Page 79 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes Self Assessment

State whether the following statements are true or false:
13. Poor tax management may lead to levy of interest, penalty, prosecution, etc. In some cases
it may lead to heavy financial loss if proper compliance is not made.

14. Tax planning is a requirement for either a business or individual.
15. Tax management on the other hand is about avoiding the payment of interest or fees for
not abiding by the tax laws and regulations.

Case Study Tax Avoidance or Tax Evasion

n. Khir, the company accountant, was deep in thought in his office. His friend, Ravi,

who was passing by Khir’s office, saw him through the glass window. On seeing his
Eworried look, Ravi knocked and entered.
“What is haunting you? Immersed so deeply in something? What is in your mind,” Ravi
asked.

Khir replied, “Our human resources manager is recruiting some software employees from
India and has assigned me the job of recommending the most tax effi cient remuneration
package equivalent to ` 200,000 per annum. To attract expatriates, the manager feels
that they should pay lower income tax as compared to others earning the same level of
income.”

“How is it possible for us to pay lesser income tax for the same level of income? Is it not tax
evasion?” Ravi asked. He cautioned Khir that tax evasion was illegal and both employees
and the organisation would be penalised for this by the Government for violating the
income tax laws. Moreover, tax evasion was unethical and also a crime against society.
Khir explained, “Ravi, yes, tax evasion is illegal and punishable. But tax avoidance is not
punishable. In fact, tax law encourages assessors to plan their taxes and pay lesser tax by
properly applying the relevant sections of the Income Tax Act.”
“Is it so? It is interesting. Could you please elaborate? I am also an expatriate employee and
I want to know more about this,” Ravi replied.
Khir continued, “I think our employees especially those who draw more than ` 100,000 per
annum should be advised on this tax avoidance and tax planning techniques because their
income will be taxed at the maximum marginal tax rate which is 26% in 2010. If they apply
tax avoidance techniques, they can save ` 260 in taxes for every ` 1,000 income avoided
which is a substantial sum.”
“Please give some simple examples so that I can understand all these tax jargons,” Ravi
requested.
“Sure, employees who draw higher salaries should not go for allowances. Take for instance,
the House Rent Allowance (HRA) and Travelling Allowance (TA), these allowances are
fully subjected to tax. Instead, if an employee opts for a Rent-Free Accommodation (RFA)
provided by the employer the tax bill will be reduced. Similarly, the Travelling Allowance
may be replaced by providing car, fuel and driver to these employees. The car can be used
by the employees for private purposes also,” Khir added.
“In what way will this save tax? Both are taxable at the same rates,” Ravi insisted.

Khir gave an explanation on how different allowances were treated in the Income Tax Act.
Contd...

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