Tax Planning is an activity conducted by the taxpayer to reduce the tax liable upon him/her by making maximum use of all available deductions, allowances, exclusions, etc. feasible under law. In other words, it is the analysis of a financial situation from the taxation point of view. The objective behind this is insurance of tax efficiency. It allows all elements of the financial plan to function in sync to deliver maximum tax efficiency.
It is critical for budgetary efficiency. Reduced tax liability and maximize the ability of retirement plans.
Tax planning is a term that stands for the calculated application of tax laws, so as to effectively manage a person’s taxation. Leading to avail the tax benefits as per the law and in accordance with the interest of the nation and its people
It should not be done with an intent to defraud the revenue, All transactions entered into by an assessee could be legally correct, yet on the whole, these transactions may be devised to defraud the revenue.
- Minimal Litigation: There is always friction between the collector and the payer of tax. In such a situation, it is important that the compliance regarding tax payment is followed and used properly so that friction is minimum.
- Productivity: Among the most important objectives, channelization of taxable income to various investment plans.
- Reduction of Tax Liability: As a taxpayer, you can save the maximum amount from payable tax amount by using a proper arrangement of your enterprise working as per the required laws.
- Healthy Growth of Economy: The growth in an economy depends largely upon the growth of its citizens. It estimates generation of white money that is in free flow.
- Economic Stability: Stability is supplemented when the tax planning behind a business is proper.
Corporate Tax Planning:
Rising profits of an enterprise mean higher liabilities of tax. In such a situation, it is important that they dedicate enough time on planning that reduces liabilities. With a tax plan, both direct tax and indirect tax is lessened at the time of inflation. Not just this.
Tax planning means a proper planning of:
- Capital budget.
- Sales and Marketing costs.
The exercise ranges from devising a model for the specific transaction as well as for systematic corporate planning
- Short-range and long-range: Short range planning refers to year-to-year planning to achieve some specific or limited objective. The tax planning which is done annually to arrive at specific objectives is called short-range. Whereas, long-range does not include immediate payoffs of any kind.
- Permissive Tax Planning: Here it conforms to law provisions of tax. It is under the express provisions of tax laws
- Purposive Tax Planning: This is the method that is based on loopholes in the laws. It is based on the measures, which circumvent the law. The permissive tax planning has the express sanction of the statute while the purposive tax planning does not carry such sanctions.