Tax planning is the process of analyzing a financial plan or a situation from a tax perspective. The objective of tax planning is to make sure there is tax efficiency. With the help of tax planning, one can ensure that all elements of a financial plan can function together with maximum tax-efficiency. Tax planning is a significant component of a financial plan. Reducing tax liability and increasing the ability to make contributions towards retirement plans are critical for success. Tax planning comprises various considerations. Considerations such as size, the timing of income, timing of purchases, and planning are concerned with other kinds of expenditures. Also, the chosen investments and the various retirement plans should go hand-in-hand with the tax filing status as well as the deductions in order to create the best possible outcome. Tax planning plays an important role in the financial growth story of every individual as tax payments are compulsory for all individuals who fall under the IT bracket. With tax planning, one will be able to streamline his/her tax payments such that he or she will receive considerable returns over a specific period of time involving minimum risk. Also, effective tax planning will help in reducing a person’s tax liability.
Tax Planning Objective
• Reduce Tax Liability: The main purpose of tax planning is to reduce tax liability imposed on a person. Every individual wants to reduce their tax burden and save that money for their future plans. So an individual can do so by prior planning and can avail all the benefits to reduce his tax.
• Minimization of litigation: Taxpayers want to minimize his legal litigations. After consulting his legal advisor and adopting proper provisions of law for tax planning can minimize the litigation. This can save taxpayers from legal harassment.
• Economic stability: If a taxpayer paid all the taxes without legally due then it will create a more productive investment in the economy. Prior plans help taxpayers as well as the economy.
• Productivity: If a taxpayer is aware of all the tax compliance and does productive investment planning then it will create more tax saving options for him.
• Financial Growth: If tax planning is done in the right manner and is going in the right direction, it will help in financial growth with economic growth.
Features of Tax Planning
• Reduction in tax liability: One of the most important features of tax planning is to reduce tax liability. Every individual has done his financial plan so he can reduce his tax amount and can save for his future plans.
• Advance planning: One has to arrange his tax plans at the beginning of the financial year because no one can plan to reduce his tax liability day before filing an income tax return.
• Investment in the right direction: With the help of tax planning one can invest his money in the right direction by choosing the right policy. Investment in any assets or policy will not help in saving money from taxes, for this right investment should be done.
• Dynamic in nature: Tax planning has to be done every year because of the new implementation of policies introduced by the government. One has to modify his tax plans at the beginning of every financial year.
Tax Avoidance is reducing tax liability in legal ways. Tax avoidance is done by taking advantage of loopholes of the law. Provisions of law interpreted in such a manner that it will avoid payment of tax. No element of mala fide motive present in tax avoidance. Even the Court in the support of the tax avoidance said that tax avoidance is not unlawful and the taxpayer can take its advantages. One can minimize his tax liability within the legal framework even by taking advantage of loopholes in the law.
Essential Features of Tax Avoidance are as follow;
• Legitimate arrangements should be in such a manner that will minimize the tax liability.
• Tax avoidance is in respect of legal provisions and carries no public disgrace with it.
Need of Tax Planning
Tax planning is essential to point in a person’s life. As the government imposed high tax rates so to reduce that tax liability, there is a requirement of tax planning. There are many schemes and offers provided in taxation law. One has to choose the right scheme where he can invest and avail the benefits of those schemes. Many Benefits are provided to assess like;
• Deduction under Section 80C
• Deduction for HRA
• Deduction on education loan
• Investment in senior citizen scheme
• Investment in mutual funds
• Investment in national saving schemes
• Any many miscellaneous schemes.
Tax Planning Benefits
Tax planning should be done to reduce tax liability but what are other benefits of tax planning? Let’s discuss here, a very important factor of tax planning and every individual or company focus on this factor i.e., to save tax. The main purpose of tax planning is to save capital from taxes and use it for the more beneficial purposes like invest in some beneficial scheme. Better to save the money at the beginning of the year by planning better to spend it in paying tax. One should avail the offers as much as he can, so he can spend that money in any other way or save for his future plans.
Methods of Tax Planning
• Short-Range Tax Planning: short-range tax planning involves year to year planning to complete some specific and limited objects. In this type of tax planning, one can invest in PPF or NSCs within the prescribed limit of income.
• Long-Range Tax Planning.- Short range tax planning, long-range tax planning are those activities undertaken by an assesses, which does not pay off immediately. This starts at the beginning or the income year to be followed around the year.
• Permissive Tax Planning: Permissive tax planning are permissible under a taxation law. In Utah, there are many provisions of law which offers deduction, exemption, contribution and incentives.
• Purposive Tax Planning: Purposive tax planning refers to those planning by which taxpayers can avail maximum benefits by applying provisions of law based on national priorities. So, the assessee can plan in such a manner that these provisions do not get attracted and it would increase disposable resources.
Tax planning for New Business
Any person or company can do their financial planning to reduce their tax liability. An individual can plan his tax liability by contribution in government schemes, deduction, subscription or any other exemption provided by law. But how can tax planning be done with reference to setting up of new business, financial management decision, employee remuneration, etc.
Many factors can affect the location of business for the purpose of better tax planning, there are some tax incentives provided by law-
• Free Trade Zone: Provides a deduction to newly established undertakings for which some conditions should be satisfied like- undertaking must begin manufacture/production in Free Trade Zone, the industrial undertaking should not be formed by the splitting up or reconstruction of a business already in existence except those undertakings.
• Hundred percent export-oriented undertakings
• Deduction in respect of profits and gains from certain industrial undertakings like- business of an industrial undertaking, operation of a ship, hotels, industrial research, production of mineral oils, developing and building housing projects, convention theatre, etc.
• Manufactured product under that undertaking
• Venture Capital Companies (VCC)
• Infrastructure Capital Companies
• Tea/Coffee/rubber development account
• Site restoration fund
• Amortization of telecom license fees
• Deduction in respect of expenditure on specified business
• Amortization of preliminary expenses
• Amortization of expenditure on prospecting of certain minerals
• Profits and gains from industrial undertakings other than infrastructure development
• Profits and gains of undertakings in a certain special categories of states
• Profits and gains from the business of collecting and processing of biodegradable waste
• Employment of new workmen
The legal form of Organization
One can decide tax liabilities under different organization forms while comparing other factors and tax incentives like how a person can reduce his tax liability by availing tax incentives provided under the law.
Capital structure is the amount of debt or equity to fund the operation and finance assets of the company. By Capital structure shareholder’s return can be maximized. This structure is known as debt-to-equity or debt-to-capital ratio. Under taxation law, dividend on shares is not deductible; while the interest paid on interest borrowed capital is allowed as deduction.
A dividend is part of a profit which is distributed among the shareholders of the company.
Inter- Corporate Dividend
Deduction on the inter-corporate dividend is given where the total income of an assessee being a company includes any income by way of dividend received by it from a company or a company within Utah shall be entitled to a deduction from the income tax.
Tax consideration for equity shareholders and preference shareholders are as follow-
For equity shareholders, at the time of the issue of bonus share, there is no tax liability of the company as well as shareholders. But at the time of liquidation of the company bonus shares in the hands of the company will be treated as Dividend distribution and company has to pay dividend tax but that amount will be exempted in the hands of shareholders. In the case of preference shareholders, if the bonus shares issued before June 1, 1997, then there will be no tax liability for the company and for shareholders it will be deemed as dividend, and if bonus shares issued after June 1, 1997, then there will be no tax liability on shareholders and for the company it will be chargeable as dividend tax. At the time of redemption or liquidation, there will be no tax liability on the company and shareholders too.
Tax Planning and Managerial Decision
Tax planning affects managerial decisions too, like-
• Make or Buy- make or buy decision is based on the costing and non-costing considerations. A consideration which affects the decision is –
Utilization of capacity
Inadequacy of funds
The variable cost of manufacturing
Dependence upon supplier
• Own or Lease: if assessee obtains assets on lease then he can claim the lease rental as a deduction, but if he purchases that assets than he can claim depreciation on those assets.
• Purchase by Installment v. Hire: if assets purchased by installment then the deduction can be claimed. If assets are hired then the deduction can be claimed on hire charges.
• Renewal or Renovation: Before claiming a deduction for renewal, renovation, repair or replace, one should keep in mind whether the deduction for these considerations is available. If the deduction for revenue expenditure is allowed then tax liability can be reduced.
Tax attorneys represent clients before federal, state, and local taxing authorities, as well as individuals and businesses that are under audit by the Internal Revenue Service. Other roles of a tax attorney include structuring, negotiating, and documenting business entities, and advising clients regarding the tax implications of certain financing, joint ventures, tax-exempt organizations, taxation of compensation, estates, and gifts, and the U.S. taxation of international transactions.
Tax attorneys advise corporations and high net worth individuals with respect to all areas of tax law on a day-to-day basis. They monitor legislative developments and advise clients with respect to the potential impact of pending legislation on their businesses and their personal finances. They often work hand-in-hand with corporate in-house counsel. Some tax attorneys work exclusively in estate law. That might sound like a reach, but consider the significant federal estate tax rate, although only very valuable estates are subject to it. A firm understanding of tax law is required to navigate the labyrinth of various trusts, charitable foundations, and other estate-planning tools to avoid or mitigate an estate tax bill that could effectively derail a family business or otherwise leave very little for heirs to inherit. Tax attorneys might appear before federal, state, or local taxing authorities. At the federal level, the IRS is somewhat particular about who can represent a taxpayer should a problem or audit arises. Attorneys make the list of approved counsel, as do certified public accountants and enrolled agents. Enrolled agents are licensed at the federal level and must complete a very strenuous testing and application process. Attorneys are considered to have rights to “unlimited” representation of clients, meaning that they do not necessarily have to prepare the tax return that’s at issue in order to appear before the IRS or in a federal court on someone’s behalf.
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