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Importance of Tax Planning: Features and Methods of Tax Planning

Importance of Tax Planning: Features and Methods of Tax Planning

Tax Planning

Tax planning is avoiding tax by availing the various relief’s and concessions available in the law. It implies compliance with taking provisions in such a manner that full advantage is taken of all tax exemption, deduction, concession, rebate and relief permissible under the act so that the incidence of tax is kept at lowest possible point. Thus, tax planning reduces the outflow of cash resources by way of the government so that same may be effectively utilized by assesses for his benefit.

Tax planning is legal ethical and economic. It is a legitimate device of minimizing tax liability or tax burden. For the purpose of enhancing the investment provides different types of facilities to the business organizations. Tax planning means use of these facilities given by the laws to reduce the tax liability.

Indian Supreme Counts judge Ranga Nath Mishra on the case McDowell and company vs. CTO says, “Tax planning may be legitimate provided it is within framework of law.

Colorable devices can not be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid payment of tax by resorting to dubious method”.

In the words of Mishra, the legitimate device to reduce tax liability is tax planning. If there is use of unnecessary means to reduce tax liability, it can not be taken as tax planning.

To conclude, we can say that tax planning is a scientific planning of company operations. It is economic, legal and ethical activity, it is the use of various incentives, concessions, allowances, rebates etc. and it is an activity related to future. It has the objectives of: (Kandel, Puspa Raj, 2007p,332).

  • Reduction of tax liabilities
  • Minimization of litigation
  • Productive investment
  • Healthy growth of economy
  • Economic stability

Features of Tax Planning

The features of tax can be explained as follows: (Poudyal, K.B., 1998).

  • It is future oriented. It concerned with activities to be undertaken in future.
  • It is a legitimate device of minimizing tax burden. The legislature encourages using this device.
  • It is legal, ethical and economic.
  • It is the genuine use of facilities provided in the tax law.
  • It establishes a good relationship between government and business community. It enhances a healthy environment in the country

Methods of Tax Planning

Methods of tax planning depend upon the objectives sought to be achieved. Broadly speaking, tax planning may be short-range or long range.

The short range tax planning is applied to realize tax benefits under special circumstances. For examples where total incomes goes up on account of huge capital gain in a year, tax incidence may be substantially reduced by resorting to other exemptions provided in this connection. It is an example of short-range tax planning.

The long range tax planning may not confer immediate tax benefits but it may be advantageous in long run. For example selection of nature of the product, selection of location, selection of source of capital etc (Lal,B.B, 1996p,161).

Importance of Tax Planning

We know that a tax is payment of money by person to the government. Because of the involvement of money in tax paying, it is a burden to the taxpayer. So each and every tax payer wants to reduce it. The reduced liability, on the other hand, induces the people or investor to do the extra investment work. In case of individual also, the reduction of tax liabilities encourages to do extra work. Due to this reason, the government provides certain facilities to the public related tax matters. It is known that the use of such facilities by the people is tax planning. Tax planning has certain implications or importance (Pandy, T.N., 1994,pp,24-27).

The major among them are:-

  • Tax Planning saves tax and increase profitability.
  • It avoids unnecessary worries, tensions and administrative hassles.
  • It helps in using the facilities provided by the government.

There are subsidiary advantages also of tax planning. They can be:-

  • It helps in increasing working capital.
  • It helps in an increasing of profit distribution.
  • It creates easiness in day to day work.
  • It enhances the investment opportunity.
  • It enhances competitive abilities.
  • It helps in developing of manpower.
  • It helps in upgrading technology.
  • It creates good business environment.


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