Corporate Taxation (HONOURS-I)

Law Project

On

TAX PLANNING V/S TAX MANAGEMENT

Submitted to:

Dr. Anindhya Tiwari

Assistant Professor

Faculty of Corporate Tax (Hons1)

Submitted by:

Jagdishwar Kutiyal
Roll No. 68

Semester X, Section A

Submitted on:

25 March,2022

Hidayatullah National Law University

Nava Raipur, Atal Nagar, District - Raipur 492002 (Chhattisgarh)

 CERTIFICATE OF ORIGINALITY

This is to “ certify that Mr. Jagdishwar Kutiyal, Roll Number 68, student of Semester
X, Section-A of B.A. LL.B. (Hons.), Hidayatullah National Law University, New Raipur
(Chhattisgarh) has undergone research of project work titled ‘Tax Planning v/s Tax
Management’, in partial fulfilment of the subject of Corporate Taxation Law.

Place: Raipur ……………………….......................

Date: .2022 Dr. Anindhya Tiwari

Assistant Professor

(Faculty of Corporate of Taxation Law)

Hidayatullah National Law University, Raipur, Chhattisgarh

I
 DECLARATION OF ORIGINALITY

I, Jagdishwar Kutiyal, have undergone research of the project work titled ‘Tax Planning v/s
Tax Management’, as a student of the subject Corporate Taxation (Hons -1). I hereby declare
that this Research Project has been prepared only for academic purposes and is the outcome
of the investigation and preparation done by me under the able guidance and supervision of
Dr. Anindhya Tiwari, Assistant Professor, Faculty of Corporate Tax, Hidayatullah National
Law University, Raipur.

The authors endorses certain views as his own and gives due credit to the jurists & other
writers wherever required.

………………………..

Roll No. 68

Semester V, Section-A

II
 ACKNOWLEDGEMENTS

I, Jagdishwar Kutiyal, would like to humbly present this project to Dr. Anindhya Tiwari. I
would first of all like to express my most sincere gratitude to Dr. Anindhya Tiwari for her
encouragement and guidance regarding several aspects of this project. I am thankful for being
given the opportunity of doing a project on ‘Tax Planning v/s Tax Management’. I am also
thankful to the online library sources for all the conveniences they have provided me with,
which have played a major role in the completion of this paper.

I would like to thank God for keeping me in good health and senses to complete this project. I
would also like to thank my family members and my friends for giving their valuable
opinions in the completion of this paper.

I present this project with a humble heart.”

………………………

Jagdishwar Kutiyal

Semester x

Section A

RollNumber: 68

III
 TABLE OF CONTENTS

S. NO. PARTICULARS PAGE NO.

1. CERTIFICATE OF ORIGINALITY I

2. DECLARATION OF ORIGINALITY II

3. ACKNOWLEDGEMENTS III

4. CHAPTER 1 1
INTRODUCTION AND RESEARCH METHODOLOGY

5. CHAPTER 2 6
TAX PLANNING

6. CHAPTER 3 9
TAX MANAGEMENT

7. CONCLUSION 12

8. BIBLIOGRAPHY 13

IV
 CHAPTER 1

INTRODUCTION AND RESEARCH METHODOLOGY

1.1 INTRODUCTION

Taxation cannot be avoided in an organised society because it is the price paid by the public
to the governing authority for administrative and political stability. It is the responsibility of
every citizen to pay his or her taxes on time and not to use any device to avoid paying taxes.
Because paying taxes reduces tax payers' disposable income, an effective tax strategy is
critical for successful financial planning. Tax planning has been introduced in the Income
Tax Act to address the issue of tax burden.
Tax planning “is the arrangement of one's financial affairs in such a way that, without
violating any legal provisions, full advantage is taken of all tax benefits, such as exemptions,
rebates, allowances, and other reliefs or benefits permitted by the Act. An assessee can
arrange his affairs in such a way, that if possible he may not be required to pay tax, or his
liability be reduced to the minimum. However, this arrangement must be, without violating
legislative injunctions of taxing statutes, by lawfully circumventing them.1 This will help in
reducing the burden of taxation on the assessee.

Tax planning can be defined as the intelligent application of expert knowledge in the
planning of one's economic affairs in order to secure the consciously provided tax benefits
based on national priorities in accordance with legislative and judicial opinion. 2 However, it
does not imply taking unfair advantage of tax law loopholes or evading tax liability. As a
result, tax planning is defined as the methods used by a taxpayer to legally reduce his tax
burden.Tax planning may be legitimate provided it is with in the frame work of tax laws.
Hence tax evasion and tax avoidance must be understood as distinct from tax planning.

Certain exemptions are granted through notifications under Central Excise, Service Tax, and
Customs law. As a result, proper understanding of various tax rules, regulations, and
provisions, exemptions, and procedures, and application of the same in business is essential.

1
Krishna, B. (1979). TAX PLANNING AS TO CAPITAL GAINS. Journal of the Indian Law Institute, 21(4),
536. Retrieved from http://www.jstor.org/stable/43950657
2
Ibid, p. 542
1
To a large extent, industries and businesses try to reduce the burden of their tax obligations
through various means and methods.

Whenever a tax is imposed, there is always a conflict between the governing authority and
the taxpaying public. On the one hand, the taxpayer will always try, rightly or wrongly, to
minimise or reduce his tax liability by adopting certain measures, and on the other hand, the
government will try to amend the tax provisions in such a way that there is minimal scope for
reducing tax burden. Despite this, certain exemptions in Excise Duty, Customs, and even
Service Tax are granted for a variety of social or economic reasons. Certain deductions and
abatements are provided in exchange for meeting certain conditions and extending benefits to
specific segments of society.Sometimes, taxpayers take advantage of faulty drafting of the
rules. The decisions by Supreme Court, High Courts and Tribunals become a law on the
subject and are binding on taxpayers as well as Government authorities. Sometimes to
overcome the decision of the Apex Court, amendments are made in the law. In such
conditions Tax management and Tax planning becomes an important task of the taxpayer.3

Tax planning, tax management, tax avoidance, and tax evasion are all terms that are used
when discussing tax issues. Though the ultimate goal of all four activities is to reduce tax
liability, they are distinct concepts from a legal, ethical, and operational standpoint.”

We shall discuss these concepts in detail in the coming chapters.

1.2 RESEARCH METHODOLOGY

1.2.1 PROBLEM OF THE STUDY:

 What is Tax Planning?

 Whether Tax planning is a legal and legitimate way of reducing tax liability?
 What is Tax Management?
 What is Tax Evasion? How is it different from Tax Avoidance?
 What is the difference between Tax Planning and Tax Management?

3
Mahesh C. Purohit. (1995). Improving Sales Tax Management in India. Economic and Political Weekly, 30(9),
449. Retrieved from http://www.jstor.org/stable/4402445

2
1.2.2 RATIONALE:

I decided to make a project on the aforementioned questions because it is important to

understand the difference between the two terms i.e. ‘Tax Planning’ and ‘Tax Management’.
People often use these two terms interchangeably which cannot be accepted. Also, it is very
important to understand the basic points of difference between Tax Planning, Tax Evasion,
and Tax Avoidance.

1.2.3 OBJECTIVES OF THE STUDY:

 To understand the meaning of Tax Planning and Tax Management.

 To find out as to how tax planning is a legal and legitimate way of reducing tax
liability.
 To understand the basic points of difference between Tax Planning and Tax
Management.
 To find out the difference between Tax Evasion and Tax Avoidance.
 To highlight the importance of Tax Planning and Tax Management.

1.2.4 REVIEW OF LITERATURE:

 Anil Kumar Jain (1987) “It has been observed that tax avoidance denotes a situation
in which the taxpayer reduces his tax liability by exploiting loopholes and ambiguities
in the legal provisions, whereas tax evasion denotes a situation in which facts are
deliberately misinterpreted and the tax liability is understated. As a result, while tax
avoidance is perfectly legal and is sometimes referred to as 'tax planning,' tax evasion
is illegal and, as such, carries the risk of penalties and prosecution under tax laws.
 James Alm, Roy Bahl & Matthew N. Murray (1990) have mentioned the
development and estimation of a model of individual tax compliance behaviour,
including evasion and avoidance. The model takes into account the significance of
marginal income tax rates, payroll tax contributions and benefits, as well as the
likelihood of detection and the penalty for unpaid taxes. Individual-level data is used
to estimate share equations for avoidance, evasion, and reported income. According to
the estimation results, the tax base rises with higher benefits for payroll tax
contributions and falls with higher marginal tax rates; the base also falls with harsher
penalties and more certain detection of evasion as individuals substitute avoidance
income..

3
  Sanjit R. Rajayer (2010) has established the existence of a rule of law arising from
the McDowell case and placed it in the context of India's developing tax avoidance
jurisprudence. After examining the essence of the 'rule' in McDowell, it is argued that
the rule is merely a rule in relation to the nature of analysis to be undertaken by the
court, rather than a specific determination or test to determine which transactions are
permissible and which are not in the context of tax avoidance.
 Prashant Bhushan (2012) The Vodafone tax case, in which the Supreme Court
overturned a Bombay High Court ruling on the validity of the income tax
department's claim on capital gains incurred in the Hutch and Vodafone sale
transaction, has been hailed as a boon to corporate investment. The decision, on the
other hand, favours tax evasion strategies. Indeed, it runs counter to the Supreme
Court's own 1986 decision opposing such tactics.
 Thomas Plenborg & Rene Coppe Pimentel (2016) have proposed that there are
eight empirical implementation issues that practitioners should pay closer attention to.
Implementation issues include the selection of comparable firms, the use of reported
versus forecasted earnings, and the best method for calculating averages. In order to
improve the accuracy of valuation outputs, they identified a more effective way to
handle each implementation issue. We anticipate that by synthesising the main
empirical findings and identifying best practises for applying market multiples, we
will be able to assist analysts, portfolio managers, and investment bankers in making
more informed decisions when determining a firm's value.”

1.2.5 NATURE OF STUDY:

The research work has been done using the descriptive methodology and the same is doctrinal
and analytical in nature.

1.2.6 SOURCES OF DATA:

The study has been done using the second hand data. These secondary information have been
gathered from published sources such as books, Journals, Articles, Newspapers, Magazines,
etc.

4
1.2.7 MODE OF CITATION:

APA 6th ed. has been followed for citation purposes.

1.2.8 LIMITATION OF THE STUDY:

This project explains the meaning of the terms such as ‘Tax Planning’ and ‘Tax
Management’. Critical analysis has not been done. The study majorly focuses upon the points
of difference between ‘Tax Planning’ and ‘Tax Management’. Also, a limited number of
cases have been taken into account while completing the paper. The topic needs more
explanation in terms of different types of tax planning barring short range and long range tax
planning.

5
 CHAPTER 2

TAX PLANNING

The term ‘tax’ refers to a mandatory contribution that a person must make to the country's
revenue, which is imposed by the government (central or state) on the income or wealth of
the persons or included in the cost of goods, services, or transactions. For obvious reasons,
every assessee wants his or her tax liability to be as low as possible, and in order to do so, he
or she can use tax planning to reduce the tax burden as much as possible by using legal
methods and means.

Tax “planning can be defined as an arrangement of one’s financial and economic affairs by
taking complete legitimate benefit of all deductions, exemptions, allowances, and rebates so
that tax liability reduces to minimum.

For example, X is an individual. For the assessment year 2012-13, his gross total income is
Rs. 3,40,000. Tax on Rs. 3,40,000 is Rs. 16,480. To reduce his tax liability, he deposits Rs.
50,000 in public provident fund account. Consequently his taxable income and tax liability
would thereof be reduced to Rs. 2,90,000 and Rs. 11,330 respectively.4

Here, as the tax liability has been reduced within the legal framework, it is tax planning.

In the process tax planning, there is no intention to deceit the legal spirit behind the tax law.

A few examples of tax planning could be: Correct Classification of the goods, claiming
permissible deductions like discounts, freight etc. from the assessable value, availing Cenvat
credit, availing benefits under Foreign Trade Policy, restructuring of business, procurement
from Small Scale Industries, et cetera.

2.1 TAX EVASION AND TAX AVOIDANCE:

Each tax payer is expected to make voluntarily disclosures of his income and tax liabilities
through legal compliance. When a tax payer deliberately or consciously does not furnish
material particulars or furnishes inaccurate or false particulars or defrauds the State by
violating any of the legal provisions, it shall be termed as tax evasion. Tax evasion is

4
Singhania, V., & Singhania, K. (2016). Direct Taxes Law & Practice. New Delhi: Taxmann Publications (P.)
Ltd.
6
considered as unethical and illegal. Tax avoidance, on the other hand, is a method of reducing
tax liability by availing of certain loop holes and lacunae in the law. It is the art of escaping
the burden of tax without breaking the law. However, this kind of tax planning demands a
thorough knowledge of the provisions of the tax laws and relevant legal decisions as well as
other statutes affecting any aspect of taxation. The Supreme Court of United States has in
fact, said that one may “avoid a tax but may not evade it 5. In this context, it is worth noting
that taking advantage of the loopholes in law provides only short run benefits because, as and
when the loopholes in the law are made public or sometimes even earlier, legislature steps
into plug the loopholes.”

In the earlier days, it was established in various courts both in India and abroad that tax
avoidance is legally valid. It has been explicitly laid down that it is open to the tax payer to
avoid tax if he can do so within the limits of the law without violating it. 6 In recent years,
however, the courts have changed their attitude towards tax avoidance and have viewed tax
avoidance with displeasure. The Supreme Court of India has said that it is neither fair not
desirable to expect the legislature to intervene and take care of every device and scheme to
avoid taxation, it is up to the court to determine the nature of new and sophisticated legal
devices to avoid tax and consider whether the situation created by the devices for what they
really are and to refuse to give judicial benediction. 7 In the same judgment, Supreme Court
judges made a clear distinction between tax avoidance and tax planning - tax planning may
be legitimate provided it is with in the frame work of law. Colourable devices cannot be part
of tax planning and it is wrong to encourage or entertain the belief that it is honourable to
avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen
to pay the taxes honestly without resorting to subterfuges.

It is clear from the “above judgment that what constitutes a crime is tax evasion and what is
undesirable is tax avoidance but it is certainly desirable to engage in the practice of tax
planning.

2.2 SHORT RANGE AND LONG RANGE TAX PLANNING

Tax planning may be classified into two broad heads: short range tax planning and long range
tax planning. Short range tax planning may be the same as year to year planning to achieve a

5
United States vs. Isham, 84 U.S 496 (21 L. Ed. 728)
6
Ramaswami Naicher vs. State of Madras, (1968) 69 ITR 420
7
McDowell Co Ltd. vs. CTO, 154 ITR 148 (SC)

7
specific or limited objective. For example, an employee whose income is likely to register an
unusual growth in a particular year as compared to the preceding yea, might plan to subscribe
to the PPF/NSC within the prescribed limits in order to enjoy substantive tax relief. By
investing in such a way, he is not making permanent commitment but he is substantially
making savings in the tax.8 Short term goals for each year should be identified and it should
be consistent with the long term goals.

In the case of long range tax planning, each tax payer should identify and specify his long
term financial objectives. Long term goals must be flexible enough to adapt changes as well
as strong enough to accommodate short term plans. The long range planning sometimes may
not even confer immediate tax benefits. It aims at a long future period, the benefit of which
may be spread over a number of years in future. For example, in case where an employee
transfers certain shares to his minor son, the income arising from the shares will be clubbed
with transferor’s income under” section 64 (IA) of the Act.9

8
Hicks, S. A.; Dillaway, M. P. (1982). Control over tax planning. Tax Executive, 34(3), 236
9
Ibid.

8
 CHAPTER 3

TAX MANAGEMENT

Tax planning is a broader term that includes tax management as well. Tax management is an
essential component of tax planning. Planning that results in the timely filing of various
returns, compliance with applicable laws, and the avoidance of interest and penalties is
referred to as efficient tax management. It is a procedure for avoiding defaults and ensuring
legal compliance. Tax management would include the filing of returns with all necessary
documentary evidence for various claims, rebates, reliefs, deductions, and the computation of
income and tax liability. If the assessee fails to meet his or her obligations under the tax laws,
he or she may face serious consequences.Such consequences take shape of levy of interest,
penalty, prosecutions, forfeiture of certain rights etc. Therefore any effort in tax planning is
incomplete unless proper discharge of responsibilities is made.

Tax “management is not a device to enable a taxpayer to evade, or try to evade, his
obligations to the State. On the contrary, it is an activity where integrity is essential. There
can be said to be four basic objectives of tax management. The first is to ensure that the
corporation is correctly determining and paying the taxes imposed upon it by law, but paying
no more and no less than it should. The second is to ensure that all significant corporate
decisions involving money, whether related to current or future operational or financial
planning, are properly tested for tax implications and the minimization of tax cost. The third
is to cultivate an appropriate tax consciousness in the thinking of the management team. The
fourth is to foster and maintain good but correct relations with the taxing authorities.10
The functions of tax management are exercised in two ways: (1) control over compliance and
(2) planning. For a long time, these functions were turned over by industry to the
corporation's auditors. Later, the compliance function-i.e., the preparation and filing of
returns became an internal operation in larger businesses, although the planning function
remained with the auditors. More recently, both functions have been united in larger

10
Holland, V. (1963). Effective tax management. Tax Executive, 15(2), 99

9
corporations in a ‘tax executive’ who may be described as Taxation Controller, Tax Manager
or some similar title.11
Planning is, of course, the most important function. While compliance is concerned with past
transactions, the filing of returns and the payment of taxes, planning is concerned with
surveying transactions before they are closed and considering their tax implications. Tax
planning is important in all phases of a corporation's” existence.12

3.1 THE DISTINCTION BETWEEN TAX PLANNING AND TAX MANAGEMENT

Tax management involves the procedures of compliance with the statutory provisions of law.
The following are the broad areas of difference between tax planning and tax management13:
Basis Tax Planning Tax Management

Meaning Tax planning devices a Tax management implies

person’s financial affairs by well-timed and regular
taking advantage of all the adherence to the tax laws and
allowable deductions, arrangements of financial
exemptions, allowances and affairs, in a way that reduces
rebates legitimately, so that the taxes.
the tax liability is the least.

Deals with Planning of taxable income Maintaining accounting

and planning of investments. records, filing of returns,
audit of accounts and
payment of taxes on time.

Objective To reduce the tax liability to To adhere to the provisions

a minimum. of tax laws.

Emphasis It lays emphasis on reducing It lays emphasis on reducing

tax liability. taxes and penalties.

11
McLaughlin, C. (1963). The function of tax management. Tax Executive, 15(2), 106
12
Ibid, p 107
13
Surbhi S., Difference between Tax Planning and Tax Management, https://keydifferences.com/difference-
between-tax-planning-and-tax-management.html.

10
Obligation It is not compulsory. It is compulsory for every
assessee.

It needs to be “noted that while tax planning is futuristic in its approach, tax management
relates to past (i.e. assessment, proceedings, rectification, revision, appeals, etc.), present
(filing of return of income on time on the basis of updated records) and future (corrective
action).
Further, the benefits arising from tax planning are substantial particularly in the long run. As
a result of effective tax management, penalty, prosecution, etc. can be avoided. It benefits in
the short” run.14

14
Singhania, V., & Singhania, K. (2016). Direct Taxes Law & Practice. New Delhi: Taxmann Publications (P.)
Ltd.

11
 CONCLUSION

It cannot be denied that tax is a tricky business and one needs to make “sure that he
understands it to the best of his abilities. There are different types of taxes that we pay
throughout our life such as consumption tax, VAT, property tax, progressive, among others.

We have already discussed as to what is tax planning and what is tax management and how
they are different from each other. It should always be kept in mind that tax planning is
important for both small and large scale businesses as it can helps to achieve the business
goals. If one has a tax plan as an owner of a business, he can lower the amount of taxable
income and reduce his liabilities. Depending on the type of business one has, he can obtain
many different benefits.

It has been already been established that tax planning is the honest and rightful activity to
minimize tax burden of various persons. The basic need of tax planning is to reduce the tax
liability by arranging the financial affairs in accordance with the requirements of law. It is to
be noted that channelization, of taxable income to the various investment schemes is one of
the prime purpose of tax planning.

On the other hand, tax management includes filing of various returns in time, compliance of
the applicable provisions of law and avoiding of levy of interest and penalties which is its
prime purpose.

Often, people who do not know the difference between the two major terms discussed in this
paper i.e. tax planning and tax management use them interchangeably. However, the two
terms are nowhere the same in their meanings. One who is new in tax matters must from the
beginning itself understand the difference between the two.

At the end, it can be concluded by saying that tax planning and tax management are two most
important concepts in the taxation” world.

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 BIBLIOGRAPHY

BOOKS:

1. Singhania, V.K., & Singhania, K. (2016). Direct Taxes Law & Practice. New Delhi: Taxmann
Publications (P.) Ltd.
2. Mehrotra, H.C., & Goyal, S.P. (2018). Income Tax including Tax Planning & Management. Agra:
Sahitya Bhawan Publications.

JOURNALS AND ARTICLES:

1. Alm, J., “Bahl, R., & Murray, M. (1990). Tax Structure and Tax Compliance. The
Review of Economics and Statistics, 72(4), 603-613. Retrieved from
https://www.jstor.org/stable/2109600
2. BHUSHAN, P. (2012). Legitimising Tax Avoidance. Economic and Political
Weekly, 47(9), 37-40. Retrieved from http://www.jstor.org/stable/23214472
3. Hicks, S. A.; Dillaway, M. P. (1982). Control over tax planning. Tax Executive,
34(3), 233-242.
4. Holland, V. (1963). Effective tax management. Tax Executive, 15(2), 99-105.
5. Jain, A. (1987). Tax Avoidance and Tax Evasion: The Indian Case. Modern Asian
Studies, 21(2), 233-255. Retrieved from http://www.jstor.org/stable/312646
6. Krishna, B. (1979). Tax Planning as to Capital Gains. Journal of the Indian Law
Institute, 21(4), 536-549. Retrieved from http://www.jstor.org/stable/43950657
7. McLaughlin, C. (1963). The function of tax management. Tax Executive, 15(2), 106-
111.
8. Mahesh C. Purohit. (1995). Improving Sales Tax Management in India. Economic
and Political Weekly, 30(9), 449-456. Retrieved from
http://www.jstor.org/stable/4402445
9. Plenborg, T., & Pimentel, R. (2016). Best Practices in Applying Multiples for
Valuation Purposes. The Journal of Private Equity,19(3), 55-64. Retrieved from
http://www.jstor.org/stable/44397547”
10. Rajayer, S. (2010). Existence and Relevance of the McDowell Rule: Use of the
Corporation as a Vehicle of Tax Planning in Light of "Vodafone" and the Direct
Taxes Code. National Law School of India Review, 22(2), 125-136. Retrieved from
http://www.jstor.org/stable/44283794

13