Tax planning is the diagnosis of the financial situation of any individual, organization etc as the case may be and do planning from tax perspective so as to ensure the optimal tax efficiency. It is an important part of financial planning. It involves planning of the income and expenditure by following the various provisions of Taxation law and abiding it legally with the aim of minimizing the tax burden. The planning helps the taxpayers to lessen the tax liability through various options viz deductions, exemptions, rebates stated in the Income Tax Act or other corresponding tax laws. Optimal tax planning keeps eye on overall cost of capital in the course of planning for tax
One of the key features of tax planning is its linkage with the future. A sound tax planner will have ideas of minimizing the tax liability in either long term or short term. It is not necessary that impact can be seen always in the short term. The optimal tax planning must consider the following elements :
- Choices of the business entity
- Size of the business
- Timing of the income
- Planning for purchases and expenditures
- Capital structure
- Residential status of the owner
Tax avoidance is the act of reducing the tax liability by analyzing and implying the loopholes in the provisions of taxation laws. Even though it is intentional but is considered to be legal as it complies the provisions of law with deep analysis of loopholes in it. There is a general rule for penal provisions if there is any ambiguity in the provisions of the law, the benefit of doubt will be given to the tax payer. The government continuously keep on the track of loopholes so as to update their taxation provisions to counter the avoidance. Like government introduced the concept of Minimum Alternate Tax when found companies are using the loopholes to down the tax liability so as to get in the purview various zero tax paying companies who are avoiding the tax by using the loophole.
Tax evasion is the illegal deliberate act done by any individual or the organization with the aim of no payment or underpayment of actual tax liability. It is done by under reporting of the income or over reporting of the expense with false vouchers. One caught evading the tax is subjected to criminal charges and penalties may be imposed as per the relevant statutes. Few ways generally seen to evade taxes are submitting of the wrong financial statements, claiming unjustified exemptions or deductions on the basis of false documents, not reporting the correct income, investing in various tax heaven countries.
Differences between Tax Planning, Tax Avoidance and Tax Evasion
One may get these terminology in order to search for saving tax. These terms are clarified above. Below are the key differences summarized:
Among the aforesaid three options tax planning is considered to be the most fair and appropriate approach of controlling the tax liability. Even though tax avoidance is legal but is considered to be unfair and penal provisions may get applied if found that it violates the tax rules. One should consult with Chartered Accountant who is the financial doctor to get the planning properly done.