Methods of Reducing Tax Liabilities

Tax Planning-Tax Evasion-Tax Avoidance

Submitted By :-

Anand Sharma Roll No- 09 PGDM 3A

There is nothing which hurts more than payment of taxes. One question that goes through
every tax payers mind is how can I reduce my tax liability? Reducing tax liability is not always a bad or illegal exercise. There are legitimate ways to reduce taxes through proper tax planning and such methods are always encouraged. But unfortunately, there is also a tendency to reduce tax through illegal methods. They are not accepted practice and can invite problems. There are three methods which are commonly used by the taxpayers to reduce their tax liabilities :

Tax Planning, Tax Evasion and Tax Avoidance

TAX PLANNING
Tax planning is arrangement of financial activities in such a way that maximum tax benefits, as provided in the income-tax act are availed of. It envisages use of certain exemption, deductions, rebates and reliefs provided in the act.Taxes are here to stay and the best we can do is to plan for them. Tax planning is not just planning how to pay tax, but also maximizing benefits from it.On the tax payment part, it is common to see people paying large part of tax towards the end of financial year. This may sound convenient but government does understand this. Paying tax in time is mandatory otherwise it may attract penalty, even if you pay all your taxes at the financial year end . Tax planning is an important part of financial planning. Efficient tax planning enables you to reduce your tax liability. With our advice, you will pay the right amount of tax. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with your long term goals. Tax planning is not..... Tax Planning is NOT tax evasion. It involves planning of your income sources and investments. It is not tax evasion which is illegal under Indian laws. Tax Planning is NOT just putting your money blindly into any investments avenues. Tax Planning is NOT difficult. It can be practiced by anyone and with a very little time commitment as long as one is organized with their finances.

Active Invest will offer you prudent advice on how to efficiently optimize your taxes. We will suggest relevant tax-saving ideas and instrument options that will effectively address the four important issues regarding tax-planning: Is there any tax benefit on the amount invested? Is there any tax benefit on the income received from such investments? Is the principal investment received on maturity taxable? What is the rate of tax on the income received? WHY TAX PLANNING ?

Tax planning is an integral piece of a proper financial plan. The fact is many people do not concentrate on tax planning Understanding the impact taxes will have on your financial well-being is essential, especially for those who are self-employed. Take time to plan for the current year and make adjustments to create positive momentum. There are always new laws and changing provisions in the tax code, which, again illustrate the importance of planning. Tax planning is not a device to reduce tax burden. In fact, it helps savings by investments in government securities. Savings reduce extravagance, and correspondingly inflation. Tax savings are permitted only for investment made i:n government securities and bonds of priority sectors which ultimately help the nation. Therefore, the savings in tax help the Central and state governments to mobilizes funds by way of investments and as such the government earns much by way of other benefits, by sacrificing small amount of tax. The Supreme Court in one case observed that "Tax planning may be legitimate provided it is within the framework of Law". By tax planning, the government is equally benefited. Savings and investments are interconnected. Before making investments the person has to consider various factors such as

Liquidity-when he requires the amount to meet the educational expenses of children,for marriage, house construction or for a secure future after retirement. Security of the investment. The return and tax on income on such investments.

TAX EVASION
Tax evasion is the illegal act or practice of failing to pay taxes which are owed. In businesses, tax evasion can occur in connection with income taxes, employment taxes, sales and excise taxes, and other federal, state, and local taxes. Dishonest taxpayers try to reduce their taxes by concealing income, inflation of expenses, falsification of accounts and willful violation of the provisions of the Income-tax Act. Such unethical practices often create problems for the tax evaders. Tax department not only imposes huge penalties but also initiate prosecution in such cases . Examples of practices which are considered tax evasion: Knowingly not reporting income . Under-reporting income (claiming less income than you actually received from a specific source . Providing false information to the IRS about business income or expenses . Deliberately underpaying taxes owed .

Substantially understating your taxes (by stating a tax amount on your return which is less than the amount owed for the income you reported). Because tax evasion is considered intentional, the IRS can bring you under criminal charges and tax evasion can result in jail time as well as substantial fines and penalties. Common Misspellings: Tax evasion is commonly confused with tax avoidance, which is the legal minimizing of taxes owed by approved means.

Penalties for Tax Fraud and Evasion Consequences for not filing a tax return can include both criminal and civil penalties. Criminal Consequences: Criminal charges may be brought against an individual within six years of the date that the tax return should have been filed. Additionally, non-filers can be fined up to $25,000 per year and may also be put in prison for one year for each year of nonfiling. Civil Consequences: Civil penalties include assessing interest of taxes due for the entire period of time for which they are outstanding. While criminal consequences are limited to 6 years, civil penalties can accrue indefinitely. NEW DELHI, NOV. 22 2012: The Directorate General of Central Excise Intelligence (DGCEI) has detected two cases of tax evasion by Cadbury India, the Minister of State for Finance, S.S Palanimanickam, said in a written reply in Rajya Sabha on Thursday. The Minister said, two cases of tax evasion by Cadbury India Ltd have been detected by DGCEI during the years 2009-10 to 2012-13, up to October 31, 2012. One case is related to evasion of Central excise and the other is concerned with evasion of service tax. He said Central excise duty evasion by the Baddi (in Himachal Pradesh) unit of Cadbury India was detected in 2011-12. It involves evasion of approximately Rs 200 crore. The matter is under investigation, Palanimanickam said. The other case, related to service tax evasion of Rs 13.43 crore by Cadbury India, Mumbai, has been adjudicated and a demand of Rs 11.75 crore was confirmed along with a penalty of equal amount. He said Rs 12.08 crore tax with Rs 0.53 crore interest was realised during investigation. In response to the Finance Ministrys answer, a Cadbury India spokesperson said, A compliant and ethical corporate culture, which includes adhering to laws and regulations in the countries in which we operate, is integral to our success. To that end, we are fully cooperating with the authorities on this enquiry. Since the investigation currently is under way, it will be inappropriate on our part to discuss the details at this time.

TAX AVOIDANCE
Tax avoidance is a strategy which involves exploiting legal means of reducing taxes with the goal of minimizing tax liability. Avoidance is a perfectly legal approach to handling taxes,
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although sometimes avoidance practices can stray into the realm of being abusive, at which point people may cross the line into tax evasion. In tax evasion, people utilize illegal means to avoid paying all or part of their taxes; evasion can result in prosecution and fines or prison time. Most taxpayers engage in a certain amount of tax avoidance, because people want to avoid paying more taxes than they need to. In a simple example, most people claim all of the exemptions available to them. Likewise, people may take advantage of retirement accounts which offer tax savings if they plan on saving money for retirement; as long as one is putting money aside, one might as well reduce taxes at the same time. These tax avoidance strategies are usually encouraged by financial planners and accountants. A skilled accountant can show a taxpayer where he or she can save on taxes, and provide advice about conducting financial affairs in a way which will limit tax liability. Accountants will usually not guarantee to reduce tax liability by a set amount or percentage, but they do pride themselves on finding as many ways as possible to generate tax savings for their clients. Most taxpayers use some forms of tax avoidance. For example, individuals who contribute to employer-sponsored retirement plans with pre-tax funds are engaging in tax avoidance because the amount of taxes paid on the funds when they are withdrawn is usually less than the amount that the individual would owe today. Furthermore, retirement plans allow taxpayers to defer paying taxes until a much later date, which allows their savings to grow at a faster rate.

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