“Tax Planning, Tax Avoidance, Tax Evasion & the Tax Management “


“Tax Planning, Tax Avoidance, Tax Evasion & the Tax Management “

“Every taxpayer is entitled to arrange his affairs in a such manner so as to pay minimum tax”

Tax is a cost which may be significant, variable & to some extent controllable. Every taxpayer loves tax saving. Optimizing tax is one of the key considerations before paying tax. Though tax planning is a valid legal tool, tax avoidance may not be & tax evasion is absolutely not. Before we discuss the few common tax planning options & mantras, one needs to know that the tax planning has to be strictly within the four walls of the law. Knowingly or unknowingly, while attempting to make tax planning, taxpayers sometimes enter the zone of tax avoidance or even tax evasions. Of-course, all such methods are adopted to maximize the cash inflow and minimize the cash outflow. Let us get familiar with the terminology & important features of tax planning, tax avoidance, tax evasions & the new emerging concept of tax management.

Tax Planning:

Tax Planning means reducing tax liability by taking the optimum advantage of available legitimate options, concessions and exemptions provided in the tax law. It involves the process of arranging business operations in such a way that reduces tax liability.

Tax Avoidance

Tax avoidance is taking undue advantage of the loopholes, lacunae or drafting mistake for reducing tax liability and thereby avoiding payment of tax which is otherwise lawfully payable. If the payment of tax is avoided by complying with the provisions of law but defeating the intention of the legislature, it is referred to as the tax Avoidance. Generally, it is done by interpreting, misinterpreting or twisting the provision of law thereby resulting in avoidance of tax. The dividing line between Tax Avoidance & Tax Planning is very thin and both look similar except the fact that 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. Tax avoidance can be done by adjusting the accounts in such a manner that there will be no violation of tax rules. It is complying with the provision of law in letter but not in spirit. The Government often plugs the loophole of tax avoidance by doing retrospective amendment. Provisions related to Dividend Stripping, Clubbing, Locking period concept, etc are designed with an aim to plug the loophole.

Tax Evasion:

Wherever the payment of tax is avoided through illegal means or fraud, it is referred to as Tax evasion. Tax evasion is blatant fraud and steps can be planned even before the tax liability has arisen. Unlike tax avoidance, it is totally unlawful way & is subject to severe penal consequences. It is often done by hiding information, misrepresenting income, inflating deductions, claiming exemption without eligibility,  doing transactions in cash, parking funds at overseas locations, recording Bogus Expense, taking accommodation entries, etc. Mostly the tax evasions instances are followed by prosecution proceeding. India is acting tough against tax evaders and likely to witness high prosecution proceeding in years to come.

Tax Management:

Over a period of time, Tax administration has evolved in such a way that the cost of penalty & fine much supersedes the tax. And it calls for planning the affairs in such a way 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 deals with filing of Return in time, getting the accounts audited, deducting tax at source etc. The objective is to avoid payment of interest, penalty, prosecution etc. Tax Management has become an integral part of the business management.

Evergreen Mantra for Tax Planning:

The biggest weapon in the hands of the taxpayers to save tax is “Tax Planning”. It is the use of bonafide means & by complying with all the provisions of law in true spirit & letter. Tax planning options depend upon the long term and short term objectives and vary with the requirements and expectations of each taxpayer. Few time tested mantras valid in all seasons are:

1.   Tax Planning should be resorted at the source of income.

2.   The Planning should be done before the accrual of income.

3.   It has to be done in pace with the changing tax laws.
4. Tax impact varies with the time, place & person.

Tax planning can be done by using available options in the law with regard to exemption, deduction, rebate, deferment. Few of the common areas where one can stretch the tax planning tool could be by following modes:

  1. Choice of accounting system can be one of the powerful sources of tax planning, mostly in the case of professionals.
  2. The lowest tax rate of 15% for manufacturing companies has resulted in new business being set up in Companies as against proprietary & partnership firms. Taxpayers may choose the most suitable form of organization like Company, firm, LLP, Proprietary firm, etc from a tax point of view.
  3. Buying or taking on rent of Car, Machinery, Land/Building etc can be crucial in tax planning of all businesses.
  4. Taking Salary in different forms, components & names could be an area of tax planning for salaried taxpayers.
  5. Fundraising structure like Equity Capital, debenture, loans, etc could be an area of tax planning for corporate.
  6. Gift, Choosing the right name for purchase of moveable or   immoveable property in family, Timing of accrual of income or purchase / Sale of property, investment so as to claim deduction u/s 80C, 80D, Investment in  the house property for claiming capital gain  exemption, etc can be few of the tools for tax planning for individuals.
  7. For NRI, Planning for Residential Status of the person in such a way that the tax impact in each country is optimized. A person may arrange his stay in India such a way that he is treated as NR in India.

Tax laws are the part of the dynamic laws & keep on evolving. So, Tax planning tools, choice and options cannot be stagnant and taxpayers have to remain observant & updated with the changing laws for tax optimizations. We will keep discussing a few more tax planning ideas in our subsequent issues in 2021. Wish you all a very happy new year well in advance.

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