Tax Planning

 Tax Planning

Tax Planning is a legal way of arranging one’s financial affairs in such a manner that one pays minimum or no tax. This includes taking maximum benefits of all rebates, reliefs, deductions, exemptions and concessions available in the tax laws in such a way that the incidence of taxation is nil or at the most, least.

This can range from:

(1)  simple planning of investments by a salaried individual

(2)  planning routine expenditure or by setting up an HUF by a small business family

(3)  setting up of multiple companies by a medium to big business houses

(4)  complicated cross border business transactions by multinational companies.

 

 

In a tax planning scenario, the individual or corporate arrange their activities in such a way that all the activities happen in a legal way within the framework of law.

Such planning can be with respect to Direct Tax (Income Tax, Dividend Distribution Tax, etc.) or Indirect Taxes (GST, Customs, etc).

For proper Tax Planning it is important to have proper knowledge of the current tax laws. This is especially true in cases where the tax laws change frequently. It is also important to have good knowledge of related tax laws.

Some times when the provisions of the law are not properly interpreted, issues may arise. For instance, it may not be clear whether a particular arrangement is legally allowed, whether it is within the purview of law or whether the action can be open to some other interpretation. Such other interpretation may mean that the tax payer is avoiding or evading tax. Such interpretation by the tax official may mean that this will lead to litigation which may or may not result in favour of the tax payer. In order to have effective tax planning, people prefer to consult chartered accountants or consultants who are experienced in this activity.

Proper Tax Planning should have some meaningful objectives behind it such as:  

in the micro level:

(1)  paying lower tax or

(2)  making productive investments,

in the macro context:

(1)  Growth of Economy or

(2)  Economic stability.

All types of tax payers whether salaried individuals, self-employed professionals or business men or corporates must do tax planning in conjunction with cash flow planning.

Having a tax planning idea which jeopardises their cash flow would make no sense. For instance, a salaried person with a salary of say 7 lakhs per year having a family consisting of his wife and school going children to support should not commit to a life insurance premium of 20 to 25 thousand per month, just because he is able to save on taxes by paying this premium.

Tax Planning could mean different things to different people.

 

 

For some it could be just taking a Life Insurance policy at the end of the year, for a diligent and disciplined investor it could be systematically building their retirement corpus by investing in a combination of Equity Linked Saving Schemes and Provident Fund. For some one else it could mean taking a home loan where one gets benefit for repayment of interest and principal of the same by monthly EMIs.

Business people buy vehicles on loan and claim depreciation and motor vehicle running expenses, driver’s salary, interest paid to financial institutions on the loans taken and such related expenses as bonafide business expenses.

Indian business tax payers staying in joint families use the family HUF as an additional entity for tax planning.

A person looking at tax planning has to ensure that in his enthusiasm to lower taxes he does not resort to tax evasion or tax avoidance.

 

 

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