TAX PLANNING, TAX

MANAGEMENT, TAX EVASION

AND TAX AVOIDANCE

Lesson 1
Introduction
■ Tax payment has never been a pleasure for any tax payer.
■ Though tax is defined as a contribution by the people to the government but
it is a levy and an unpleasant burden on every assessee.

■ It is a task which requires lot of mental and physical efforts.

■ One tries to reduce tax burden by many means because tax is reduction in
his disposable income which he earned from his physical and mental efforts.
■ Therefore every tax payer tries to minimise the burden of tax by his own
means.
CONCEPT OF TAX PLANNING

■ Tax Planning is an exercise undertaken to minimise tax liability

through the best use of all available allowances, deductions,
exclusions, exemptions, etc., to reduce income.
■ Tax planning can be defined as an arrangement of one's financial and
business affairs by taking legitimately in full benefit of all deductions,
exemptions, allowances and rebates so that tax liability reduces to
minimum.
■ In other words, all arrangements by which the tax is saved by ways and
means which comply with the legal obligations and requirements and
are not colourable devices or tactics to meet the letters of law but the
spirit behind these, would constitute tax planning.
■ In brief tax planning may be defined as an
arrangement of one's financial affairs in such a way
that without violating in any way the legal provisions
of an Act, full advantages are taken of all
exemptions, deductions, rebates and reliefs permitted
under the Income Tax-Act, so that the burden of the
taxation on an assessee, as far as possible be the
least.
TAX MANAGEMENT

■ Tax planning is a broader term which requires

management of affairs in such a way that results in the
reduction in minimisation of tax liability.

■ Tax planning is not possible without tax management.

■ It refers to the compliance of statutory provisions of law.

Areas of tax management
■ Some important areas of tax management are as stated below.
1) Deduction of tax at source
2) Payment of tax and self assessment
3) Payment of tax on demand
4) Maintenance of accounts
5) Audit of accounts
6) Payment of cess, duty or fees, bonus and commission to employees etc.
7) Furnishing return of income
8) Documentation and maintenance of tax files etc.
9) Review of order received from tax Authorities.
OBJECTIVES OF TAX PLANNING
Basic objectives of tax planning are:
1) Reduction of tax liability
2) Minimisation of litigation
3) Productive investment
4) Reduction in cost
5) Healthy growth of economy
6) Employment generation
■ (a) Reduction in tax liability: The basic objective of tax
planning is to reduce the tax liability so that enough
surplus out of profits remains with the earner of it for his
personal and social needs and also for future investments
in his business.
■ This is only possible by planning his tax affairs properly
and availing the deductions, exemptions and reliefs, etc.
which are admissible under the Acts.
■ He can succeed in doing so by updating his knowledge
about the various concessions available in the taxation
laws and the conditions to be fulfilled to avail them.
■ (b) Minimisation of litigation: There is always a tug-of-war between the tax
payers and the tax administrators. The tax payers try their best to pay the
least tax and the tax administrators attempt to extract the maximum.
■ This sometimes results in prolonged litigation. Actually the main reason of
litigation lies in tax avoidance and not in tax planning.
■ Whenever a tax payer wants to reduce his tax liability by finding a loophole
in the Act and title tax administrator does not agree with the interpretation of
the assessee under which he is demanding exemption, deduction or relief, it
results in litigation.
■ A good tax planning is always based on clear words of the statute or in
conformity with the provisions of the taxation laws. In such a case the
chances of litigation are minimised.
■ Case- keroche industries
■ Bidco oil refineries
■ (c) Productive investment: A proper tax planning brings
fiscal discipline in the functioning of a tax payer and
reduces the transfer of money, from the person who has
earned it by hard labour, to the Government for waste and
misuse.
■ The amount so saved enhances the capacity of the tax
payer for expansion and growth, which in turn increases
the tax revenue of the Government.
■ (d) Reduction in cost: Incidence of tax (direct and
indirect) forms a part of cost of production.

■ The reduction of tax by tax planning reduces the

overall cost.

■ It results in more sale, more profit and more tax

revenue and more investment.
■ (e) Healthy growth of economy: The growth of a nation's
economy depends upon the growth of its peoples.
■ Savings through tax planning devices foster the growth of
economy while savings through tax evasion lead to
generation of black money, the evils of which are obvious.
■ The tax planning plays an important role in the development
of backward regions and development of infrastructure
facilities or in other words it takes the economy in the
intended direction.
■ (f) Employment generation: The amount saved by tax
planning is generally invested in commencement of new
undertakings or expansion of the business.
■ This creates new employment opportunities in the society.
■ Further, taxation laws are so complicated that by and large
tax payers cannot plan their affairs efficiently. Hence, such
persons need services of chartered accountants, financial
advisers and lawyers.
■ Such persons join the business concerns either as
employees or provide their services as tax experts.
IMPORTANCE OF TAX PLANNING
■ Though the basic objective of the planning is to minimise the tax
liability of tax payer yet following are the some considerations
which are important for tax planning-
■ (i) When an assessee has not claimed all the deductions and relief,
before the assessment is completed, he is not allowed to claim
them at the time of appeal.
■ (ii) Tax planning exercise is more reliable since the Companies
Act, and other allied laws narrow down the scope for tax evasion
and tax avoidance techniques, driving a taxpayer to a situation
where he will be subjected to severe penal consequences.
■ (iii) Presently, companies are supposed to promote those activities and
programmes, which are of public interest and good for a civilised society.
In order to encourage these, the Government has provided them with
incentives in the tax laws. Hence a planner has to be well versed with the
laws concerning incentives.

■ (iv) With increase in profits, the amount of corporate tax also increases
and it necessitates the devotion of adequate time on tax planning to
minimise' tax burden.

■ (v) Tax planning enables a company to bear the burden of both direct and
indirect taxation during inflation. It enables companies to make proper
expense planning, capital budgeting, sales promotion planning etc.
■ (vi) Repairs, renewals, modernisation and replacement of plant
and machinery are indispensable for an industry for its continuous
growth.
■ The need for capital formation in the corporate sector cannot be
ignored and heavy taxation reduces the inflow of corporate funds.
■ Capital formation helps in replacing the technologically obsolete
and outdated plant and machinery and enables carrying on of
manufacturing operation with a new and more sophisticated
system.
■ Any decision of this kind would involve huge capital expenditure
which is financed generally by ploughing back the profits,
utilisation of reserves and surplus along with the availing of
deductions.
■ Availability of accumulated profits, reserves and surpluses and
claiming such expenses as revenue expenditure are possible
through proper implementation of tax planning techniques.
■ (vii) In current days of credit squeeze and dear money conditions,
even a shilling of tax decently saved may be taken as an interest-
free loan from the Government, which perhaps, an assessee need
not repay. It is rightly said that money saved is money earned.

■ Thus, any legitimate step taken by an assessee directed towards

maximising tax liability, keeping in view the intention of law, will
not only help it but also the society since it promotes the spirit
behind the legal provisions.
ESSENTIALS OF TAX PLANNING
■ Successful tax planning techniques should have following
attributes:
■ (a) It should be based on up-to-date knowledge of tax laws. Not
only is an up-to-date knowledge of the statute law necessary,
assessee must also be aware of judgments made various by the
courts.
■ In addition, one must keep track of the circulars, notifications,
clarifications and Administrative instructions issued by the KRA
from time to time.
■ (b) The disclosure of all material information and furnishing the
same to the income-tax department is an absolute pre-requisite of
tax planning as concealment in any form would attract the penalty
clauses - the penalty often ranging from 100 to 300% of the
amount of tax sought to be evaded.
■ (c) Whatever is planned should not simply satisfy the requirements
of law by complying with legal provisions as stated and meeting
the tax obligations but also should be within the framework of law.
■ It means that sham transactions or make-believe transactions or
colourable devices, which are entered into just with a view to
misuse the legal provisions, must be avoided.
■ Every citizen is obliged to honestly pay the taxes. Therefore, only
colourable devices resorted to by the tax payers for evading a tax
liability will have to be ignored by the court.
■ (d) A planning model must be capable of attainment of the desired
objectives of a business and be suitable to its possible future
changes.
■ Therefore, all the important areas of corporate planning, whether
related to strategic planning, project planning or operational
planning involving tax considerations for long-term or short-term
management objectives and policies should be strictly scrutinised in
relative situations.
■ Foresight is the essence of a business. Tax planning is one of its
important attributes.
TAX EVASION AND TAX
AVOIDANCE
■ In the context of not paying tax, there are generally two methods
which are used by the assesses. They are (1) Tax Evasion (2) Tax
Avoidance.

■ (1) Tax Evasion: It refers to a situation where a person tries to

reduce his tax liability by deliberately suppressing the income or by
inflating the expenditure showing the income lower than the actual
income and resorting to various types of deliberate manipulations.
■ An assessee guilty of tax evasion is punishable under the relevant
laws.
■ Tax evasion may involve stating an untrue statement knowingly,
submitting misleading documents, suppression of facts, not
maintaining proper books of accounts of income earned (if required
under the law) omission of material facts in assessments etc.
■ An assessee who dishonestly claims the benefit under the statute by
making false statements, would be guilty of tax evasion.
■ A tax evader reduces his taxable income by one or more of the
following steps :
a) Unrecorded sales.
b) Claiming bogus expenses, bad debts and losses etc.
c) Charging personal expenses as business expenses, e.g., car
expenses, telephone expenses, travelling expenses, medical
expenses incurred for self or family may be shown in the account
books as business expenses.
d) Non-disclosure of capital gains on sale of asset.
■ (2) Tax Avoidance: The line of demarcation between tax planning and
tax avoidance is very thin and blurred. There could be elements of
malafide motive involved in tax avoidance also.
■ Any planning which, though done strictly according to legal
requirements defeats the basic intention of the Legislature behind the
statute could be termed as instance of tax avoidance.
■ It is usually done by adjusting the affairs in such a manner that there is
no infringement of taxation laws and by taking full advantage of the
loopholes therein so as to attract the least incidence of tax.
■ Earlier tax avoidance was considered completely legitimate, but at
present it may be illegitimate in certain situations only.
The social evils of tax avoidance
■ The social evils of tax avoidance are manifold, which may be Summarised as below:
1) Substantial loss of much needed public revenue, particularly in a welfare state like
Kenya;
2) Serious disturbance caused to the economy of the country by piling up of mountains
of black money directly causing inflation;
3) Large hidden loss to the community by some of the best brains in the country being
involved in the perpetual war waged between tax avoider and his expert team of
advisers, lawyers and accountants on one side, and tax officer and perhaps not so
skillful advisers on the other side;
4) Sense of injustice and inequality of those who are unwilling or unable to profit by it;
5) Tactics of transferring the burden of tax liability to the shoulders of the guideless,
good citizens from those of artful dodgers.
 DIFFERENCE BETWEEN TAX PLANNING' AND TAX MANAGEMENT'

■ The difference between tax planning and tax management are stated as under:
■ 1. Tax planning is a wider-term. It includes tax management. Tax management is
the first step towards tax planning.
■ 2. The primary aim of tax planning is minimising incidence of tax, whereas main
aim of tax management is compliance with legal formalities.
■ 3. Tax planning is not essential for every assessee, while tax management is
essential for every person, otherwise he may be liable for penal interest, penalty
and prosecution.
■ For example, a person may not be reducing his tax liability by claiming any
exemption, deduction, relief, etc. in computing his total income but if he is liable
to pay advance tax or responsible for deduction of tax at source, etc. he has to
comply with all legal formalities.
■ 4. Tax planning is a guide in decision making while tax
management -is a regular feature of an undertaking.

■ 5. Tax planning essentially looks at future benefits arising out of

present actions.
■ Tax management relates to past, present and future.
■ 6. In tax planning exemptions, deductions and reliefs are claimed
while in tax management the conditions are complied with to
claim the exemptions, deductions and reliefs.

■ 7. In tax planning alternative economic activities are studied and

an activity with least incidence of tax is selected whereas tax
management includes maintenance of accounts in prescribed
form, getting books audited, filing the required forms and returns,
payment of taxes, etc.
 DIFFERENCE BETWEEN TAX
PLANNING AND 'TAX EVASION'
■ 1. Tax planning is an act within the four corners of the Act to
achieve certain social and economic objectives and it is not a
colourable device to avoid the tax. Tax evasion is a deliberate
attempt on the part of tax-payer by misrepresentation of facts,
falsification of accounts including downright fraud.

■ 2. Tax planning is a legal right and a social responsibility. By tax

planning certain social and economic objectives are achieved. Tax
evasion is a legal offence coupled with penalty and prosecution.
■ 3. Tax planning requires thorough knowledge of the relevant Acts, social,
economic and political situation of the country while tax evasion requires
misadventure to infringe the law.

■ 4. Tax planning helps in economic development of the country by

providing additional funds for investment in desired channels while tax
evasion generates black money which is generally utilised for smuggling,
bribery, extravagant expenses on luxury and unlawful activities.

■ 5. A tax planner enjoys its fruits freely and he does not suffer from high
blood pressure, whereas a tax evader remains always in anxiety of search
and seizure and suffers from many abnormalities.
 DIFFERENCE BETWEEN 'TAX AVOIDANCE' AND 'TAX EVASION'

1) Tax avoidance is legal but tax" evasion is illegal.

2) In case of tax avoidance the objects and spirit of the law are not
followed while in the case of tax evasion the provisions of the law are
flouted.
3) In case of tax avoidance no penalty can be imposed while in case of tax
evasion the person is liable to penalty and prosecution.
4) In case of tax avoidance, black money is not generated, hence, it is not
very harmful to the society. In case of tax evasion, black money is
generated which is mostly used for unproductive illegal and immoral
purposes.
Illustration 1
■ State with reason whether following transaction are an act of (i) Tax evasion
(ii) Tax avoidance (iii) Tax management.
a) A ltd. maintains a register for tax deducted at source for timely compliance
b) Rael deposited Shs. 7000/- in P.P.F. account to avail deduction s
c) R. Ltd. purchases an expensive car for the use of the son of a director which is
shown as business assets.
d) A transfer some debenture to his friend without any consideration to save tax
on interest an debentures.
e) X Ltd. deducts at source tax from the payments but does not deposit the same
in the government treasury.
END
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