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Tax Planning

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Presentation onTax planning in context of managerial decision

IntroductionTaxes are what even an honest citizen despises (hate) the most as human being by very nature of selfish Every businessman tries to maximize his profits by reducing cost, he should also arrange his affairs in such a way ,that he pays the least amount of tax The primary objective of tax planning is to save the hard labors of the taxpayer in enjoying the fruits of his income and wealth to maximum possible extent.

Methods commonly used by the tax payers to minimize tax liability

The Goal of the tax payer is to minimize his tax liabilityTo achieve this goal three methods are commonly used by the tax payer 1.Tax evasion 2.Tax Avoidance 3.Tax Planning

Tax evasion

Tax evasion means avoiding of tax liability illegally. It is evading tax by dishonest means Tax evasion is unethical and have to be condemned, The courts also do not favor such means Evasion, once proved, not only attracts heavy penalties but may also leads to prosecution Such an evader of tax is not a good citizen Tax evasion as a means to reduce tax liability cannot be advocated by any one Examples are 1.Concealment of income 2.Increase of expenses to suppress income 3.Falsification of accounts 4.Conscious violation of rules

Tax avoidance

Tax avoidance is the art of dodging (evading) tax without breaking lawIt is minimizing the tax by taking advantage of loopholes in the laws It is lawful but involves the element of malafide intention It defeats basic intention of the legislature

Tax planning

Tax planning is the arrangement of financial activities in such away that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws. It entitles the assessee to avail certain exemptions, deductions and relief so as to minimize his tax liability Tax planning is intelligent application of expert knowledge of planning the tax It is 100% legal

Definition

Tax planning can be defined as arrangement of ones financial and economic affairs by taking complete legitimate benefit of all deduction, exemptions, allowances and rebates so that tax liability reduces to minimum. Features OF Tax planning: 1.Reduction of tax liability 2.Minimisation of litigation 3.Productive investment 4.Healthy growth of economy 5.Economic Stability

THREE METHODS-RATING

Tax planning is actually not meant for the end but is a year round activity.

1.Tax evasion -VERY BAD2.Tax Avoidance OK 3.Tax Planning -VERY GOOD

Needs and Objectives of Tax Planning

Tax planning is done for the reduction of Tax Burden. To avoid any sort of litigation. To avoid any type of raid and penalty. To avail the benefit of concessions and exemptions given under law. The tax planning avenues provide a financial cushion or backup for the use of contingencies in future. For preparation and maintenance of systematic records. To discharge the responsibility of a good citizen.

Areas of tax planning

1.Location of Business 2.Nature and Size of business 3.Form of business organization 4.Specific management decisions like make or buy, own or lease 5.Employee remuneration 6.Mergers/Amalgamation of companies 7.Double Taxation relief 8.Non-residents 9.Advance ruling

Tax avoidance VS Tax EvasionTax avoidance1Any planning of tax which aims at reducing or negating tax liability in legally recognized permissible ways, can be termed as an instance of tax avoidance.

Tax evasionMethods at which tax liability can be avoided illegally

2It takes in to account the loopholes of law Its an attempt to evade tax liability by unfair means or methods It is unlawful and consider as tax omission

3

It is lawful but includes tax hedging within the legal framework of law.

4

Intentional tax planning before the actual tax liability arises

Intentional attempt to avoid payment of tax after the liability to tax has arisen.

Tax planning VS Tax EvasionTax planning Tax evasion

1

It is an act within the permissible range of the Act conducted to achieve social and economic benefits It is a legal rights to achieve social and economic objective It accelerates development of the economy of a country by generating funds for investments in desired sectors

It is an attempt to avoid tax by misrepresentation of facts and falsification of accounts It is a legal offence which may lead to penalty and prosecution Tax evasion retards (slowdown) the development of a country by generating black money which works as a parallel economy It encourages bribery and weakens economic and political situation of the country

2

3

4

It promotes professionalism and strengthens economic and political situation of the country

Tax planning vs. Tax managementTax planning Tax management

1 2

Reduce the tax liability to the minimum Futuristic in its approach

To comply with the provision of law Relates to past , present and future.

3

Very wide in its coverage and also includes tax managementThe benefits arising from tax planning are substantial particularly in long run.

Limited in its scope

4

As a result of tax management, penalty, penal interest, prosecution etc. can be avoided

Tax planning in managerial decisions

Consideration which one has to take in to mind while taking make or buy decisions

Establishing new unit Tax incentive Under section 10A 10B 32 80-IA 80-IB Sale of plant and machinery Section-50

leasing

Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets.The consideration for the lease is called rent. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership.

Own or lease

Tax Deductibility

Treat leasing as an operating expense. Anything that is off the balance sheet like this will typically be 100% tax-deductible. This is not the case when you purchase equipment, as it will be considered an asset. However, when you lease something you can take advantage of deducting it on your taxes.

Depreciation

Another advantage of leasing is that you can speed up the depreciation on assets. When you purchase something, you have to depreciate it over the usable life of that particular asset. However, if you lease that product instead, you can depreciate it over the length of the lease term instead of the usable life. Therefore, if you take a three-year lease on something that has a five-year usable life, you can depreciate everything two years faster. In the grand scheme of things, this could amount to a substantial overall tax savings.

Continue.

If asset is purchased , the assessee can claim depreciation. Besides, interest on capital borrowed to finance investment in plant and machinery can also be claimed as deduction. if asset is at lease, deduction can be claimed in respect of lease rentals and lease management fees.

Tax planning in managerial decisions

Make or buy

Factors that should be considered are :

Utilization of capacity Inadequacy of funds Latest technology Variable cost of manufacturing vis-a-vis purchase price Dependence upon supplier Labor problem in factory

others

10A :the income of any newly established undertaking in a free trade zone. 10B:Special provisions in respect of newly established hundred per cent. export-oriented undertakings. 80-IA:Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IB: Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.