Tax Planning

Definition: Tax Planning can be understood as the activity undertaken by the assessee to reduce the tax liability by making optimum use of all permissible allowances, deductions, concessions, exemptions, rebates, exclusions and so forth, available under the statute.

Put simply, it is an arrangement of an assessee’s business or financial dealings, in such a way that complete tax benefit can be availed by legitimate means, i.e. making use of all beneficial provisions and relaxations provided in the tax law, so that the incidence of the tax is minimum.

This ensures savings of taxes along with conformity to the legal obligations and requirements. Therefore, it is permitted by law.

Objectives of Tax Planning

• Reduction of Tax Liability: An assessee can save the maximum amount of tax, by properly arranging his/her operations as per the requirements of the law, within the framework of the statute.
• Minimization of Litigation: There is a war-like situation between the taxpayers and tax collectors as the former wants the tax liability to be minimum while the latter attempts to extract the maximum. So, proper tax planning aims at conforming to the provisions of the tax law, in such a way that incidence of litigation is minimized.
• Productive Investment: One of the major objectives of tax planning is the channelisation of taxable income to different investment plans. It aims at the optimum utilization of resources for productive causes and relieving the assessee from tax liability.
• Healthy Growth of Economy: The growth and development of the economy greatly depend on the growth of its citizens. Tax planning measures involve generating white money that flows freely and results in the sound progress of the economy.
• Economic Stability: Proper tax planning brings economic stability by various techniques such as mobilizing resources for national projects or availing ways for investments which are productive in nature.

Tax Planning follows an honest approach, to achieve maximum benefits of tax laws, by applying the script and moral of law. Therefore the objectives do not in any way contradict the concept of tax laws.

Types of Tax Planning

1. Short-range and long-range Tax Planning: The tax planning which is made every year to arrive at specific or limited objectives, is called short-range tax planning. Conversely, long-range tax planning alludes to such practices undertaken by the assessee which are not paid off immediately.
2. Permissive Tax Planning: Tax planning, wherein the planning is made as per expressed provision of the taxation laws is termed as permissive tax planning.
3. Purposive Tax Planning: Purposive tax planning refers to the tax planning method which misleads the law. Under this type, there is no expressed provision of the statute.

Tax planning means intelligently applying tax provisions to manage an individual’s affairs, in order to avail the tax benefits based on the national priorities, in accordance with the interest of general public and government.