Tax Planning Introduction

1. Post Graduate and Research Department of Commerce
TAX PLANNING
AND MANAGEMENT
Dr. S. CHANDRASEKARAN
Assistant Professor of Commerce
PG & Research Department of Commerce
Vivekananda College
Tiruvedakam West
Madurai

2. TAX PLANNING

3. TAX PLANNING CONCEPTS
 TAX PLANNING
 TAX EVASION
 TAX AVOIDANCE
 TAX MANAGEMENT

4. Introduction
Before knowing about the concept of tax planning, it is
necessary to know the meaning of 'tax' and its imposition.
Under dictionary meaning, the word 'tax' means 'a rate or sum
of money levied on persons or property for the benefit of the
State'. Section 2(43) of the Income Tax Act, 1961, defines 'tax'.
Tax means income tax chargeable under the provisions of this
Act.
There are three stages in the imposition of tax :
(i) There is the declaration of liability, that is the part of
the statute which determines what persons in respect of what
property are liable.
(ii) There is the assessment.
(iii) Method of recovery if the person taxed does not
voluntarily pay.
According to the Supreme Court the components which enter into
the concept of a tax are:

5. (i) The character ofthe imposition known by its nature which
prescribes the taxable event attracting the levy.
(ii) A clear indication of the person on whom the levy is imposed
and who is obliged to pay the tax.
(iii) The rate at which the tax is imposed.
(iv) The measure to which the rate will be applied for computing
the tax liability.
If these components are not clearly and definitely
ascertainable, it is difficult to say that the levy exists in point of
law.
The rate of tax being very high at present, it has become
necessary to arrange the fiscal affairs in such a way as to attract
least tax. This can be done by three ways :
 (1) Tax Planning,
 (2) Tax Evasion,
 (3) Tax Avoidance.

6. TAX PLANNING
Tax planning may be defined as an arrangement of
one's financial affairs in such a way that without
violating in any way the legal provisions of an Act, full
advantage is taken of all exemptions, deductions,
rebates and reliefs permitted under the Act, so that the
burden of the taxation on an assessee, as far as possible,
the least.
Actually the exemptions, deductions, rebates and
reliefs have been provided by the legislature to achieve
certain social and economic goals. For example section
80IB of the Income Tax Act, 1961 provides deduction
from gross total income in respect of profits from newly
established industrial undertakings in industrially
backward State or industrially backward district as may
be notified in this behalf. The object of the tax
concession is clear, i.e., economic development of
industrially backward district or State.

7. Section 80C provides deduction from gross total
income, if an individual or H. U.F. saves the amount and
invests or deposits it in the prescribed schemes. The
deduction has been provided to encourage savings and
investments for economic development of the country.
Thus, if a person takes the advantage of the aforesaid
deductions, he not only reduces his tax liability but also
helps in achieving the objective of the legislature, which is
lawful, social and ethical.
Thus, tax planning is an act within the four corners of
the Act and it is not a colourable device to avoid the tax.

8. TAX EVASION
When a person reduces his total income by making
false claims or by withholding the information regarding
his real income, so that his tax liability is reduced, is
known as tax evasion. Tax evasion is not only illegal but it
is also immoral, anti-social and anti-national practice.
Therefore, under the direct tax laws provisions have been
made for imposition of heavy penalty and institution of
prosecution proceedings against tax evaders.
The tax evader reduces his taxable income by one or
more of the following steps:
 (1) Unrecorded sales.
 (2) Claiming bogus expenses, bad debts and losses.

9.  (3) Charging personal expenses as business expenses,
e.g., car expenses, telephone expenses, travelling expenses,
medical expenses incurred for self or family may be shown in
the account books as business expenses.
 (4) Submission of bogus receipts for charitable donations
for deduction u/s 80G.
 (5) Non-disclosure of capital gains on sale of asset.
 (6) Non-disclosure of income from 'Benami transactions'.
In brief to evade tax he suppresses or omits receipts, inflates
expenses and claims bogus deductions.

10. TAX AVOIDANCE
Tax avoidance is an art of dodging tax without actually
breaking the law. It is a method of reducing tax incidence by
availing of certain loopholes in the law. The Royal Commission
on Taxation for Canada has explained the concept of 'avoidance
of tax' as under:
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 provision or lack of provision in the law. It excludes
fraud, concealment or other illegal measures.
In other words, 'tax avoidance' is a device which
technically satisfies the requirement of the law but in fact it is
not in accordance with the legislative intent.
.

11. "Avoidance of tax is not tax evasion and it carries no
ignominy with it, for it is a sound law and; certainly, not
bad morality, for anybody to so arrange his affairs as to
reduce the burnt of taxation to a minimum."
However, now the Supreme Court is of the view that
the colourable devices to avoid tax should not be
encouraged and this is the duty of the court to expose the
persons who avoid tax and refuse to approve such
practice because the social evils of tax avoidance are
manifold, and may be summarised as under:
(a) substantial loss of much needed public revenue,
particularly in a welfare state like ours;
(b) serious disturbance caused to the economy of the
country by piling up of mountains of black money directly
causing inflation;

12. (c) large hidden loss to the community by some of the
best brains in the country being involved in the perpetual
war waged between tax avoider and his expert team of
advisers, lawyers and accountants on one side, and Tax
Officer and perhaps not so skilful advisers on the other side;
(d) sense of injustice and inequality which tax
avoidance arouses in the breasts of those who are unwilling
or unable to profit by it;
(e) ethics (or lack of it) of transferring the burden of tax
liability to the shoulders of the guideless, good citizens from
those of artful dodgers.
One may not agree with the issue of generating black
money by avoidance of tax. In legal tax avoidance the
money neither goes out of books nor it is spent unnecessarily
but it is used for further expansion of business.

13. TAX MANAGEMENT
Tax planning is not possible without tax management.
Tax management refers to the compliance with the statutory
provisions of law. Tax management covers matters relating
to :
(i) compliance with legal formalities;
(ii) taking steps to avail various tax incentives;
(iii) saving from consequences of non-compliance of
statutory duties, i.e., savings from penal interest, penalties
and prosecutions;
(iv) review of department's orders and if need be apply
for rectification of mistake, filing appeal, request for
revision or settlement of a case.
Some important areas of tax management are
discussed here in brief:

14. 1. Deduction of tax at source
(A) The person making the prescribed payments should deduct tax at
source at the prescribed rates.
(B) The tax deducted at source should be paid to the Central
Government within the time as prescribed in Rule 30 of the Income
Tax Rules, 1962.
(C) He should furnish to the recipient of income a certificate regarding
tax deducted at source in the prescribed Form No. 16 or 16A as the
case may be, as under:
(i) TDS from salary (Form No. 16)-Up to 15th June of the following
financial year.
(ii) TDS from any other payment (Form No. 16A)-Quarterly within
fifteen days from,
(a) 31st July, (b) 31st October; (c) 31st January; (d) 31st May.
(D) He should furnish quarterly returns regarding tax deduction at
source and not deduction of tax at source in certain cases.

15. 2. Collection of tax at source
(i) Every seller should collect tax at source on profits and
gains from business of trading in alcoholic liquor or forest
produce etc. as provided in section 206C.
(ii) Every person, who grants lease or a license or transfers
any right or interest in any parking lot or toll plaza or mine or
quarry should collect tax at source as provided in section 206C.
(iii) A seller, who receives any amount as consideration for
sale of a motor vehicle of the value exceeding f ten lakh, shall at
the time of receipt of such amount, collect from him one percent
of the sale consideration as income tax.
He should also comply with the conditions laid down in
section 206C regarding payment of tax to the Central
Government and issue a certificate to the buyer regarding tax
collected at source.

16. 3. Payment of tax
(1) Advance payment of tax. An assessee who is liable to pay tax
during a financial year `10,000 or more he has to pay advance
tax as under:
(A) I. on or before 15th June-Not less than 15% of advance tax.
II. on or before 15th September-Not less than 45% of the
advance tax less the amount paid in first instalment.
III. on or before 15th December-Not less than 75% of the
advance tax less the amount paid in first and second instalments.
IV. on or before 15th March-100% of the advance tax less
the amount paid in earlier instalments.
(B) An eligible assessee in respect of eligible business (see
Sec. 44AD) or eligible profession (see Sec. 44ADA) shall pay
the whole amount of advance tax on or before 15th March of the
relevant previous year.

17. (2) Tax on self-assessment. Before furnishing the
return of income an assessee should compute the tax on
his total income declared in the return and interest
payable under the provisions of this Act for delay in filing
the return or any default or delay in payment of advance
tax. If any tax or interest is due, it should be paid before
furnishing the return and the proof of such payment must
be furnished along with the return. (Sec. 140A)
(3) Payment on demand. When a notice of demand
IS received from the department, the amount should be
paid within 30 days of the service of the notice or within
the specified period in the notice of demand, as the case
may be. (Sec. 220)

18. 4. Maintenance of accounts
Every businessman or a professional must maintain
such books and documents as may enable the A.O. to
compute the total income of the assessee. However, where it
is compulsory to maintain books of account and other
documents as provided in section 44AA and Rule 6F, it
should be maintained as provided and retained to avoid
penalty under section 271A.
5. Audit of accounts
In all cases audit of accounts is not necessary. However,
where the turnover or gross receipts in business for the
previous year exceeds rupees one crore and in profession it
exceeds ` 50 lakh the audit is compulsory. (Sec. 44AB and
Rule 6G) Further to claim deduction under certain sections
the audit report is required in prescribed form, e.g.,
Sections For audit Report Form No
80IA 10CCB
80IB 10CCB
80JJAA 10DA

19. 6. Payment of certain sums
(i) Any sum payable by him by way of :
(a) tax, duty, cess or fees under any law, or
b) as bonus or commission to employees, or
(c) interest on loan from public financial institution, etc., or
(d) interest on loan or advance from scheduled banks, or
(e) encashment of leave at the credit of employee,

20. 7. Fulfilment of conditions to claim or retain a
deduction
(a) Where a capital asset has been transferred and the
assessee wants to claim exemption on capital gains u/s 54D
or 54EC or 54G or 54GA, the tax manager must ensure that
(a) the new eligible asset is acquired or the amount is
deposited in the Capital Gains Account Scheme, 1988,
before, the due date of furnishing the return; and (b) the new
eligible asset is acquired within the specified period and it
(new asset) is not transferred within a period of three years
from the date of acquisition so that the exempted capital
gains do not become chargeable-to tax.
(b) Where the assessee has claimed exemption on long-
term capital gains u/s 54EC and he has invested long-term
capital gains in the specified bonds within six months from
the date of transfer of original assets, such bonds are not

21. 8. Furnishing the return of income
The tax manager must ensure that the return of income
is furnished on or before the due date of furnishing the return
[u/s 139(1)] otherwise the assessee will lose the right to
carry-forward and set-off the losses and become liable to
penal interest, penalty, prosecution or fine or both.
9. Documentation and maintenance of records
Documentation is an indispensable ingredient of tax
management. An assessee should keep reliable, complete and
updated documentation of all the relevant tax files so that the
documentary evidence can be made available at a short notice
whenever it is required. In absence, thereof, an assessee may
lose of case for want of proper documentary evidence.
Maintenance of account books, records, vouchers, bills,
correspondence and agreements, etc. is also a part of tax
management. Wherever separate accounts are required for
claiming tax benefit.

22. 10. Review of orders
It is an important function of tax management to
review the assessment order and other orders received
from the tax department. If there is an apparent mistake in
the order, an application for rectification should be made.
If the order is prejudicial to the interest of the assessee
and it is advisable to file an appeal, revision or an
application for settlement of the case steps should be
taken in this direction. In such a case the opinion of the
experts may be sought or they may be engaged for the
purpose.

23. DIFFERENCE BETWEEN 'TAX PLANNING' AND
'TAX EVASION'
1. Tax planning is an Act within the four corners of the
Act to achieve certain social and economic objectives and it
is not a colourable device to avoid the tax. Tax evasion is a
deliberate attempt on the part of tax payer by
misrepresentation of facts, falsification of accounts including
downright fraud.
2. Tax planning is a legal right and a social
responsibility. By tax planning certain social and economic
objectives are achieved. Tax evasion is a legal offence
coupled with penalty and prosecution.
3. Tax planning requires thorough knowledge of the
relevant Acts, social, economic and political situation of the
country while tax evasion requires boldness to infringe the
law.

24. 4. Tax planning helps in economic development of the
country by providing additional funds for investment in
desired channels while tax evasion generates black money
which is generally utilized for smuggling, bribery,
extravagant expenses on luxury.
5. A tax planner enjoys his fruits freely and he does not
suffer from high blood pressure, whereas a tax evader
remains always in anxiety of search and seizure.
As our society has become 'money society', whatever
the evils of black money may be, it has become a part of the
life of most of the people. The Legislature has initiated steps
to curb black money by passing Black Money Act and
Prevention of Money Laundring Act. This, if implemented
effectively can go a long way in checking the menace of
black money.

25. DIFFERENCE BETWEEN TAX PLANNING
AND TAX AVOIDANCE
1. In tax planning the letter and the spirit of the
law are followed while in tax avoidance the tax is
reduced by taking advantage of the loopholes of
the law.
2. Tax planning is permanent while tax avoidance
is temporary. However, no penalty can be imposed
either in case of tax planning or in case of tax
avoidance.

26. DIFFERENCE BETWEEN TAX AVOIDANCE
AND TAX EVASION
1.Tax avoidance is legal but tax evasion is illegal.
2.In case of tax avoidance the objects and spirit of
the law are not followed while in the case of tax
evasion the provisions of the law are flouted.
3. In case of tax avoidance no penalty can be
imposed while in case oftax evasion the person is
liable to penalty and prosecution.
4. In case of tax avoidance, black money is not
generated, hence, it is not very harmful to the society.
In case of tax evasion, black money is generated
which is mostly used for unproductive purposes.

27. DIFFERENCE BETWEEN 'TAX PLANNING' AND 'TAX
MANAGEMENT'
Tax planning primarily aims at adopting an
arrangement so as to bring about the least incidence of tax
under the four corners of law. On the other hand, tax
management comprises a wider field like compliance with
the statutory provisions of law, prospective planning so as to
ease the financial constraints if any, that would arise when
discharging the commitments through payment of tax,
keeping close watch and monitoring the statutory
requirements of other laws, claiming the due reliefs arising
on account of double taxation avoidance agreements or
claiming unilateral relief, etc. Thus, whilst tax planning is
the pivot which enables the drawing up of the different
incentives and keep the incidence of tax low, the tax
management is the revolving wheel, which translates the
policy in terms of results. The difference between tax
planning and tax management are :

28. 1. Tax planning is a wider-term. It includes tax
management. Tax management is the first step towards tax
planning.
2. The primary aim of tax planning is minimising
incidence of tax, whereas main aim of management is
compliance with legal formalities.
3. Tax planning is not essential for every assessee;
while tax management is essential for every person,
otherwise he may be liable for penal interest, penalty and
prosecution. For example, a person may not be reducing
his tax liability by claiming any exemption, deduction,
relief, etc. in computing his total income but ifhe is liable
to pay advance tax or responsible for deduction of tax at
source, etc. he has to comply with all legal formalities.
4. Tax planning is a guide in decision making while
tax management is a regular feature of an undertaking.

29. 5. In tax planning exemptions, deductions and reliefs
are claimed while in tax management the conditions are
complied with to claim the exemptions, deductions and
reliefs.
6. In tax planning alternative economic activities are
studied and an activity with least incidence of tax is
selected. Whereas tax management includes maintenance
of accounts in prescribed form, get these audited, filing
the required forms and returns, payment of taxes, etc.
7. Tax planning essentially looks at future benefits
arising out of present actions. Tax management relates to
past, present and future. In respect of appeals, revision,
rectification of mistakes, etc. it deals with the past.
Maintenance of records, self-assessment, filing the return
and other documents, keeping pace with the changes, etc.
are present activities. Follow-up plans, etc. are in future.

30. PRECAUTIONS IN TAX PLANNING
(1) Tax planning requires analysis of the tax
implication of any decision involving finance. Such
analysis should precede the decision, for once the decision
has been implemented in ignorance of law, the tax
obligations have to be met.
(2) Tax planning cannot be attempted in isolation.
Due attention has to be paid to allied laws and economic
factors also. Similarly, Sec. 80IE of the Income Tax Act
provides deduction from gross total income in respect of
profits from newly established industrial undertakings in
North-Eastern States, but this area may require additional
overheads to be incurred like transport, higher
salaries/wages to trained and technical staff, etc. and may
thus nullify the benefit of this incentive.

31. (3) While tax planning one has to keep in view all the direct tax laws
(the Income Tax Act and the Wealth Tax Act). The amount of one
kind of tax saved through tax planning should not result in payment
more of the other tax. The net result of tax planning should be the
least of all the taxes taken together. .
(4) Tax planning should not be based on tax avoidance. The
tax avoidance is based on availing of certain loopholes in the law.
Whenever the loopholes come to light they will be checked by
amendments in the law. Consequently, the planning based on such
loopholes will fail.
(5) Tax planning should not be based on the basis of
decisions of High Courts or the Supreme Court. When a decision is
not in consonance of the intent of the legislature, sometimes the law
is amended retrospectively or prospectively. In this connection some
of the decisions and their fate may be noted:

32. (6) Tax planning is done for a financial activity which a
person proposes to carry out in near future. So the tax manager
should keep in mind that the tax benefits which were available
earlier but which have been discontinued for the business
commencing in the current year or in the following year, are not
considered or their reference for tax planning is not made.
Otherwise a wrong decision may be taken. For example, a
deduction under section 80IE from gross total income was
allowed to a newly established small-scale industrial undertaking
which began to manufacture or produce articles before 1.4.2002.
Now for a person who is planning-to commence a small-scale
industrial undertaking, in the current year the consideration of tax
 benefit under section 80IB has no relevance.

33. (7) Some people are of the opinion that claiming the deduction for
expenses, which are expressly allowed under the Act, is tax planning.
If a person does not claim the expenses which he has incurred and
which are deductible in computing the income shows ignorance of
the law. Tax planning presupposes thorough knowledge of tax laws.
Tax planning is possible only for an economic activity where
alternatives are available. In such a case he can choose the best
alternative in order to attract least tax liability. For example, a senior
citizen wants to invest ` 5,00,000 who is liable to pay tax on his total
income @30%. Suppose he has three options for investment at the
time of investment :
(i) Senior Citizen Savings Scheme @ 9%,
(ii) Fixed deposit in a bank @ 7.5%, and
(iii) Bonds of a financial institution @ 8%.
In the three cases his net income would be :
(i) ` 45,000 - 13,500 Tax = ` 31,500
(ii) ` 37,500 - 11,250 Tax = ` 26,250
(iii) ` 40,000 - 12,000 Tax = ` 28,000

34. NEED FOR TAX PLANNING
 1. Reduction in tax liability
 2. Minimisation of litigation
 3. Productive investment
 4. Reduction in cost
 5. Healthy growth of economy
 6. Employment generation

35. LIMITATIONS OF TAX PLANNING
1. When an assessee has not claimed exemption,
deduction or relief for which he is entitled to, before the
assessment is completed, he is not allowed to claim it as
rectification of mistake or in appeal or revision.
2. Tax planning cannot be done in isolation. Other
economic factors, apart from the Income Tax Act and
other Economic Laws (e.g., Partnership Law or
Company Law) have to be considered before taking any
decision in respect of reducing the tax liability. This
puts a limitation on the scope of tax planning.
3. Sometimes a decision taken for tax advantage
leads a favour some of the family members at the cost
of others in terms of individual property or income
rights. This may cause irritations and imbalances in the
family. Hence, social, moral and psychological
implications force not to go beyond a certain level for
tax reduction.

36. 4. With increase in profits, the quantum of tax also
increases. It necessitates the devotion of adequate time on tax
planning. Otherwise this time might have been used for some
productive purposes.
5. The direct tax laws are amended frequently either by
the Direct Tax Laws (Amendment) Act or by the Finance Act.
This puts an hindrance in making a long-term tax planning.
The tax payers are not sure whether the tax advantages granted
at present by the legislature will continue in near future? So,
they hesitate in taking a long-term decision for their economic
activities resulting a slow growth of the economy.
6. The tax incentives are allowed on fulfilment of certain
conditions. Sometimes it is very difficult to fulfil those
conditions and the tax payers are not in a position to avail the
incentives.