Tax Planning Tax Avoidance and Tax Evasion

Tax Planning, Tax Avoidance and Tax Evasion

Question:- What is tax planning? State the features, objectives and importance of tax planning.


The main objective of tax planning is, “To minimize the tax liability of the taxpayer, explain the need for tax planning in the context of this statement.


What do you understand by the term ‘tax planning’? State the objectives of tax planning.


Meaning and Definition of Tax Planning

In simple words, tax planning means planning of income keeping in view the rules and provisions related to income tax in such a way that minimum income-tax liability arises and minimum income-tax has to be paid. . To do this, he has to study the income-tax rules thoroughly and know about the exemptions, reliefs and incentives available in them, only then he can do effective tax planning.

According to Professor Dalton , “Tax planning is a legal method of minimizing tax liability by taking advantage of tax exemptions and tax incentives while acting honestly in accordance with the policies of the government.”

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Essential Elements or Characteristics of Tax Planning

  • Tax planning is done under rules, provisions and notifications, so tax planning is legal.
  • Being statutory, tax planning is considered an ethical action.
  • Tax planning reduces the income-tax liability, resulting in an increase in personal income.
  • Since income is received continuously over a period of time, tax planning is a continuous process.
  • Since tax planning is a continuous process, tax planning can be done both in the short term and long term.
  • In tax planning, planning of income, expenditure and investments is done.
  • There are different forms of tax planning.
  • The basis of tax planning is the available exemptions, reliefs, deductions and incentives.

Objectives of tax planning-

 (1) Reducing tax liability

(2) Reducing disputes

(3) Incentive to productive investments

(4) Reducing costs

(5) Increasing employment

(6) Bringing economic stability

(7 ) To promote healthy growth of the economy.

also read:- UNIT – I Basic Concepts Tax

Importance of Tax Planning

 Tax planning is not only important for the tax payer (tax payer) but it is also beneficial for the society, country, business, industry etc.

 For Taxpayer

The taxpayer reduces his tax liability by tax planning. For this purpose, he gets the benefit of exemptions, reliefs and deductions allowed in the Act. He invests his savings in such schemes from where he gets maximum tax benefits.

 For the society

The society also gets many benefits from tax planning. Savings money is invested in industries. New industrial units provide employment opportunities. This increases the demand for the goods, resulting in better standard of living of the people.

For the country

The government has started developing schemes for the progress of the nation. Capital for schemes can be increased by encouraging individuals to save and invest. This reduces the burden on government revenue.

For industry and trade

Through tax schemes, the government inspires people to do balanced development of different parts of the country. If an industrial undertaking is established in a backward district or a backward state, then some percentage of the income from it can be spent for the development of these states and districts for a particular period.

Question-  “Tax planning is a legal and ethical way to save tax” Explain the statement and describe its importance. How is tax planning different from tax evasion?

Answer- The given statement “Tax planning is a legal and ethical way to save tax” is actually true. Tax planning is a technique by which a person reduces his tax liability without in any way contravening the provisions of the legislation. See answer to question 6 for a detailed discussion of tax planning.)

Tax Evasion/Tax Evasion/Tax Evasion

 ‘Tax evasion’ is a technique to reduce tax-liability or avoid tax-liability by violating the Tax Act. It is completely illegal. A taxpayer who evades tax can be punished with fine or with imprisonment. ‘Tax evasion’ is a clear contravention of the Tax Act done with the intention of knowingly, manipulatively and with the aim of defrauding the Government). Generally, tax evasion can be done in two ways – firstly by not showing the illegally earned income in the tax return and secondly by reducing the taxable income by giving wrong and misleading information in the tax return or by claiming wrong policies. Thus tax evasion involves the following elements

 Tax evasion is done by violating the tax provisions.

Tax-evasion is immoral and illegal, as a result, the taxpayer is punished with both economic and criminal penalties if caught.

Tax evasion causes economic loss to the government and the country and the rise of black economy.

Some examples of tax evasion are-

  1. Withholding of income i.e. not writing the details of taxable income in the return.
  2. To reduce income by writing artificial and false expenses in the books.
  3. Reducing profit by debiting personal and family expenses as business expenses, such as expenses for personal use car petrol, telephone bills, personal travel expenses etc. Show less profit.
  4. By undervaluation of the stock or by writing off unrealized bad debts and losses.
  5. By showing short sale i.e. selling goods without bill.
  6. Concealment of profits on sale or transfer of shares, etc.
  7. Sale of immovable property at higher value and registration of it at lower value and saving tax on difference amount.
  8. Payment of artificial salary and interest to near relatives
  9. By artificial transfer of property in the name of relatives, not to include income from that property in his income.
  10. Getting false deductions, e.g. Some taxpayers can get deduction under section 80G by obtaining artificial receipts of donations (without giving donations). Similarly, export exemptions are obtained by increasing the profit of export trade and reducing the profit of internal trade.

Conclusion- Tax evasion is not only illegal but it is immoral, anti-social and anti-national, therefore provisions have been made in the Direct Tax Acts to impose heavy fines and punishment on the persons who evade taxes.

 Difference between Tax Planning and Tax Evasion

 1. Statutory provisions are followed under tax planning, while statutory provisions are violated under tax evasion.

Some social and economic objectives are fulfilled through tax planning, whereas tax evasion is a legal offense, for which financial punishment and punishment are given.

In-depth knowledge of Income Tax Act 1961, Income-tax Rules, State Notifications, Court decisions and related Finance Act is necessary for tax planning, but boldness is required for tax evasion.

The economic development of the country takes place through tax planning, while black money is generated through tax evasion.

Tax planning is said to be a legal and ethical action, whereas tax evasion is immoral and illegal.

The adopter of tax planning remains fearless, whereas the tax evader is always surrounded by the fear of raids and punishment.

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