Tax planning is the general exercise of analysing a possible financial plan or a situation from the taxation perspective in the way that it’s the most beneficial for the business or individual. With efficient tax planning, businesses can ensure that all the elements of a financial plan work together with minimum tax liabilities. Typically, tax planning encompasses considerations including (but not limited to) the size of the income, the timing of it, the time when the purchases were made, and the kind of expenditures made; further, the chosen investments and picking the most appropriate retirement plan plays an essential role in ensuring which deductions may be applicable. With the help of proper tax planning from experienced taxation lawyers, it is easy to streamline one’s payments to receive significant returns over a given amount of time with the least risk.
The advantages of tax planning include minimising litigation, leveraging greater productivity, reducing tax liabilities and, in general, ensuring more excellent economic stability.
Typically tax planning can fall under any of the following categories:
- Purposive tax planning: When the tax planning is done with a specified objective in mind.
- Long range/ short range tax planning: When the tax planning is conducted at the beginning or the end of the fiscal year.
- Permissive tax planning: When the planning falls under the legal framework.
Please find below a non-exhaustive list of areas in tax planning:
- international taxes, including treaty issues, transfer pricing, investment structures, etc.; this area is especially relevant for corporate groups or even a singular corporate entity functioning internationally in more than one country,
- government and local tax planning
- wills, trusts, etc.
- Executive compensation
- taxation about corporate restricting, i.e. mergers, acquisitions, etc.
- business formation and choice of entity and the consequent tax implications
- tax-exempt organisations
- tax dispute resolution
- estate tax planning
- individual income tax planning
- tax-qualified plans, including pension plans, ESOPs, profit sharing etc.
While opting for Domestic or International Tax Planning, various implications of chosen modus must be carefully and thoroughly examined, viz General Anti Avoidance Rules and Specific Anti-avoidance rules under the domestic law and a tax treaty. This is where the role of the experienced taxation law firm or tax lawyer comes into play.
It is also essential to keep in mind tax planning and tax evasion. While tax planning is implementing legal ways to reduce tax bills, tax evasion evades taxes through concealment.
Supreme Court of India, in the Mcdowell case, has observed that:-
“Tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning. It is wrong to encourage or entertain the belief that it is honourable to avoid tax payment by resorting to dubious methods. Every citizen must pay the taxes honestly without resorting to subterfuges.”
Keeping the distinction between tax planning and tax avoidance or tax evasion, we will elaborate on various aspects and areas of tax planning as highlighted above in our next post.
R & D Law Chambers is a Full-Service Law Firm headquartered in Ahmedabad, and the above article is published on our website to provide general information. No reader or user should act or refrain from acting based on the information written above without first seeking legal advice from a qualified law practitioner.