LESSON SEVEN

TAX- PLANNING, AVOIDANCE & EVASION

Whether salaried individual or business owner, every person who is liable to pay income tax
definitely tries to minimize the tax liability, at least for once. Even though it is unethical to
save income tax and not pay the required tax amount as per your income, taxpayers still
choose the following ways to minimize their tax liability.

Although these terms may sound similar and they also have a similar objective of minimizing
the tax liability, but technically they are very different from each other and here’s
the difference between tax planning, tax avoidance and tax evasion.
What Is Tax Planning?

 Tax planning is a completely logical and legal way of minimising one’s tax liability
by availing the benefits of all the concessions, provisions, deductions and exemptions
provided under the Income Tax Act.

 Tax planning involves activities like income analysis, restructuring and investing, as
particular investments made for a particular period can help the taxpayer avail a tax
deduction.

 The primary aim of tax planning is not only to save taxes by any means, but to
develop a long term, multi-faceted, logical and legal strategy that continues to
channelise your income and optimise your taxes for years and years.

 While paying taxes is your duty, you can use provisions within the law to reduce the
amount that you pay as tax. Fintoo’s experts help you with this so that you can save
more and utilize the amount smartly for your goals and responsibilities.
Tax planning concept

 Tax planning is the arrangement of the affairs of a taxpayer in such a way as to

minimise tax liability at lowest cost without contravening any tax law or
regulations. It is determination, in advance, of the tax effect of proposed business
actions.

Tax planning requires:

 A deeper understanding of the tax legislation; and

 A sound knowledge of case law in taxation.

Tax consultancy is therefore basically tax planning involving offering tax advice to clients
in various situations. Tax revenue departments have to ensure the following through
proper tax planning: -

 Taxpayers comply fully with tax laws and regulations; and

 Revenue collection is maximised.
A careful study of decided cases is important in:

(i) Highlighting tax planning schemes;

(ii) Provision of judicial interpretation of the legislation;

(iii) The judgement in a particular case will show strengths and weaknesses of a
particularscheme.

Aims of tax planning

1. To achieve compliance with tax laws since non-compliance with tax laws is costly
due to penalties and interest charges.
2. To ease administration as in working out arrangements, methods of accounting,
records tobe kept, reports to be prepared etc.
3. To achieve the most advantageous financial position out of a business transaction
to be measured in terms of direct tax savings from planning and financial benefits
by way of cashflow effects.
Tax planning for individuals
The tax planning measures of an individual would depend on whether they are
employed or unemployed. The following tax planning measures are allowable for
employees.
Insurance Relief

 An employer should notify employees who have taken individual life assurance
covers or education policies with a maturity of 10 years and maybe paying out
of payroll premiums on the same that they are eligible to claim insurance relief
and effect the samethrough the payroll.
Non-cash Benefits

 Increasing the non-taxable benefits may reduce tax on employees especially

where such benefits are allowable for corporate tax purposes. Examples of
benefits that the company could consider introducing or expanding include the
following:-
Medical services
 This entails the reimbursement to staff of medical expenses incurred for self and
dependants or access to designated hospital facilities where the company holds
an account. There is nomaximum limit of the same under the law.
Staff development and training
 Training costs directly paid to a training institution for an employee in relation
to the employees’ responsibilities at the work place and for the benefit of the
company’s businessare allowable for corporate and PAYE purposes.
Mileage reimbursement for use of personal car on the company business
 This benefit is tax efficient in comparison to the car benefit and provision of staff
transport which are taxable on the employees.
Tax planning for companies
Companies may lay strategies for tax planning. Some of the reasons companies or
entities should plan for their taxes are:

 Tax is a major expense in company’s P&L;

 To take advantage of the available tax incentives.
 To minimise tax penalties and interest;
 The IRD aggressiveness in collecting taxes;
 To improve cash management and forecast;

There are many strategies that companies can adopt in tax planning. Some of the tax
planning opportunities are:
(a) Tax compliance

 One of the best strategies for tax planning for companies is tax compliance. The
company should ensure that it complies with its obligation to pay corporate taxes, to
deduct advance taxes, to pay withholding taxes and to file returns. This will avoid
unnecessary penalties and interest being levied on the company for non-
compliance in case of an audit by the revenue authority.
(b) Tax losses used to reduce taxable income

 Tax losses or tax deficits of a company can be carried forward to be offset against
future income from the same source. Following an amendment in the 2009 Finance
Bill, the carry forward of tax losses is only allowed for the year of income it arose
and four subsequent years. The company should be able to use tax losses to plan
their taxes.
(c) Tax refunds used to reduce tax payable;

 The company should utilise tax refunds to reduce tax payable. Tax refunds arise from
overpayment of taxes. It can be overpayment of VAT, corporation tax among
others. The refund is allowed upon application and approval by the CDT. One can
apply to offset a recoverable or a refund from one form of tax against tax payable in
another form.
(a) Lower tax rate on listing at the Stock exchange

 Companies can list their shares to make use of preferential tax rates. Companies
newly listed on any securities exchange approved under the Capital Markets Act
enjoy favourable corporation tax rates as follows:

 If the company lists at least 20% of its issued share capital, the corporation tax rate
applicable will be 27% for the period of three years commencing immediately
after theyear of income following the date of such listing.”
 If the company lists at least 30% of its issued share capital, the corporation tax rate
applicable will be 25% for the period of five years commencing immediately after
the year of income following the date of listing.”

 If the company lists at least 40% of its issued share capital, the corporation tax
rate applicable will be 20% for the period of five years commencing
immediately after the year of income following the date of such listing. The
corporate tax rate applicable to the company may therefore change if the
percentage of thelisted share capital exceeds 20% of the issued share capital.
(a) Instalment tax payment

 The payment of instalment tax is a good means of cash management since it

helps avoid a situation where a company pays a huge tax balance. Further, the
company can opt to use either the previous year basis or the current year basis
while estimating instalment tax payable. Whichever method is selected, the
company should adopt a good approach to the management of cash flows.
(b) Application for tax exemptions or remissions

 The company can explore the avenue of applying for tax exemptions or tax
remissions.
(c) Applications for waiver of penalties and interest

 The Income Tax allows the taxpayer to apply for waiver of any penalties and
interests charged. The taxpayer should therefore pay the principal tax and make
the application for waiver of penalties of interest - it will be upon the
commissioner to grant.
Tax Avoidance:

 Tax avoidance primarily is an act of minimising one’s tax liability by using legitimate
methods that are within the limits of law or methods that do not break the law.
Though tax avoidance also helps a taxpayer to minimise the tax liability like tax
planning, but it is not as simple, straightforward and advisable as tax planning.

 The activities in tax avoidance primarily focus on taking unfair advantages of the
loopholes or lacunae in the income tax laws and manipulating the accounts in ways
that help to avoid the taxes without breaking any rules or laws.
  Though the process of tax avoidance does not break any laws or rules, but in some
cases that reflect acts like;

 Disclosing / Reporting less income

 Hiding important facts related to tax calculation
 Showing fake transactions that do not relate to their true purpose
 Using fabricated contracts and statements
 Channelizing the funds through fake offshore branches

Tax avoidance may be included under the categories of fraud and crime.
What Is Tax Evasion?

 Tax evasion is the activity in which an individual or an organisation deliberately

underreports the income, inflates the deductions and shows bogus expenses in order to
minimise the tax liability.

 Moreover, acts like not reporting cash transactions and hiding money in offshore
accounts, are also termed as techniques of tax evasion.

 Unlike tax avoidance which may or may not come under the category of fraud or crime,
tax evasion is undoubtedly considered as a crime and the individual or organization
opting the means of tax evasion to save the taxes are liable to face prosecution in criminal
court and may be given a stringent punishment in the form of a heavy fine or
imprisonment or both.
What are The Difference between Tax Planning, Tax Avoidance and Tax Evasion?

Tax Planning Tax Avoidance Tax Evasion

Minimising Tax Minimising Tax

Minimising Tax Liability
Liability Liability

Legal Legal Illegal

Ethical Unethical Unethical & Illegal

 Using loopholes in the
Using the provisions Disclosing wrong or
law and manipulating
of the law misleading information
the accounts

Penalty or
Penalty or imprisonment
No Penalty imprisonment or both if
or both
violating the tax laws

Long Term Short Term Short Term