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Personal Financial Planning

Notes legitimately entitled to plan his taxes in such a manner that his tax liability is minimal and net
income from the business and other sources is maximum. Tax Planning thus can be defined as an
arrangement of the financial affairs within the scope of law in a manner that derives maximum
benefit of the exemptions, deductions, rebates and relief and reduces tax liability to the minimal.
As long as one is within the framework of law, one can plan financial affairs in such manner
which keeps tax liability at its minimum. However, in the name of tax planning, one should not
indulge in Tax Evasion, and the line between Tax Planning and Tax Avoidance is very thin, so
one needs to tread carefully. Tax evasion is sheer non-payment of tax even when it is due to be
paid in the circumstances of the case. It should be remembered that while tax planning is
perfectly legal, Tax Evasion is illegal and can result into penalties and prosecution for the
perpetrator. When financial transactions are arranged in a way that it becomes obvious that they
were entered with a malafide intention of either not paying taxes or with a view to defeat the
genuine spirit of law, they cannot be accepted as legitimate Tax Planning. Twisting of facts or
taking a very strict and literal interpretation of law without understanding the basic purpose of
the law can only lead to punishable offence. Given below are the key difference between the tax
planning and tax evasion:

Table 11.1: Difference between Tax Planning and Tax Evasion

Tax Planning Tax Evasion
Tax planning is an act within the permissible Tax evasion is an attempt to avoid tax by
range of the Act conducted to achieve social misrepresentation of facts and falsification of
and economic benefits. accounts.
Tax planning is a legal right which enables the Tax evasion is a legal offence which may lead
tax payer to achieve social and economic to penalty and prosecution.
objectives.
Tax planning accelerates development of the Tax evasion retards the development of
economy of a country by generating funds for economy of a country by generating black
investment in desired sectors. money which works as a parallel economy.
Tax planning promotes professionalism and Tax evasion encourages bribery and weakens
strengthens economic and political situation economic and political situation of the country.
of the country.

11.3 Tax Avoidance

Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that
although within the four corners of the taxation laws, the advantage is taken by finding out
loopholes in the laws.
In the words of Justice O.Chinnappa Reddy of Supreme Court in Mcdowell &Co Ltd. vs. CTO(1985)
154 ITR 148(SC) at page 160, the evil consequences of Tax Avoidance are manifold and can be
summarised as follows:
a. Substantial loss of much needed public revenue, particularly a welfare state like ours.
b. Serious disturbance caused to the economy of the country by piling up of black money
directly causing inflation.
c. Large hidden loss to the community by some of the best brains in the country being
involved in the perpetual war waged between tax avoider and his expert team of advisers,
lawyers, and accountants on one side, and the Tax adviser and his perhaps not so skilful
advisers on the other side.

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