Page 62 - DCOM301_INCOME_TAX_LAWS_I

Unit 3: Tax Planning: An Introduction

Objectives Notes

After studying this unit, you will be able to:
Explain the concept of Tax Planning

Define Corporate Tax Planning
Describe Tax Evasion
Discuss Tax Avoidance
Trace the concept of Tax Management

Introduction

Tax planning involves conceiving of and implementing various strategies in order to minimize
the amount of taxes paid for a given period. For a small business, minimizing the tax liability
can provide more money for expenses, investment, or growth. In this way, tax planning can be
a source of working capital. There are several general areas of tax planning that apply to all sorts
of small businesses. These areas include the choice of accounting and inventory–valuation
methods, the timing of equipment purchases, the spreading of business income among family
members, and the selection of tax-favoured benefit plans and investments.
So, before one can embark on a study of the tax planning, it is absolutely vital to understand the
meaning of tax planning and the concept of tax evasion, tax avoidance, tax planning and tax
management. The purpose of this unit is to enable the students to comprehend basic expressions.
Therefore, all such basic terms are explained and suitable illustrations are provided to define
their meaning and scope.

3.1 Concept of Tax Planning

Tax planning is a broad term that is used to describe the processes utilized by individuals and
businesses to pay the taxes due to local, state, and federal tax agencies. The process includes such
elements as managing tax implications, understanding what type of expenses are tax deductible
under current regulations, and in general planning for taxes in a manner that ensures the amount
of tax due will be paid in a timely manner.
One of the main focuses of tax planning is to apply current tax laws to the revenue that is received
during a given tax period. The revenue may come from any revenue producing mechanism that
is currently in operation for the entity concerned. For individuals, this can mean income sources
such as interest accrued on bank accounts, salaries, wages and tips, bonuses, investment profits,
and other sources of income as currently defined by law. Businesses will consider revenue
generated from sales to customers, stock and bond issues, interest bearing bank accounts, and
any other income source that is currently considered taxable by the appropriate tax agencies.

Tax planning involves conceiving of and implementing various strategies in order to minimize
the amount of taxes paid for a given period. For a small business, minimizing the tax liability
can provide more money for expenses, investment, or growth. In this way, tax planning can be
a source of working capital. Tax planning is not a device to reduce tax burden. In fact, it helps
savings by investments in government securities. Savings reduce extravagance, and
correspondingly inflation. Tax savings are permitted only for investment made in government
securities and bonds of priority sectors which ultimately help the nation. Therefore, the savings
in tax help the Central and state governments to mobilise funds by way of investments and as
such the government earns much by way of other benefits, by sacrificing small amount of tax.

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