax Liability
Tax Planning
• Corporate tax planning is a means of reducing tax liabilities on a registered company.
• The common ways to do this includes taking deductions on business transport, health insurance of employees,
office expenses, retirement planning, child care, charitable contributions etc.
• Through the various tax deductions and exemptions provided under the Income Tax Act, a company can
substantially reduce its tax burden in a legal way.
Types of Tax Planning:
1. Purposive tax planning: Planning taxes with a particular objective in mind
2. Permissive tax planning: Tax planning that is under the framework of law
3. Long range and Short range tax planning: Planning done at the start and end of a fiscal year respectively.
Objectives of Tax Planning
• Minimal Litigation: There is always friction between the collector and the payer of tax. In such a situation, it is
important that the compliance regarding tax payment is followed and used properly so that friction is minimum.
• Productivity: Among the most important objectives of tax planning is channelization of taxable income to
various investment plans.
• Reduction of Tax Liability: As a tax payer, you can save the maximum amount from payable tax amount by
using a proper arrangement of your enterprise working as per the required laws
• Healthy Growth of Economy: The growth in an economy depends largely upon the growth of its citizens. Tax
planning estimates generation of white money that is in free flow.
• Economic Stability: Stability is supplemented when the tax planning behind a business is proper.
Limitation of Tax Planning
• The direct tax related acts are amended frequently, hence its difficult to plan for long time.
• Tax planning can’t be done isolation, every other act related to direct tax has to be considered.
• When assessee has not claimed exemptions and deductions for which its eligible, before completion
of assessment. It can’t be rectified later.
Tax Avoidance
• Tax Avoidance is a legally accepted method to reduce the tax liability by structuring the transactions to avail the
largest tax benefits.
• It 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 under law.
Methods Of Tax Avoidance
• Country of residence: A company may choose to avoid taxes by establishing their company or subsidiaries in an
offshore jurisdiction.
• Legal entities: Without changing country of personal taxation may be legally avoided by the creation of a
separate legal entity to which one's property is donated.
• Tax shelters: Are investments that allow, and purport to allow, a reduction in one's income tax liability.
Although things such as home ownership, pension plans, and Individual Retirement Accounts.
Methods Of Tax Avoidance
• Double taxation: Most countries impose taxes
on income earned or gains realized within that
country regardless of the country of residence
of the person or firm. Most countries have
entered into bilateral double taxation treaties
with many other countries to avoid taxing
nonresidents twice - once where the income is
earned and again in the country of residence.
Tax Evasion
• The Income Tax Act strictly prohibits Tax Evasion, as it is a deceitful method to reduce or absolve the tax
liability.
• Is illegal action in which a individual or company to avoid paying tax liability. It involves hiding or false
income, without proof of inflating deductions, not reporting cash transaction etc.
Methods Of Tax Evasion
• Failing to pay the due: This is the simplest way in which someone may evade taxes. They simply won't pay it
to the government, not even when the dues are called for. A person engaged in this sort of tax evasion won't,
willingly or unwillingly, pay the tax before or after the due date.
• Smuggling: When certain goods move from one location to another, across international or state borders, a tax
or charge may be payable in order to move the goods. However, some individuals may move these goods in
surreptitious ways in order to avoid paying those taxes that evading the tax altogether.
• Submitting false tax returns: They may submit false or incorrect information in order to either lessen the tax
that they are supposed to pay or not pay it at all. This is also tax evasion since the complete information is not
provided and they may actually be paying less than what they should.
• Inaccurate financial statements: False financial documents or accounts books are submitted, ones that show
incomes less than what was actually earned, the tax may come down.
• Using fake documents to claim exemption: members who actually don't qualify for such privileges will get
documents created to support their claim of being a part of that group thus claiming exemptions where they are
not suited.
• Bribery: There may be a situation where there a certain amount due in taxes which the individual may not be
willing to pay. In such a case he or she may actually offer a bribe to officials to not make them pay the tax and to
make it 'disappear'.
• Storing wealth outside the country: Offshore accounts are accounts maintained outside the country and
information about the dealing in these accounts is not disclosed to the income tax department thereby evading any
and all taxes due on that wealth
Cause Of Tax Evasion
• Lack of simplicity and accuracy of the tax legislation.
• Inefficiency of the Tax Administrations .
• Presence of multinational enterprises with aggressive tax planning.
• Tax pressure high rates.
• Digital economy, with the significant technological development: electronic commerce, collaborative platforms,
digital currencies and new ways of commercializing goods and services, there are increasing difficulties for taxing
and controlling.
Best Ways To Avoid Tax Evasion
• Reducing tax rates.
• Make more simplified laws and simplified system.
• Design a well-organized tax administration structure.
• Strengthen anti-corruption policies.
• Increase awareness among taxpayers by conducting seminars, conferences and through media.
• Design a permanent tax structure.
• Ensure the political changes do not affect well defined tax structure. Make tax administration more independent
and autonomous without losing final control of Government.
• Audit, tax collection, depositing and filing provisions to be more strengthened and updated.
• Make penalty provisions more stronger and avoid it s nonimplementation.
• Encourage taxpayers to pay tax by more friendly schemes.
• Give relief provisions to huge tax payers.
Differences Between Tax Evasion, Tax Avoidance, And Tax Planning Tax Management
• Its is an integral part of tax planning.
• An assessee is advised to take all precautions which are necessary to claim and retain tax benefits in scheme of
tax planning.
• It also protects an assessee against penalty by discharging tax obligations in time.
• Tax management plays vital role in claiming allowances dedications and tax exemptions by complying with the
requireds conditions.
Objectives Of Tax Management
• Tax planning with reasonable business that is in line with tax laws.
• Business decisions and day to day business activities are in line with tax laws and regulations.
• Accounting treatments for tax issues are in line with accounting system and standards as well as tax laws.
• Tax filings and tax payments are in line with relevant tax laws.
• Tax registration, accounting records and information's as well as preparations of reports must follow the tax
rules and laws applicable.
Difference Between ‘Tax Planning’ And ‘Tax Management’ Tax Planning
Tax Management
Its is an integral part of tax planning.
An assessee is advised to take all precautions which are necessary to claim and retain tax benefits in scheme of tax
planning.
It also protects an assessee against penalty by discharging tax obligations in time.
Tax management plays vital role in claiming allowances dedications and tax exemptions by complying with the
requireds conditions.
Objectives Of Tax Management
•Tax planning with reasonable business that is in line with tax laws.
• Business decisions and day to day business activities are in line with tax laws and regulations.
• Accounting treatments for tax issues are in line with accounting system and standards as well as tax laws.
• Tax filings and tax payments are in line with relevant tax laws.
• Tax registration, accounting records and information's as well as preparations of reports must follow the tax rules
and laws applicable.
Difference Between ‘Tax Planning’ And ‘Tax Management’
Areas of Tax Planning
Tax Planning in Relation to Setting Up a New Business
Tax Planning in Relation to Location Business
• Tax planning is relevant from location point of view. There are certain locations which are given special tax
treatment.
•Some of those are Special economic zones, backward states, North Eastern states, etc.
Tax Planning in Relation to Nature of Business
• The choice of the nature of the business also calls for appropriate planning with reference to the various special
benefits available under the taxation laws to the particular kinds of industries which are not available to other
kinds.
Tax Planning in Relation to Form of Business
• Sole Proprietorship
• Hindu Undivided Family
• Partnership
• Company
• Limited Liability Partnership
Specific Management Decision/ Capital Structure Decisions
1. Own or Lease of the Asset: Advantage of taking asset on lease that you will be eligible to get deduction on
revenue expenses. But, depreciation cannot be claimed.
Advantage of owning asset by purchasing is that organization would be eligible to get deduction under sec 32
(depreciation).
2. Make Or Buy Decisions: When the nature of business about assembling, it should make decision on whether to
buy the components from market or to make the components inside the manufacturing unit.
This decision is taken only after considering the cost of both options available for the entity.
3. Repair or Replace Decision: Tax consideration which one has to keep in mind is whether expenditure on repair
or replacement is deductible as revenue expenditure.
It the expenditure is deductible as revenue expenditure, then cost of financing such expenditure is reduced to the
extent of tax save.
If such expenditure is not allowed as deduction then it may be capitalized and on the amount so capitalized
depreciation
4. Close or Continue Decision: Treatment of losses and unabsorbed depreciation, set-off against profits and gains
of business or profession and set off against income under any head Can be carried forward and off for indefinite
period, whether business is carried on or discontinued respectively.
Tax Planning for Amalgamation
Amalgamation", in relation to companies, means the merger of one or more companies with another company or
the merger of two or more companies to form one company.
1. Tax concessions to amalgamating company
2. Tax concessions to shareholders of the amalgamating company
3. Tax concessions to amalgamated company
Transfer Pricing
• Transfer pricing regulations: is applicable to the all enterprise that enter into international transactions with an
associated enterprise.
• Arm’s length transaction in transfer pricing? It means that the price a company pays to purchase goods or
services from a related company entity should be the same as if the two entities were unrelated.
