UNIT – II (F1-505)

Meaning and Definition of Tax

Taxation is one of the ways and means through which Governments raise revenues for financing their
expenditure. Taxes are imposed on individuals as well as business entities (firms, small companies, big
corporates, etc.). Tax may also be defined as a financial levy imposed by a State on ordinary people.
Taxes may also be levied by certain sub-national bodies. There are basically two types of taxes, viz. direct
taxes and indirect taxes. Direct taxes are paid directly (e.g. income tax, corporate tax, wealth tax, etc.),
whereas the indirect taxes are paid indirectly (e.g. sales tax, service tax, goods & services tax - GST, etc.)
Some other definitions of tax are as following:
According to Prof. Seligman, "Tax is a compulsory contribution from a person to the government to defray
the expenses incurred in the common interest of all, without reference to special benefits conferred".
According to Taylor, "Taxes are compulsory payments to the government without expectation of the direct
return or benefit to the tax-payer".
Nature or Featueres of Tax
All categories of taxes exhibit following features:
(1) Tax is a Legal Collection: The quantum of tax and the identification of tax-payers have the support of
necessary statutory force. Taxes cannot be imposed unpredictably; certain legislative processes are required
to be completed precisely before imposing any tax.
(2) Tax is a Personal Obligation: Once a tax is levied by an authority, it becomes a personal obligation of
that particular individual/entity. This personal obligation is required to be paid within the stipulated time
period.
(3) Tax is a Compulsory Contribution: Tax is a mandatory contribution by the residents of a country to
their Government, which ideally needs to be paid voluntarily. The State is legally empowered to impose tax
on its citizen. Payment of tax is a legal obligation of tax-payers, and cannot be evaded on any ground
whatsoever. In the event of non-payment of tax by an individual, the State has necessary legal rights to
punish the offender.
(4) Tax is Imposed by Government Alone: The authority to impose taxes has been entrusted exclusively to
the Government. Levies imposed by others (other than Government) cannot be termed as tax.
(5) Revenue Collection: The main purpose behind imposition of taxes is to mobilize adequate revenues in
order to meet various heads of Government expenditure.
(6) Tax is a Contribution for the Common Benefit of the Society: The ultimate aim of levying and
collecting taxes is ensuring common welfare of the society at large, and not for the benefit of specific
individuals or group of individuals or institutions.
(7) Benefit is not a Condition for Tax Payment: Although taxes are collected for the common welfare of
society, no tax-payer is promised for any specific benefit. Nobody can claim any benefit from the
Government on the ground of paying the tax. As part of the Government's welfare schemes, the benefits
derived by individual tax- payers may not be in proportion of the amount of tax paid by them.
Objectives of Tax
Governments across the globe impose taxes on their citizen with following objectives in view:
(1) Raising Public Revenue: Raising public revenue, i.e. collection of money to meet Government's
expenses, is the key objective of levying taxes on common people (individuals and entities). The
Government's expenses, include the expenditure incurred in connection with ensuring social justice,
economic development, war (if any), and also creating and projecting the country's better image in the eyes
of other countries of the world.
(2) Regulation and Control: The tax rates differ for different goods and services. By manipulating the rates,
the Government can exercise control over (and regulate) the use of certain goods and services. In other
words, the tax rates may be used as an effective tool to encourage or discourage the use of specified goods or
services. This exercise is undertaken with a view to ensuring a desirable, respectable, and healthy social
order. An example of such regulation is high rates of taxes (excise duty) levied on consumption of tobacco
products and liquor (an undesirable practice prevailing in Indian society), so as to discourage their
consumption.
(3) Reduction of Inequalities in Income and Wealth: Yet another objective of taxation is to move towards
an egalitarian society, by reducing the existing gap between various strata of society with varying levels of
income and wealth. The developing nations are characterized by a wide gap between the income levels of
'highest income group' and 'lowest income group'. Through taxation, it is possible to redistribute income and
wealth in a manner that results in fair and balanced distribution of national income and wealth.
(4) Bringing Business Stability and Maintaining Full Employment Conditions: Taxation facilitates in
ensuring an environment of business stability as well as creation and maintenance of conducive employment
conditions. During the period of recession, a policy of low taxation rates may act as a catalyst for ensuring
more income for the people, which in turn raises demand and revival of the business sentiments and
economy at large.
(5) Promoting Capital Formation: Encouraging domestic savings and promoting capital formation,
especially with reference to the developing and underdeveloped countries, is also one of the objectives of
taxation. The household savings may be channelized towards manufacturing sector and used as an agent of
capital formation through the process of taxation.
(6) Increase in National Income: Taxation plays an important role in enhancing the level of national income
of a country. The income generated through taxation is channelised for manufacturing as well as various
other economic activities by the Government, the outcome of which is overall increased level of production.
This increased level of production together with other economic activities leads to increased level of per
capita income or overall increased level of national income.
(8) Restrict Unnecessary Consumption: Tax rates may be used as an effective tool for curbing
consumption of undesirable commodities, e.g. liquor, tobacco-based items (biris, cigarettes, and gutka),
bhang, etc. This can be achieved by imposing heavy tax on such harmful commodities, which automatically
brings down their consumption level.

Types of Tax
Taxes can be classified on different bases as following:

(1) On the Basis of Form

(i) Direct Tax: Direct tax is government by a person or organisation. The responsibility of a tax paid directly
to the paying such taxes lies with those individuals on whom they are imposed. Some examples of direct
taxes are income tax, wealth tax, consumption tax, inheritance tax, gift tax, expenditure tax, etc.
(ii) Indirect Taxes: Indirect tax is a type of tax, which is imposed on goods and services. Although, it is
levied on one person, but is paid by others. Some examples of indirect taxes are Excise Tax, Service Tax,
Goods and Services Tax (GST), etc.
(2) On the Basis of Income or Consumption Method
(i) Proportional Tax: A proportional tax is sometimes referred to as a flat tax. It is an income tax system that
levies the same percentage tax to everyone regardless of income. A proportional tax is the same for low,
middle, and high-income taxpayers.
(ii) Progressive Tax: Under the progressive tax system, the tax rate is not uniform; it increases with
increasing level of income, i.e. lower the income, lower is the tax rate, and higher the income, higher is the
tax rate.
(iii) Regressive Tax: Under the regressive tax system also, the tax rate is not uniform, but as against the
progressive tax system, wherein the tax rates increase with increasing levels of income, the regressive tax
system has decreasing tax rates with increasing income levels. In other words, higher the income lower is the
tax rate, and lower the income, higher is the tax rate.
(iv) Degressive Taxes: The degressive tax system is a combination of progressive tax system and
proportional tax system. Under this system, the regime of the progressive tax rates is followed up to a
specified limit, after which the regime of proportional tax rates is followed.
(3) On the Basis of Volume
(i) Single Tax System: Under the single tax system, only one kind of tax is levied on tax-payers.
(ii) Multiple Tax System: Under multiple tax system, taxes are levied on various kinds of items or bases.
 Canons of Taxation
Canons of taxation are the fundamental principles on which an ideal tax system is based. These canons were
laid down, for the first time, by the economist Adam Smith in his famous book "The Wealth of Nations". He
had suggested four canons of taxation, viz. Canon of equality, Canon of certainty, Canon of Convenience,
and Canon of economy. However, modern economists subsequently added a few more canons to the original
list. All the canons of taxation are as following:
(1) Canon of Equality: The canon of equality states that the taxation must be imposed equally among the
taxpayers. However, this approach cannot be considered as the balanced one, because the ability to pay taxes
is not the same for all the tax payers. Rich people are capable of paying more taxes than the poor people, and
as such logically their contribution in tax fund should be more. Now, if all tax-payers are asked to pay in
accordance with their ability to pay, then the sacrifices made by all taxpayers become equal.
(2) Canon of Certainty: The canon of certainty provides that there should be a certainty with regard to the
tax liability of each and every tax-payer. All aspects of the tax liability, i.e. the amount of payment, manner
of payment, time of payment, etc. should be stipulated in no unclear terms to the tax-payers and all other
concerned people. Total transparency in this matter would not leave any room for discretion on the part of
tax authorities. In the absence of transparency and certainty, the possibility of creeping in of the corrupt
practices amongst the tax officials cannot be ruled out.
(3) Canon of Convenience: The canon of convenience is meant not only to protect the tax-payers' interest
and convenience, but also that of the Government (tax authorities). It underscores the need to ensure the tax-
payers' convenience, to the extent possible, regarding the mode and timings of tax payment. This is precisely
the reason behind the collection of income tax after the harvest season. Salaried people are taxed at source at
the time of receiving salaries.
(4) Canon of Economy: Canon of economy implies that the cost of collecting a tax should be kept at the
lowest possible level. Any tax that involves high administrative cost and inordinate delay in assessment and
collection of taxes need to be avoided altogether.
(5) Canon of Simplicity: The canon of simplicity states that the tax system should be kept as simple as
possible, with a view to ensuring that:
(i) It is easy to understand various provisions for a tax payer, and no occasion of legal dispute arises
(ii) Administration of the system continues to be convenient and hassle-free for the tax authorities.
(6) Canon of Flexibility: Tax structure needs to be flexible enough, so as to enable the authorities to make
necessary changes therein promptly, whenever considered essential. Such changes, which may relate to
coverage or rates of taxes, are warranted in the backdrop of ever changing nature of economy and treasury
requirements.
(7) Canon of Social Objectives: This canon of taxation underlines the significance of fulfilling social
obligations. It lays emphasis on a close coordination and synchronization between the taxation policy (rates,
collections, statutory provisions, etc.) and social & economic policy of the Government.
(9) Canon of Functional Efficiency: Functional efficiency of taxation implies the tax policy to be
proficient, objective and easy to implement. Professor Dew was of the view that the tax laws and regulations
should be in tune with the economy, easy to understand by the assesse, and easy to administer by the
authorities. The authorities on their part should have an objective approach while implementing them.
METHODS USED BY TAXPAYERS TO MINIMISE TAX LIABILITY
As part of their tax management, it is the endeavor of the tax-payers, who always hold the view that the tax
rates are very high, to organize their financial matters in such a manner that they may have to pay tax as
minimum as possible. Their objective is, therefore, focuses on various ways and means to bring down their
tax liabilities. With the above objective in view, they resort to following methods:
Methods Used by Taxpayers to Minimise Tax Liability
1. Tax Evasion
2. Tax Avoidance
3. Tax Planning
 TAX PLANNING
Meaning of Tax Planning
The term Tax Planning means to reduce tax burden by managing and planning of sources related to
the tax. It reduces the tax liability by taking the tax advantages provided by the law itself. The exemptions,
deductions, rebates allowances are given by the law so that the certain social and economic goals can be
achieved.
For example, deductions provided under Section 80C allow deduction from the Gross total income to
encourage the individuals and HUF to invest in the prescribed schemes. Similarly, section 80 IB provides
deduction from the GTI if the business is established in the backward areas this would help in encouraging
the social and economic development of the backward areas.
Nature of Tax Planning
Nature of the tax planning can be described as follows:
(1) Legally Recognized: The tax planning is carried-out by taking the advantages of the rebates, deductions,
allowances, relief provided by the law itself which makes the tax planning legally recognized. Tax avoidance
can also be considered under tax planning but it must be noted that the intention should not be to deceive the
law.
(2) Moral: It is considered moral and fair as it is based on the law. Tax planning does not involve any
fraudulent practices therefore this feature makes the tax planning lawfull and socially acceptable.
(3) Levy: Generally, it is levied on the persons and property which lies in the jurisdiction of the state and
levied for the public purpose.
(4) Payment: As the tax liability increase with the increase in the income and accordingly the rebates and
deductions are provided. It required to be paid in terms of money at regular interval of time.
(5) Transactions: The transactions shown are not ambiguous and there is not any intention to violate the law.
The transactions do not work as a shield to avoid the taxes.
Scope of Tax Planning
The scope of tax planning has a very wide coverage and is effective in almost every area of business
management. Following are the some important areas where tax planning can be used:
(1) Business location
(2) The size of the business and its nature
(3) The form of business organization and the ownership pattern followed 4) Capital structure, make or buy,
own or lease and various other decisions of the management
(5) Remuneration of the employee working in the organisation
(6) Mergers/Amalgamation of companies,
(7) Relief in the double taxation
(8) Non-residents, and
(9) Advance rulings.
Objectives of Tax Planning
The tax planning is done in order to meet the following objectives:
(1) Reduction in Tax Liability: The primary objective of the tax planning is to serve in the reduction of the
tax liability so that the income or profit earned can be increased in the hands of the earner. This earning is
used by him to meet the personal and social needs. And the balance may be used for saving for the future or
investment in the business. This can only be possible when the financial and economic affairs are arranged in
proper manner and all the benefits provided by the law from deductions, rebates, relief are taken
successfully.
(2) Minimizes Litigation: The tax payer always try to minimize the tax liability to the greater extent and the
tax authorities always try to get the maximum tax from the tax payers. This may lead to the long-drawn-out
litigation. The tax authorities do not charge extra if the tax is reduced through tax planning but in case of
taxes reduced through tax avoidance it charges high. It is not acceptable by the tax authorities that the tax
payer tries to reduce the tax liability by taking the advantage of the loophole in the law and demand
exemption, deduction or relief so the litigation is filed by the tax authorities. But if the tax liability is reduced
by the tax planning there is a less chances of litigation.
(3) Productive Investment: The tax planning helps in increasing the earnings in the hand of the earner
because the reduction in the tax liability reduces the transfer of money in the form of tax from the earner.
This increased amount is reinvested by the businesses which will increase the profit and ultimately the tax
revenue for the government is increased.
(4) Helps in Cost Reduction: The tax liability is added in the cost of production. When the tax liability is
reduced the cost of production is also get reduced. The less cost will increase the sale revenue and therefore
the increased tax revenue for the government.
(5) Strong Growth of Economy: Savings and investment done through tax planning helps in the economic
development whereas the savings done through tax evasion creates the black money in the economy that
results in the unhealthy economic environment.
(6) Employment Generation: The increased (saved by way of reducing the tax liability) income is mostly
invested in the business for expansion or growth of the business. This creates the employment opportunities
in the economy.
Types of Tax Planning
Some of the forms of tax planning are given here under :
(1) Short-term tax planning : Short-term tax planning means a planning for current year only.
An assessee makes tax planning for the previous year and ascertains the channels of
investments so that his tax-liability for the previous year is reduced to the mimimum. Short-
term planning is done by generally salaried person or low income assesses.
(2) Long-term tax planning : Long-term tax planning means a planning for future. Under it an
assessee makes investments in such plans or scheme which help him in reducing his future
tax liability. An assessee plans for present and future both so that his liability for the current
year as well for years to come is reduced to the minimum. Normally, assesses carrying on
business or profession or whose future income is likely to increase adopt long-term tax
planning.
(3) Investment tax planning : Investment tax planning means a planning for investments’
income which creates minimum tax-liability. Investment yield income in form of interest or
dividends. Interest or dividends, in certain cases, are either exempt from tax or attract a low
rate of tax. Under this planning investments are made in such securities and funds whose
incomes are either exempt in full or are partly exempt. Assessee plans such investments
which helps him in keeping his tax-liability to the minimum. Investment planning is adopted
by those assesses who have some additional funds.
(4) Estate Tax Planning : In this, an assessee can reduce his tax liability by transferring assets
which are more profitable in terms of income to persons whose total income even
after such transfer is not taxable.
Importance of Tax Planning
Following is the importance of the tax planning:
(1) Tax planning is done to benefit the tax payer.
(2) Tax planning is a lawful and reliable activity.
(3) The incentives are provided to the companies by the government and these can be used to increase the
profit.
(4) The tax liability increases with the increase in the income. This makes arrangement of the affairs efficient
and tax planning necessary.
(5) The burden of direct and indirect taxes can be dealt easily if tax planning is done efficiently.
(6) It helps in proper arrangement of various financial affairs like expenses, capital budgeting and sales
promotion.
(7) Treating the amount in the accumulated profits, reserves and surplus as the revenue expenditure is
possible only with the help of tax planning.
(8) The saved tax can be treated as an interest free loan which needs not to be repaid.
Limitations of Tax Planning
Tax planning has following limitations:
(1)The assessee is not allowed to claim the exemption, deduction or relief for which he is entitled to receive
if the claim has not been made before the assessment is completed. The claim cannot be made by any method
of rectification of mistake or appeal or revision.
(2) In addition to the Income tax laws various other laws like Partnership or Company Act are also to be
considered while calculating the tax liability. This feature limits the tax planning. There may be various
deductions and exemptions which are provided under Income Tax Act but other Acts may nullify the
exemption.
(3) There may be a situation when the tax advantage of the one member of HUF may act as the tax
disadvantage of the other member in terms of individual property. This counter attack of one member over
the other member may create imbalance in the family.
(4) Tax planning involves the adequate time to get it efficiently applied. This time if not utilized here
properly can be used in some other productive activities.
(5) The laws are frequently altered from time to time which makes the tax planning process more
complicated. This creates a limitation in making the long term planning.
(6) The tax exemptions, rebates and relief are provided only to the person who fulfills certain conditions.
This limits the tax payer in taking benefits from the tax incentives provided by the law.
TAX AVOIDANCE
Meaning of Tax Avoidance
The act of minimizing the incidence of tax by taking the advantages of the loopholes in the law is known as
tax avoidance. Tax avoidance lies within the boundaries of the law. Tax avoidance is the art of minimizing
the liability of tax within the four corners of the law.
Royal Commission on Taxation for Canada has explained the concept of 'avoidance of tax' as under:
The expression "Tax Avoidance" will be used to describe every attempt by legal means to prevent or reduce
tax liability, which would otherwise be incurred, by taking advantage of some provision or lack of provision
in the law. It excludes fraud, concealment or other illegal measures. In other words, 'tax avoidance' is a
device that technically satisfies the legal requirement of the law but in fact it is not in accordance with the
legislative intent.
Methods of Tax Avoidance
Tax avoidance can be done by following methods:
(1) Legal Entities: In this method, the tax liability is minimized by transferring the ownership or income
earned to a separate legal entity. This separate legal entity can be a company, trust or foundation. When the
income or ownership is transferred to another separate entity then the incidence of tax shifts from the
transferor to the transferee. This reduces the liability of tax on the transferor.
(2) Country of Residence: It is another method of tax avoidance under which tax liability is minimized by
changing the residential status of a company or individual to a country where lesser amount of tax is charged.
For such purpose sometimes individuals become regular traveller.
(3) Double Taxation: The double taxation is levying the tax by one or more countries on the same income.
Many countries levy tax on the income which is earned there without considering the residential status. This
helps the tax payer in reducing the tax burden to be paid in the two jurisdictions. Many countries have
entered into a bilateral agreement of double taxation.
Causes of Tax Avoidance
The individuals or company or any other person as defined under Income Tax Act adopts tax avoidance due
to various causes which may include the following:
(1) High Tax Rates: High tax rates force persons to avoid the tax. To get out of this situation the persons will
spend more on tax advice and find the loopholes that can help in tax avoidance.
(2) Vague Definition: The vague definition of the terms in the law will increase the tax avoidance on the part
of the tax payer.
(3) Not Sufficient Penalties: The penalties for indulging in the evasion of tax are not sufficient to stop the
tax payer from such activities. This tends to increase the tax avoidance.
(4) Inequality: The inequality in the economy may also lead to increase in the tax avoidance.
Remedial Measures to Check Tax Avoidance
Following measures can be taken to check the tax avoidance:
(1) The laws should be drafted in such a manner that there remain no loopholes at all.
(2) One of the major loopholes in the law is treating the individual income as the income of the HUF. This is
done by forming the small HUF. There should be some maximum limit above which the income of the HUF
should be taxed progressively and the income of all individuals of the family should be taxed separately.

TAX EVASION
Meaning of Tax Evasion
With a view to reducing the tax liability, if a tax-payer attempts to conceal the real income or makes fictitious
claims, it is termed as tax evasion. Besides, being an immoral, anti-social, and anti-national practice, the act
of tax evasion is in gross violation of statutory provisions, and as such it is illegal. Under the law, there are
provisions for taking strict penal actions against the tax evaders. Some of the practices indulged into by a tax
evader for reducing the taxable income are as following:
(1) Not recording the sales, which actually took place;
(2) Showing fictitious expenses, bad debts, losses, etc. and claiming benefits against them;
(3) Showing personal expenses (e.g. car maintenance, telephone charges, traveling expenses, medical
expenses, etc. incurred on self, or even on family members), as business expenses in the books of
accounts.
(4) Claiming deduction under Section 80-G of the Income Tax Act by submitting fictitious receipts of
donations supposed to have been made to charitable trusts;
(5) Not showing (in the Income Tax Return) the capital gains accrued on account of sale of shares and/or
other assets; and
(6) Not showing (in the Income Tax Return) the income received from 'Benami transactions'.
In short, the tax evaders attempts to evade tax payment by showing deflated income & suppressing various
receipts, and inflated expenses & claiming fictitious deductions.
Methods of Tax Evasion
Various methods are applied for avoiding tax payment by the tax evaders, some of which are as following:
(1) Smuggling: Smuggling is one of the proven methods of tax evasion, which facilitates export or import of
goods and services through unofficial channels. It has being used successfully by the tax evaders. Through
smuggling, custom duties may be entirely avoided, and banned items may be brought into the country.
(2) Customs Duty Evasion: Payment of customs duty may be avoided by the corrupt importers by making
false declaration regarding the description and quantity of the products imported. Under-invoicing is yet
another practice adopted by the importers with a view to evade payment of customs duty.
(3) Value Added Tax Evasion: Value Added Taxes (VATS) may be evaded by the producers by deflating the
sales figures, although the same is collected and kept at their level.
(4) Illegal Income Tax Evasion: The income generated through indulging in illegal activities, e.g. theft,
gambling, drug trafficking, etc. cannot be shown as legitimate income, and the people having such earnings
do not pay tax. This kind of tax evasion is known as illegal income tax evasion.
(5) Understatement of Receipts: In the normal course of business, the money received through credit sale is
added to the total income of the entrepreneur, which results in escalation of the tax liability. With a view to
bringing down the tax liabilities, some of the business organisations indulge in understating their receipt.
(6) Overstatement of Business Expenses: In the normal course of business, the business expenses are
deducted from the total income, thereby reducing the tax liability. Some business organisations indulge in the
practice of overstating their business expenses by showing inflated salaries, rather than the actual ones, to
their employees. This results in reduction in taxable income and tax liability.
Tax evasion is not only illegal, but it is a crime against the nation, as it results in heavy loss of
revenue for the Government. Although, the tax authorities try their best to curb the incidents of tax evasion,
the tax evading community also acts smart and find out new ways and means to evade their tax liabilities.
Causes of Tax Evasion
There are multiple causes of the high incidents of tax evasion, some of which are as following:
(1) High Rates of Taxation: High tax rates is the single most important driving force behind the tax-payers'
intention to hide their income. At times there is attraction to save substantial amount of money, by evading
tax, is so compelling that it is very difficult to resist it, despite the risks associated with such evasion.
(2) Perplexity of Tax Laws: Legal provisions pertaining to Indian Direct tax laws are complex in nature,
which is, inter-alia, also responsible for driving people to evade tax. The complexity associated with tax
procedures is quite perplexing for a common person. Tax filing exercise demands considerable time and
money.
(3) Inadequacy of Powers: The powers delegated to the tax implementing officials are also considered to be
not sufficient to discharge the responsibility in an effective manner. This is yet another cause for tax evasion.
The information regarding income, wealth, expenses, etc. are not disclosed honestly by tax-payers, as a result
of which it is not possible for the assessing officer to determine the correct tax liability. The assessing
officers are not empowered enough to take appropriate action against such erroneous individuals.
(4) Shortage of Experienced Personnel: Lack of sufficient number of trained and experienced personnel in
Income Tax Department is also a reason behind increasing number of tax evasion. Assessment and
investigation of income tax cases is an enormous job, and in order to cope with the same, it is necessary to
have sufficient number of officials, so that the department functions in an efficient manner.
(5) Absence of Deterrent Punishment: The prevailing provisions for penal action against the tax evaders
are not stringent enough to act as an effective deterrent. Appropriate statutory amendments empowering the
implementing authorities with sufficient forces to act against the tax evaders may perhaps go a long way in
curbing the risk of tax evasion.
(6) Lack of Transparency: Lack of transparency with regard to an individual's return status also acts as a
catalyst for tax evasion. In accordance with the statutory provisions, the department is not at liberty to
disclose data in respect of a person's IT return, barring a few specified authorities, e.g. Central Government,
State Government, Courts of Law, RBI, etc.
(7) Moral and Psychological Factors: General deficit in moral values amongst the people in Indian society,
and certain other psychological factors are also responsible for rising number of tax evasions. It is the moral
obligation of each citizen of our country to ensure timely payment of taxes to the Government, and
contribute in the nation building.
(8) Donation to Political Parties: Political system in our country is beyond the reach of the 'Rule of Law';
there is absolutely no check on their activities, especially those relating to financial matters. They are free to
raise funds from big business houses in the name of 'donation for the political party' during election
campaigns. When the election is over, the donors ask for various favours from the party who is in power.
Political party, having received donations from specific business houses, are left with no option but to
accommodate them, including saving them from the wrath of tax authorities.
(9) Corrupt Business Practices: Despite various measures taken by Government and putting in place
legislative provisions, there is no abatement in generation of black money through black marketing,
hoarding, and other corrupt practices. This black money remains out of the purview of taxation.
Remedies/Measures to Check Tax Evasion
For the effective eradication in the cases of tax evasion, the Tax authorities may take into consideration
following suggestive measures:
(1) Reduction in Tax Rates: Prevailing rates of taxation are rather at a high level, which makes the tax
evasion an attractive and tempting proposition. As the savings are quite substantial, a number of tax- payers
prefer to evade tax, despite the risks associated with such evasion. Widespread cases of tax evasion send a
negative signal in society, and encourage other tax-payers also to go for tax evasion and save considerable
amount of money. Under such a scenario, honesty and ethics/morality take a back seat. The tax reform
committee set-up in 1991, under the chairmanship of Raja J. Chelliah), had, inter-alia, recommended
lowering of tax rates as a major step for bringing about improvement in tax collection.
(2) Allowance of Certain Business Expenses: Another recommendation of the tax reform committee is to
allow the entertainment expenses, which are basically incurred by the tax-payers for the expansion of their
businesses, as deduction up to a certain limit.
(3) Regulation of Donation to Political Parties: This is one of the major problem areas behind the tax
evasion cases. As the businessmen are compelled to make donations to political parties with the intention of
protecting their interests, they take it as their right to evade tax. One of the key recommendations of the tax
reform committee was to put in place a system of regulation in this regard.
(4) Uniform Tax on Agricultural Income: The agriculture sector's contribution to the country's national
income is approximately 40% but their contribution to the country's revenue collection is extremely poor
(almost nil). The committee had recommended that the incomes received from different sources (across
various sectors) need to be taxed at uniform rates. In other words, the agriculture income should not be given
any preferential treatment and taxed at par with the taxes on income from other sources.
(5) Changes in Penal Provisions: The prevailing penal provisions against the tax evaders are not stringent
enough, and as such do not act as an effective deterrent against the tax evasion. Appropriate changes in the
existing statute needs to be carried out by the Government, so as to ensure that the punishment meeted out on
tax evaders is in right proportion of the violation.
(6) Permanent Account Number: Earlier the tax evaders were able to avoid/evade tax by opening accounts
under bogus names. However, subsequent to the recommendation of the tax reform committee to allot a
permanent account number (PAN) to each tax-payer, the same has been accepted and implemented. As on
date, each tax-payer is allotted a PAN, which has checked tax evasion to some extent.
(7) Public Opinion: Yet another recommendation of the committee is for the public to come forward and
raise a forceful voice against the rampant practice of tax evasion by initiating a drive to ostracize the tax
evader. Social boycott of tax evader may send a strong signal to the potential tax evaders, and there is a
possibility that they would refrain from evading tax.
(8) Vigorous Prosecution: In our country, there is a general tendency not to adhere with their responsibilities
towards the Government. In fact a majority of citizen take pride in violating various rules, regulations, and
laws. With the above concern in mind, the committee had recommended that there is a need for the
department to frame a very tough prosecution policy against tax evaders.
(9) Education to People: Various mass media such as radio, television, films, etc. should be used
extensively for making common people aware of various tax provisions, so as to enable them to calculate
their tax liability and pay them correctly in a timely manner.
(10) No Awards or Recognition: The names of tax evaders who were penalised in connection with violation
of any statutory provision on taxation should not be considered for any official patronage or recognition or
awards.
Difference between Tax Avoidance and Tax Evasion
Tax Avoidance Tax Evasion
(1) Tax avoidance means minimizing the tax Tax evasion is an illegal activity through
within the four corners of the law by taking which the tax liability is avoided.
advantage of the loopholes in the law.
(2) Tax avoidance is done by taking into Tax evasion is done by using the unfair
consideration various loopholes in the law. means.
(3) Tax avoidance is done with the mala-fide Tax evasion is completely an unlawful
intention but within the boundaries of law. activity.

(4) Tax avoidance starts prior to the actual Tax evasion starts after the actual tax liability
tax liability arises. arises.

Difference between Tax Planning and Tax Evasion

Tax Planning Tax Evasion
(1) Tax planning is an act of reducing the tax Tax evasion is an act of avoiding the tax by
liability by taking the tax incentives that are using the fraudulent and unfair means.
clearly provided by the law.
(2) Tax planning is a legal activity that helps Tax evasion is a legal offence and a tax
in achieving various social and economic evader, if found guilty, will be bound to pay
objectives. the penalty.
(3) Tax planning requires the deep Tax evasion requires the courage to violate
knowledge about the relevant law and Act. the law.
(4) It helps in the economic development of It results in creating the hindrances in the
the country by generating the funds for economic development of the country by
investment in the areas which requires generating the black money which runs in the
special attention. parallel economy along with the legal money.
(5) It helps in promoting the professional It promotes the bribery in the economy which
activities and through which the economic leads to the economic and political condition
of the country is weakened.
 and political condition of the country is
strengthened.

TAX MANAGEMENT
Meaning of Tax Management
The scope of tax management lies within the scope of tax planning. Tax management is the act that results in
taking the necessary steps so that certain conditions that are needed to get the exemption, rebate and relief
can be satisfied. It helps the assesse to perform such acts and take such precautions that are necessary to
claim the tax incentives which are intended at the time of tax planning. Tax management can be defined as
the acts done to achieve the tax incentives which were visualized during the tax planning by following the
conditions, procedures and rules according to the law. It helps in paying the tax on time therefore settling the
tax liability and this would protect the person from the penalties.
Although the tax management has a narrower scope than the tax planning but without tax management, tax
planning cannot be done. It is an integral part of the tax planning.
Features of Tax Management
Following are the features of the tax management:
(1) It acts as an integral part of business management.
(2) Tax planning is incomplete without the tax management.
(3) It does not deal only with the present and the past but also with the future.
(4) It helps in determining the, tax liability in advance and making arrangement of the finance to pay the tax
in time.
(5) It deals with the operational aspect of tax payment. The tax management helps in making such
arrangements that the tax liability is discharged on time and the exemptions which are claimed by the
person are truly worthwhile by satisfying all the necessary conditions as prescribed by law.
(6) It focuses on reducing the tax liabilities.
(7) It is done with compliance to every tax rules and regulations.
(8) It deals with the past in respect of appeals, revisions and rectification of mistakes.
Objectives of Tax Management
Tax management is done to fulfil following objectives:
(1) To help the business enterprise in successful tax planning by taking all the tax laws, rules and regulations
into consideration;
(2) To manage the business decisions and day to day activities in accordance with the tax laws and
regulations by taking into consideration the impact of tax factors;
(3) To manage the accounting treatments in accordance with the accounting standards or systems and other
related tax laws and regulations;
(4) To manage the tax filings and tax payment in accordance with the tax laws and regulations; and
(5) To manage the tax registration, accounting books management, tax records management, tax information
preparation and its reporting in accordance with the tax laws and regulations.

Difference between Tax Planning & Tax Management

Basis of Tax Planning Tax Management
Difference
(1) Scope The scope of tax planning is wide and it The scope of tax management is narrower
includes the term tax management. and it is included in the term tax planning.
(2) Aim Its aim is to reduce the burden of the tax Its aim is to help the tax payer in
on tax payer. complying with the legal
formalities that will reduce the tax burden.
(3) Need It may or may not be needed by every It is required by every person.
person.
(4) Procedure It helps the tax payer to make the It helps in complying with the conditions
decision. for effective decision making.
 (5) Object The objective of tax planning is to claim The objective of the tax management is to
the tax incentives provided by the law. make the tax payer eligible to take the tax
incentives.
(6) Functions It makes the comparison of various It involves maintaining the accounts in the
alternatives in deciding about the best. prescribed manner and paying the tax on
time.
(7) Period It deals with the future benefits. It deals with past, present as well as
future.

TAX PLANNING WITH RESPECT TO SETTING UP NEW BUSINESS

In setting up a new business, there are various crucial issues which a business man must consider; one of
them is tax consideration. Tax is a legal obligation which is compulsory paid by the business man. It is cost
for business. So there is a need of proper tax planning. In this section one has to consider three main
decisions i.e., location, nature and form of organization which a business man take in setting up the new
business. A numbers of factors have to be taken into consideration in deciding about the location, nature and
form of organization of the business. Tax factor also plays an important role in taking such decisions. Tax
planning regarding these decisions includes the following:
Tax Planning with Respect to Setting up New Business
(1) Tax Planning with Respect to Location of Business
(2) Tax Planning with Respect to Nature of Business
(3) Tax Planning with Respect to Form of Business/Organisation/Ownership
(1) Tax Planning with Respect to Location of Business
Tax planning is relevant from location point of view. There are certain locations which are given special tax
treatment. Some of these are as under:
(1) Deduction under section 10A for ten years in the case of a newly established industrial undertaking in
free trade zones, etc.
(2) Deduction under Section 10AA for initial five years, 50% for subsequent five years and further deduction
of 50% for a further period of five years in the case of newly established units in special economic zones on
or after 1-4-2005.
(3) Deduction under Section 10B in the case of a newly established 100% export-oriented undertaking.
(4) Deduction under Section 10BA in the respect of profits from the export of eligible article or things.
(5) Deduction under Section 80-IAB in respect of profits and gains by an undertaking or an enterprise
engaged in the development of Special Economic Zone.
(6) Deduction under Section 80-IB in the case of newly set-up industrial undertaking in an industrially
backward State or district.
(7) Deduction under Section 80-IC in case of newly set-up industrial undertaking or substantial expansion of
an existing undertaking in certain special category States.
(8) Deduction under Section 80-ID in respect of profits and gains from business of hotels and convention
centers in specified area or a hotel at world heritage site.
(9) Deduction under Section 80-IE in respect of certain undertakings in North-Eastern States.
(2) Tax Planning with Respect to Nature of Business
Tax planning is also relevant while deciding upon the nature of business. There are certain businesses which
are granted special tax treatment. Some of them are as follows:
(1) Newly established units in special economic zones [Section 10AA].
(2) Newly established hundred per cent export-oriented undertakings [Section 10B].
(3) Tea Development Account, Coffee Development Account and Rubber Development Account [Section
33AB].
(4) Site restoration fund [Section 33ABA].
(5) Deduction in respect of expenditure on specified business [Section 35AD].
(6) Amortization of certain preliminary expenses [Section 35D].
(7) Deduction for expenditure on prospecting for certain minerals [Section 35E].
(8) Special provisions for computing profits and gains of business of civil construction [Section 44AD].
(9) Special provision in the case of shipping business [Section 44B].
(10) Special provision in the case of business of operation of aircraft [Section 44BBA].
(11) Special provision in the case of royalty income of foreign companies [Section 44D].
(12) Profit and gains from industrial undertakings engaged in infrastructure, etc. [Section 801A]
(13) Special provision for computing profits and gains of retail business [Section AF].
(14) Special provisions in case of royalty income of non-residents [Section 44DA].
(15) Profits and gains of an undertaking or an enterprise engaged in development of special economic zone.
[Section 80-IAB].
(16) Profits and gains from certain industrial undertaking other than infrastructure development undertaking
[Section 80-IB].
(17) Special provisions in respect of certain undertakings or enterprises in certain special category states
[Section 80-IC].
(18) Deduction in respect of profits and gains from business of hotels and convention centers in specified
area or a hotel at world heritage site. [Section 80-ID].
(19) Profits and gains from the business of collecting and processing of biodegradable waste [Section
88JJA].
(20) Employment of new workmen (Section 80 JJAA).
(21) Special tax rate under Sections 115A, 115AB, 115AC, 115AD, 115B, 115BB, 115BA, and 115D.
(3) Tax Planning with Respect to Form of Business/Organisation/Ownership
The form of ownership is an important tool of tax planning. There are different forms of organizations
having different tax incidences at a given level of operation. The form of ownership may be sole
proprietorship, partnership, company, cooperative society, etc. It is the form of ownership which determines
the sharing of profits, responsibilities of the activities to third parties, etc. There are different tax treatments
under different forms of ownership which are given different status under tax laws. Individuals and HUF are
assessed at a slab system while a company is assessed at a flat rate with no exemption limit. Taxation of a
firm does not have a specific shape as that a part of the income is attributable to interest and salary to partner
may be taxed at normal rates relatable to such partner and the remaining part is taxed at a flat rate as for
companies. These forms of ownership are also allowed for different tax concession and rebates under tax
laws.
(1) Sole Proprietorship: The most common form of organization found in the business world is sole
proprietorship. In this form of organization, the proprietor does not require setting up a separate legal entity
and provides no owner liability protection. Any net income will be subject to self-employment tax in addition
to income tax.
(2) Hindu Undivided Family: A joint hindu family pays tax on its total income at the prescribed rates on the
basis of slab system. The family can pay reasonable remuneration to the Karta and other family members for
their services to the business and it is allowed as a deduction in computing the business income. A Hindu
undivided family will get a basic exemption of ₹1,60,000 from assessment year 2011-12. Besides the
deductions which are allowed to all assessees, it is allowed certain deductions under section 80C, 80D,
80DD, 80DDB, and 80GG like individuals.
(3) Partnership: Does not require setting up a separate legal entity and provides no owner liability
protection. Income is not taxed at the partnership level but flows through to the partners' individual tax
returns. Net income apportioned to general partners will be subject to self-employment tax in addition to
income tax.
(4) Company: In the company form of business organization, profits of the company are taxed twice i.e., as
the income of the company, as well as the dividend of the shareholder. Companies are subject to a uniform
rate of taxation which means that the rate of tax remains the same irrespective of the volume of profits.
(5) Limited Liability Partnership (LLP): A Limited Liability Partnership (LLP) is governed by the Limited
Liability Partnership Act, 2008. A LLP is a body corporate formed and incorporated under the Limited
Liability Partnership Act, 2008 and it is a legally separate entity from that of its partners. A LLP has
perpetual succession. Any change in the partners of a LLP will not have any impact on its existence or rights
and liabilities of the LLP. LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership. LLP is liable to the outsiders to the extent of its
assets. However, liability of the partners is limited to their agreed contribution in the LLP.