Tax Practices and Corporate Tax Planning

- TAX PRACTICES FOLLOWED BY TAX PAYERS

All taxpayers across the globe would always like to minimize tax liability and tax compliances through ethical or unethical means. Various practices are followed in this regard as discussed hereunder:

1. Tax Evasion

Thus, it refers to the reduction of tax liability by illegal or fraudulent means. Wherein, there generally exists an intention, or a presumed intention, on part of the taxpayer not to pay the requisite taxes. Tax evasion is a situation, where a taxpayer tries to reduce one’s tax liability by deliberately suppressing the income or by inflating the expenditures as to show lower/reduced income than the actual income and resorting to various types of deliberate manipulations. An assessee guilty of tax evasion is punishable under the relevant laws with fines and penalties ranging from 100% to 300% of tax evaded

Example: AK Industries Ltd. installed an air conditioner costing Rs. 63,000 at the residence of a Director as per terms of his appointment; but treats it as fitted in quality control section in the factory. This is with the objective to treat it as plant for the purpose of computing depreciation. This is an example of tax evasion

2. Tax Avoidance

Any planning which, though done strictly according to legal requirements defeats the basic intention of the legislature behind the statute could be termed as an instance of tax avoidance. It is usually done by taking full advantage of various loopholes in the law and adjusting the affairs in such a manner that there is no infringement of taxation laws and least taxes are attracted. The line of demarcation between tax planning and tax avoidance is very thin and blurred. There is an element of malafide motive involved in tax avoidance.

Examples: Tax avoidance is a common practice used by individuals and corporations to legally reduce their tax liabilities. There are several methods used for tax avoidance, such as diverting income to adult children or parents who are not earning and claiming tax exemptions, transferring money to parents and enjoying exemptions based on their age, taking loans from relatives and friends with nominal interest rates, and routing investments through shell companies in countries with favorable tax laws.

Another example of tax avoidance is when a foreign company sells its product to its Indian subsidiary at a lower price compared to selling the same product to another foreign company. This allows the Indian subsidiary to shift profits outside of India and reduce its tax liability in India. However, such transactions may not be considered at arm's length prices, and could be deemed as tax avoidance..

It's important to note that tax avoidance is different from tax evasion, which is illegal and involves deliberately evading taxes by not disclosing income or providing false information. Tax avoidance, on the other hand, involves using legal methods to minimize tax liabilities. While tax avoidance may be within the bounds of the law, it can raise ethical concerns and may be subject to scrutiny by tax authorities. It's always recommended to seek professional tax advice and comply with tax laws and regulations in your jurisdiction.

3. Tax Management

Functions under tax management include maintenance of accounts, filing of return, deduction and deposit of TDS on timely basis, payment of tax on time, appearance before the Appellate authority etc. Poor tax management can lead to imposition of interest, penalty, prosecution. Losses may not be allowed to be carried forward and set off, if return of loss is not filed by due date. Tax management emphasizes on compliance of legal formalities for minimization of taxes while tax planning emphasizes on minimization of tax burden

4. Tax Planning

Tax planning means compliance with the taxation provisions in such a manner that full advantage is taken of all tax exemptions, deductions, concessions, rebates and reliefs permissible under the Income Tax act so that the incidence of tax is the least.

Examples: a. Doing business in an industrially backward State will entitle an assessee to claim a deduction under section 80-IB. This is an example of tax planning.

b. Taking Deduction under 80C by an Individual by making contribution to PPF, Paying Tuition fees of children to school, paying Life Insurance Premium, Investing in Infrastructure Bonds etc.

TAX PLANNING V/S TAX AVOIDANCE V/S TAX EVASION

The differences between tax planning, tax avoidance and tax evasion are summarised as under:

It may be concluded that while the object of all the three are the same, i.e., to reduce the liability of taxes on a person,the three are distinguished based on the means they entail. The methods involved in tax planning are sanctioned bylaw and the actions taken are not only envisaged by law but supported by it. On the other hand, tax avoidance implies the exploitation of the loopholes in the laws so as to reap benefits which were not intended by the law. Finally, tax evasion refers to the illegal actions to reduce tax burden which invite stringent legal penalties and punishment.

CONCLUSION

It's important to note that tax planning is a legitimate practice and is encouraged, while tax avoidance and tax evasion are illegal activities that can have serious legal consequences. It's essential for taxpayers to comply with the tax laws and seek professional advice to ensure that their tax planning strategies are within the legal framework and do not cross the line into tax avoidance or tax evasion.

Article Compiled by:-

Mayank Garg

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Material. Charted Secretary etc.