Tax Planning And Management

TAX PLANNING AND MANAGEMENT
M Com (Finance) IV Semester
2015 Admission
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
2039

School of distance education
CALICUT UNIVERSITY SCHOOL OF DISTANCE EDUCATION Study Material
MCom (Finance) IV Semester
TAX PLANNING AND MANAGEMENT

Prepared by Sri.P K SHAMEEM ASSISTANT PROFESSOR DEPARTMENT OF COMMERCE & MANAGEMENT STUDIES FAROOK COLLEGE, CALICUT

Scrutinised by: DR. YAKOOB. C RESEARCH GUIDE SULLAMUSSALAM COLLEGE, AREACODE

Settings & Lay Out By: SDE,Computer Cell
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SYLLABUS
TAX PLANNING AND MANAGEMENT
Objectives:  To acquaint the students with theoretical and practical knowledge of
taxplanning and management techniques.  To familiarize the students with major and latest provisions of the India tax laws and related judicial pronouncements pertaining to various assesses with a view to derive maximum possible tax benefits admissible under the law.

Module 1: Introduction to tax planning and management: Concept of tax planningand management – Tax evasions and tax avoidance-Need and significance of taxplanning and management-Tax Planning in respect of residential status. Module 2: Assessment of companies: Residential status and incidence of taxSpecial provisions applicable to assessment of total income of companies– Deductionsavailable to corporate assesses – Computation of taxable income ofcompanies and determination of corporate tax liability – Minimum Alternate Tax–Taxon distributed profit of domestic companies- Tax on income distributed to unitholders-Security Transaction Tax – Tonnage Tax. Module 3: Tax Planning: Individuals – Tax Planning with reference to all fiveheads of income for individuals – Salary, House Property, Profit from business andprofession, Capital Gains and Income from other sources – Tax planning withrespect to deductions, exemptions, Rebate, Relief, Concession and incentives(Problems focused on tax planning). Module 4: Tax planning and managerial decisions: Tax planning in respect ofmake or buy, own or lease, repair or replace, export or domestic sales, shut down orcontinue, expand or contract, amalgamate or demerger, invest or disinvest – FinancialManagement decisions, Capital Structure, dividend policy and bonusshares. Module 5: Tax planning under various circumstances: Tax planning while settingup of a business-with reference to location, nature and form of organizations-Taxplanning related to Special Economic Zones (SEZ), Export Processing Zones (EPZ) and Export Oriented Units (EOUs) – Infrastructure sector and background areas –Tax incentives for exporters.
(50% theory and 50% problem)

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UNIT I II III IV V
VI
VII VIII IX X XI XII

INDEX
TOPIC
INTRODUCTION TO TAX PLANNING AND MANAGEMENT TAX PLANNING MINIMUM ALTERNATIVE TAX (MAT) DEDUCTIONS AVAILABLE TO CORPORATE ASSESSEES ASSESSMENT OF COMPANIES TAX ON DISTRIBUTED PROFIT AND SECURITIES TRANSACTION TAX TONNAGE TAX TAX PLANNING FOR INDIVIDUALS TAX PLANNING WITH REFERANCE TO HEADS OF INCOME TAX PLANNING IN STRATEGIC MANAGEMENT DECISIONS TAX PLANNING IN SETTING UP OF BUSINESS TAX PLANNING – SEZ, EPZ, EOU, INFRASTRUCTURE…

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UNIT – I INTRODUCTION TO TAX PLANNING AND MANAGEMENT
Taxes are the compulsory contribution by the citizens of a country for meeting different government expenditures. There are three stages in the imposition of tax by the government. First step is the declaration of the liability by the Government i.e. what are all the incomes chargeable to tax, second one is the assessment and tax payment by persons and the last one is the method of recovery of tax if tax was not paid on time. Tax planning and management focuses efficient administration of tax procedures and minimization of tax liability through eligible schemes. Through this chapter we can discuss about the basic concepts of Tax Planning, Tax Management, Tax Evasion and Tax Avoidance.
TAX PRACTICES

TAX PLANNING

TAX EVASION

TAX AVIODANCE

TAX PLANNING Tax Planning is an exercise undertaken to minimize tax liability through the
best use of all available exemptions, deductions, rebates and reliefs to reduce income. Tax planning can be defined as an arrangement of one’s financial and business affairs by taking legitimately in full benefit of all deductions, exemptions, allowances, reliefs and rebates so that tax liability reduces to minimum. In other words, all arrangements by which the tax is saved by ways and means which comply with the legal obligations and requirements and are not colourable devices or tactics to meet the letters of law but not the spirit behind these, would constitute tax planning.
The Hon’ble Supreme Court in McDowell & Co. v. CTO (1985) 154 ITR 148 has observed that “tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods.”
Actually the allowances, deductions, exemptions, rebates and reliefs were given as per legal regulations to achieve social and economic goals. For instance deductions as per 80C for individuals and HUF aim to encourage saving and investment habits for the economic prosperity of the country.
Example of tax planning: where a person buys machinery instead of hiring it, he is availing the benefit of depreciation. It is his exclusive right either to buy or

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lease it. In the same manner to choice the form of organization, capital structure, buys or make products are the assessee’s exclusive right. One may look for various incentives in the above said transactions provided in Income Tax Act, for reduction of tax liability. All this transactions involves tax planning. TAX EVASION
It refers to a situation where a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure showing the income lower than the actual income and resorting to various types of deliberate manipulations. An assessee guilty of tax evasion is punishable under the relevant laws. Under direct tax laws provisions have been made for imposition of heavy penalty and institution of prosecution proceeding against tax evaders. The tax evaders reduce his taxable income by one or more of the following steps: (a) Non-disclosure of capital gains on sale of asset. (b) Non-disclosure of income from ‘Binami transactions’. (c) Willfully unrecording or partial recording of incomes. Eg: sales, rent, fees, etc. (d) Charging personal expenses as business expenses. Eg: car expenses, telephone expenses, medical expenses incurred for self or family recorded in business books. (e) Submission of bogus receipts for charitable donations under section 80 G. TAX AVOIDANCE
Tax avoidance is a method reducing tax incidence by availing of certain loopholes in the law. The Royal Commission on Taxation for Canada has explained the concept of tax avoidance as under: For our purposes 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 provisions or lack of provisions of law. It excludes fraud, concealment or other illegal measures. The line of demarcation between tax planning and tax avoidance is very thin and blurred. Any planning which, though done strictly according to legal requirements, defeats the basic intention of the Legislature behind the statute could be termed as instance of tax avoidance. It is usually done by taking full advantage of loopholes adjusting the affairs in such a manner that there is no infringement of taxation laws and least taxes are attracted.
Earlier tax avoidance was considered completely legitimate, but at present it may be illegitimate in certain situations. In the judgment of the Supreme Court in McDowell’s case 1985 (154 ITR 148) SC, tax avoidance has been considered as heinous as tax evasion and a crime against society. Most of the amendments are now aimed at curbing practice of tax avoidance.

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DISTINCTION BETWEEN TAX PLANNING, TAX AVOIDANCE AND TAX

EVASION

Basis

Tax Planning

Tax Avoidance

Tax Evasion

Meaning

Way of minimizing The assesse legally Illegal way reducing

tax liability by

takes advantage of tax liability by

availing full

loopholes in the tax deliberately

advantages of the laws

suppressing

Act through

incomes or hiking

exemptions,

expenditures.

deductions, rebates

and relief.

Aim of

Saving of tax

Hedging of tax

Concealment of tax

Practice

Nature

Moral in nature

Immoral in nature Illegal and

and bends the law objectionable.

without breaking it

Result

Advantages arise in Advantages arise in Penalty and

the long run

the short run.

Prosecution

Legal

Uses benefits of the Loopholes in the law Overrules the law

implications law

TAX MANAGEMENT

Tax management refers to compliance with the income tax rules and regulations.

Tax management covers matters relating to

(a) Taking steps to avail various tax incentives

(b) Compliance with tax rules and regulations (including timely filing of return)

(c) Protecting from consequences of non-compliance of tax rules and regulations. i.e.

penalties, prosecution etc.

(d) Review of departments orders and if need apply for rectification of mistake, filing

appeal, tax revision or settlement of tax cases.

AREAS OF TAX MANAGEMENT

Important areas of tax management are discussed below:

1. TDS (Tax Deducted at Source): Persons responsible for deducting tax at source

should deduct from the income and that should be paid to the central government

on time. Moreover he should issue deduction certificate to the deductee’s and file

it in the income tax website.

2. Collection of tax at source: In some special cases, some persons responsible for

collecting the tax at source from the buyers (sec 206C). They should comply with

those formalities.

3. Payment of tax: It includes

(a) Payment of advance tax

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(b) Payment of tax on self-assessment. (c) Payment of tax on demand (payment after receiving notice from authorities) 4. Maintenance of books of accounts: Every businessman or a professional must
maintain books of accounts and other relevant documents so that the tax can be computed accurately and verified by the Assessing Officer. Maintenance of account books, vouchers, bills, correspondence and agreements, etc. is a part of tax management. 5. Audit of books of accounts: If the turnover of the business for the previous year 2015-16 exceeds one crore rupees, the audit of books of accounts is compulsory as per income tax rules. (w.e.f P.Y 2016-17 – 50 lakh). In case of profession audit is compulsory if the gross receipts more than 25 lakhs. 6. Furnishing the return of income: The tax manager must ensure that the return of income is furnished on time otherwise the assesse will lose the right to carry forward and set off the losses and become liable to pay interest, penalty, prosecution or fine or both. 7. Documentation and maintenance of tax records: An assessee should keep complete and updated tax files so that the documentary evidences can be made available in case of all queries. Tax files include filed returns, Form 16, documentary evidence in support of deductions, rebate and relief, court orders, etc. 8. Review of orders of Income Tax Department: Review the assessment orders and other orders received from the tax department is an important function of tax management. If there is any mistake in the order, application for rectification can be made. If the order is prejudicial to the interest of the assessee he can file an appeal, revision or an application for settlement of case can be made.

DIFFERENCE BETWEEN TAX MANAGEMENT AND TAX PLANNING

TAX PLANNING

TAX MANAGEMENT

1. It is a wider term than tax management1. It is the first step towards tax planning.

2. Aim of tax planning is to minimize ta2x. Aim of tax management is compliance

burden.

with legal formalities.

3. It is a guide in decision making

3. It is a regular activity

4. It is not essential for every assesse. 4. It is essential for every individual.

5. It looks at future benefits out of presen5t. It relates to the past, present and future.

actions

PROBLEM 1.1 Specify whether the following acts can be considered as an act of (a) tax management; or (b) tax planning; or (c) tax evasion. (a) Mr. A invests in Public Provident Fund so as to reduce tax payable.

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(b) ABC Ltd maintains TDS register at the company to enable timely compliance. (c) X Ltd installed an air conditioner at the residence of a director as per terms of his
appointment; but treats it as fitted in quality control section in the factory. This is with the objective to treat it as plant for the purpose of computing depreciation. Solution: (a) Investment in PPF is a part of tax planning. (b) ABC Ltd maintains TDS register in the company as part of legal compliance. So it is tax management. (c) Air conditioner is installed in the director’s residence. But by fraud the company claiming depreciation of Air conditioner in the company’s books to reduce tax burden. So it is tax evasion.

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UNIT- II

TAX PLANNING

Tax planning is the analysis of one's financial situation from a tax efficiency point of

view so as to plan one's finances in the most optimized manner. Tax planning allows a

taxpayer to make the best use of the various tax exemptions, deductions and benefits

to minimize their tax liability over a financial year. This process varies from person to

person and depends, among many factors, taxable income, time schedule for

investments, risk bearing inclination, existing investment pattern, expected returns

etc. Over the years, tax planning scenario has become more dynamic and

complicated, due to constant changes in the tax laws and falling interest rates.

Further tax planning cannot be done in isolation; it should be a part of overall

Financial Planning.

NEED AND SIGNIFICANCE OF TAX PLANNING

Tax Planning is the honest and rightful activity to minimize tax burden of various

persons. Needs and significances of tax planning were discussed below.

(a)

Reduction of tax liability: The basic need of tax planning is to reduce tax

liability by arranging his affairs in accordance with the requirements of law, as

contained in the fiscal statutes. In many a cases, a taxpayer may suffer heavy taxation

not on account of the dosage of tax administered by the Act, but, because of his lack

of awareness of the legal requirements

(b)

Minimization of litigation: There is always tug-of-war between taxpayers

and tax administrators. Tax payers try to pay least tax and the tax administrators

attempt to levy higher amount of tax. Where a proper tax planning is adopted by the

tax payer in conformity with the provisions of the taxation laws, the incidence of

litigation is minimized

(c)

Productive investment: Channelization, of taxable income to the various

investment schemes is one of the prime purpose of tax planning as it is aimed to

attain twin-objectives of: (i) harnessing the resources for socially productive projects,

and, (ii) relieving the tax payer from the burden of taxation, converting the earnings

into means of further earnings.

(d)

Reduction in cost: The reduction of tax by tax planning reduces the overall

cost. It results in more sales, more profit and more tax revenue.

(e)

Healthy growth of economy: The growth of a nation’s economy is

synonymous with the growth and prosperity of its citizens. In this context, a saving of

earnings by legally sanctioned devices fosters the growth of both. Tax-planning

measures are aimed at generating white money having a free flow and generation

without reservations for the overall progress of the nation. On the other hand tax

evasion results generation of black money, the evils of which are obvious. Tax

planning thus assumes a great significance in this context.

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