TAX PLANNING

MEANING & DEFINITION An agreement of ones 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 burden of taxation on an assessee, as far as possible, the least. The exemptions, deductions, rebates and reliefs have been provided by the legislature to achieve certain social and economic goals. 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. Thus, tax planning presupposes thorough knowledge of tax laws so that the best alternative or choice may be thought of in order to attract least tax liability. 2. Tax planning cannot be attempted in isolation. Due attention has to be paid to allied laws and economic factors also. For example, from tax point of view loan capital or public deposits may be cheaper than share capital but the Companies Act, 1956 puts certain restrictions on public deposits. 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 of 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. 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 wrong decision may be taken. 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 the 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. 8. Tax planning is not possible without tax management. Tax management covers matters relating to ; Compliance with legal formalities Taking steps to avail various tax incentives Saving from consequences of non-compliance of statutory duties. Review of departments orders and if need be apply for rectification of mistake, filing appeal, request for revision or settlement of a case.

TAX MANAGEMENT Tax management covers matters relating to; compliance with legal formalities

Taking steps to avail various tax incentives Saving from consequences of non-compliance of statutory duties. Review of departments orders and if need be apply for rectification of mistake, filing appeal, request for revision or settlement of a case.

IMPORTANT AREAS OF TAX MANAGEMENT A. Deduction of tax at source : Proper deduction of tax at source should be made in the following cases: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Salaries Sec. 192 Interest on Securities Sec. 193 Dividends Sec. 194 Interest other than interest on Securities Sec. 194A Winnings from lotteries/crossword puzzles Sec. 194B Winnings from horse races Sec. 194BB Payment to resident contractors Sec. 194C Payment of insurance commission Sec. 194D Payment to non-resident sportsman or sports association Sec. 194E Payment of N.S.S. Sec. 194EE Payment on account of repurchase of units by Mutual Fund or UTI Sec. 194F Payment of commission on sale of lottery ticket Sec. 194G Commission on brokerage Sec. 194H Payment of rent Sec. 194I Payment of fees for professional or technical services Sec. 194J

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Payment of compensation on acquisition of certain immovable property Sec.194LA Interest payable to non-residents & foreign co. Sec. 194LB Payment of interest t a non-resident or a foreign co.- Sec. 194LC Other sums payable to non-residents & non-Indian cos. Sec. 195 Payment to an Off-shore Fund Sec. 196B Payment of interest or dividends on Foreign Currency Bonds or Shares of Indian Co. Sec. 196C Payment of income in respect of listed Securities to FIIs Sec. 196D

17. 18. 19. 20. 21.

22.

B. Collection of tax at source: 1. Every seller should collect tax at source from the buyer of alcoholic liquor or forest produce etc., as provided in section 206C. 2. Every person, who grants lease or license or transfers any right or interest in any parking lot or toll plaza or mine or quarry should collect tax at source as provide in section 206C. He should also comply with the conditions laid down in section 206C regarding the payment of tax to the Central Government and issue a certificate to the buyer regarding tax collected at source. C. Payment of tax: 1. Advance payment of tax: An assessee who is liable to pay tax during a financial year Rs. 10,000 or more he has to pay advance tax as under: Corporate assessee 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. Non-corporate assessee i. On or before 15th September- Not less than 30% of advance tax. ii. On or before 15th December- Not less than 60% of advance tax less the amount paid in first instalment. v. On or before 15th March- 100% of the advance tax less the amount paid in earlier instalments.

D.

E.

F.

G.

2. Tax on self-assessment: Before furnishing the return of income the assessee should compute the tax on his total income declared in the return and the 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. 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. Maintenance of accounts: Every businessman or a professional must maintain such books and documents as may enable the Assessing Officer 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. Audit of accounts : In all cases audit of accounts is not necessary. However, where the turnover or gross receipts in business for the PY exceeds Rs. 60lakh and in profession it exceeds Rs. 15lakhs the audit is compulsory. Payment of certain sums: Any sum payable by the assessee by way of tax, duty, cess or fees under any law, or as bonus or commission to employees, or interest on loan from public financial institution, etc., or interest on loan or advance from Scheduled banks, or encashment of leave at the credit of employee, or any sum payable by him as employer by way of contribution to PF, superannuation fund, gratuity fund or any other fund for the welfare of employees, should be paid on or before the due date of furnishing the return of income and the evidence for such payment must be furnished along with the return for the allowance of deduction. Employees contribution to PF, superannuation fund, fund set-up under provisions of the Employees State Insurance Act, 1948, or any other fund deducted from their salary must be deposited in the relevant fund on or before the due date prescribed to avoid taxability of such contributions as income in the hands of employer. Further, every payment which the assessee wants to claim as deduction in computing his income under the head Profits and gains of business or profession or Income from other sources, in excess of Rs. 20,000 should be made by Account payee cheque or Account payee draft to avoid denial of 100% of such payment. Fulfillment of conditions to claim or retain a deduction: A resident assessee or an Indian company is entitled to a deduction in respect of earnings in foreign exchange. However, the sale proceeds must be brought/received in India within the prescribed period of six months from the end of the PY or within the period as

extended by the prescribed authority. Otherwise the assessee will not get the benefit or deduction. H. 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, otherwise the assessee will lose the right to carry forward and set-off the losses and become liable to penal interest, penalty, prosecution of fine or both. I. 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. J. 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.

TAX PLANNING VS TAX MANAGEMENT

TAX PLANNING Tax planning is a wider term. It includes tax management. The primary aim of tax planning is minimizing of incidence of tax. Tax planning is not essential for every assessee.

TAX MANAGEMENT Tax management is the first step towards tax planning. The main aim of tax management is compliance with legal formalities. Tax management is essential for every person, otherwise he may be liable for penal interest, penalty and prosecution. Tax planning is a guide in decision making It is a regular feature of an undertaking. In tax planning exemptions, deductions and In tax management the conditions are complied reliefs are claimed. with to claim the exemptions, deductions and reliefs. In tax planning alternative economics are It includes maintenance of accounts in studied and an activity with least of tax is prescribed form, get these audited, filing the selected. required forms and returns, payment of taxes, etc. It looks at future benefits arising out of present It relates to past, present and future. actions.

REFERENCES
INCOME TAX - H.C. MEHROTRA