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TAX PLANNING V/S TAX EVASION

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TAX PLANNING

Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. 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 a process individuals, businesses, and organizations use to evaluate their financial profile, with the aim of minimizing the amount of taxes paid on personal income or business profit. Effective tax planning entails analyzing investment instruments, expenditures, and other factors such as filing status for their tax liability impact. Accounting, finance, banking, and insurance firms all emphasize slightly different aspects of tax planning in accordance with the types of services they provide and the laws governing their industries. Estate planning is a form of tax planning, in that its intent is to minimize estate taxes after death. Tax planning involves conceiving of and implementing various strategies in order to minimize the amount of taxes paid for a given period. For a small business, minimizing the tax liability can provide more money for expenses, investment, or growth. In this way, tax planning can be a source of working capital. According to The Entrepreneur Magazine Small Business Advisor, two basic rules apply to tax planning. First, a small business should never incur additional expenses only to gain a tax deduction. While purchasing necessary equipment prior to the end of the tax year can be a valuable tax planning strategy, making unnecessary purchases is not recommended. Second, a small business should always attempt to defer taxes when possible. What tax planning is not...

Tax Planning is NOT tax evasion. It involves sensible 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 80C investments.

Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by everyone and with a very little time commitment as long as one is organized with their finances.

Planning taxes this year A) You will have certain needs and goals to meet. Understand what those are and then figure out how to maximize tax efficiency in your effort to meet them. Tax planning should be a part of the overall financial planning that you must do. For instance, you might be getting married and need to buy a house. In this situation you need to get insurance to protect you spouse if they are financially dependant upon you, as well as you need to get a home loan. What should you prioritize and what do you have the capacity to afford? If you blindly put money into an insurance policy, it might not even be sufficient to give you adequate insurance cover. However, if you choose to pay off the principal on your home loan, that could be a better option in this situation. B) Do not blindly invest money with the the first agent that you might come across. You might end up making mistakes. A lot of people end up buying insurance policies with minimal insurance coverage or putting money in instruments where they cannot access the money when they need it. C) Do not make last minute decisions just because your payroll department has reminded you that the internal deadline for submitting proofs is approaching. Tax planning involves planning in advance to avoid the last minute scramble. Selecting tax saving investments You should think about the following criteria, before selecting your tax saving investments for the year:

Liquidity: How quickly will you need the money? Will you need to access the money within the next year or two years or over what duration ? None of the above instruments let you withdraw your money quickly, in fact there is a minimum three year lock in for all tax saving investments.

Risk and Return: How much risk do you want to take. There is a trade off between the two, some instruments are very low risk, but as a result they give low returns which are capped.

Inflation protection: The instruments that give you a low return typically are the worst type of investments regarding inflation. This is important because many of the instruments give you a fixed rate of interest, and lock in your money for a long period. This is not a good protection against inflation.

Tax Exemption: All tax saving investments under Section 80C are alike in one respect that they are tax exempt when they are invested. But they differ with respect to the tax on the income you earn from such an investment as well as the tax on the maturity of the investment.

TAX PLANNING IN INDIA Tax Planning India is an application to reduce tax liability through the finest use of all accessible allowances, exclusions, deductions, exemptions, etc, to trim down income and/or capital profits. Salaried individuals in India are not fully aware of the tax planning exercise which is why they rush at the end of the tax-planning season and make investments to reduce their tax liability. This has negative effect on tax payable by them and they eventually end up paying more taxes than they are required to.

Tax-planning tips that can assist salaried people to reduce their tax accountability1. Make full use of the entire Section 80C deduction - The maximum reduction available in Section 80C is ` 100,000 and salaried citizens whose gross salary is `250,000 or more are entitled to use the full` 100,000 limit.

Individuals who make monetary infusions of over ` 100,000 in Section 80C in selected areas fail to understand that the advantages are limited. In spite of investing ` 70,000 and ` 40,000 in Public Provident Fund and ELSS respectively, the amount entitled by the investor is only ` 100,000.

Following investments/contributions meet the criteria for Section 80C reduction:

Public Provident Fund Accrued interest on National Saving Certificate Life Insurance Premium National Saving Certificate Tuition fees paid for children's education (maximum 2 children) Principal component of home loan repayment 5-Year fixed deposits with banks and Post Office Equity Linked Savings Schemes (ELSS)

2. Reduction of tax liability beyond Section 80C deductions - If your salary surpasses ` 250,000 pa and the reductions under Section 80C are not enough to minimize the general tax liability consider the following:

Home loan: Interest payments of upto ` 150,000 pa are entitled for reduction under Section 24. Medical insurance: A deduction of upto ` 15,000 pa under section 80D is applicable under this. Donations: Tax advantages under Section 80G entitle the donations to particular funds/institutions.

3. Assert tax advantages on house rent paid - If HRA is not included in the salary structure then the salaried individuals can asset rent paid by them for residential

lodging. This reduction is accessible under Section 80GG and is smallest amount of the following:

25% of the total earnings or, ` 2,000 every month or, Surplus of housing charge paid over 10% of total salary

4. Reorganize the salary - Reorganizing the salary and incorporating certain apparatus can help in the long run in minimizing the tax liability. In order to assert tax benefits salary reform is a more competent measure. The following can be included in an individual's salary structure:

Food coupons can release up to ` 60,000 per year from tax. Medical expenses which are compensated by the employer spare up to ` 15,000 per year. House Rent Allowance (HRA) should be incorporated in the salaries of individuals who stay in rented houses Transport allowance discharge upto ` 800 per month.

5. Go for a combined home loan - The primary reimbursement on a home loan is entitled for a reduction of up to ` 100,000 pa and the interest rewarded is entitled for a reduction of up to ` 150,000 pa. When a home loan is for a considerable amount then the interest and chief reimbursement surpass the allotted limit. A salaried individual can go for a combined joint home loan with his parent, spouse or sibling, to guarantee the best utilization of tax advantages. In this way both the owners can assert tax reductions in the percentage of their stake holding in the loan.

CONSIDERATIONS OF TAX PLANNING There are different considerations while planning of family investments. They are as follows:

Choosing the right member's fund for investments. Availability of the concessions on the initial investment and the returns. The tax liability of such earnings. Taxability of sums received on maturity. Capital generation needs of each member. The age of the investor.

Investment made in the name of Senior Citizens

Higher basic exemption limit and increased rate of return. Rs. 1.95 lakh is exempt from tax (F.Y. 2007-08). With investment or utilising, a senior citizen may not pay tax up to Rs. 2.85 lakh. Certain investment schemes offer higher rates of return or are open for senior citizens. Investing in these increases the earnings of the family. Funds for a senior citizen can be generated by gifts from a high net worth member. It would not suffer tax. The earnings are reinvested to increase income in the subsequent years.

Note: - A donor legally divests the title to the property in favour of the recipient by the way of gift, so he/she cannot have any claim to the property thereafter. Tax-exempt Investment It can be made in the name of any member but one should keep in mind to make it through such member whose chance of falling in the highest tax bracket is the least in the long run. It can be made in the name of minor so that parents does not have to pay the tax even after clubbing.

Concessional Tax Treatment certain investments attract tax concessions, like short-term capital gains on the transfer of shares through recognised stock exchanges. It is taxed only at 10% flat. Investment on shares can be made in any members name as it do not result in any differential tax outflaw. Investment on Business Premises An investment can be made in office/ business premises in the name of a member who is not the proprietor of the business. Take an example, a person carrying a retail business can buy a shop in the name of another member and then take it on rent. The rent paid is tax-deductible. The rent earned by the member of the family paying lesser or negligible tax suffers lesser tax than the tax paid by the owner of the business. Salary Earners and HRA A salary earner can reduce tax liability by paying rent to a member of his family who owns his house in which the former resides, provided the member falls in lower tax bracket. But before practising this one must take into consideration the place where the house is located, the local laws on letting out property on rent, like stamp duty, registration charges, leave and license agreements. The rent should be perfectly paid by cheque and on regular basis through the year to prove authenticity of the transaction. Joint Ownership of a Residential House In case of joint ownership where the shares are in an agreed ratio, each co-owner's share of the income from the property will be included in his/her total income while filing returns. While taking loans, the co-owner can take in any ratio, irrespective of the sharing ratio. Hence, it is beneficial for the person in higher tax bracket to borrow more. It helps him/her to save more tax on interest deductions. Owning House Property A self-occupied house should always be bought by the person with highest tax bracket.

This will not fetch any return and the fall in his investible surplus will reduce his future income and future tax liability. Investment made in the name of Senior Citizens

Higher basic exemption limit and increased rate of return. Rs. 1.85 lakh is exempt from tax (F.Y. 2005-06). With investment or utilising, a senior citizen may not pay tax up to Rs. 2.85 lakh. Certain investment schemes offer higher rates of return or are open for senior citizens. Investing in these increases the earnings of the family. Funds for a senior citizen can be generated by gifts from a high net worth member. It would not suffer tax. The earnings are reinvested to increase income in the subsequent years.

Note:- A donor legally divests the title to the property in favour of the recipient by the way of gift, so he/she cannot have any claim to the property thereafter. Tax-exempt Investment It can be made in the name of any member but one should keep in mind to make it through such member whose chance of falling in the highest tax bracket is the least in the long run. It can be made in the name of minor so that parents does not have to pay the tax even after clubbing. Concessional Tax Treatment Certain investments attract tax concessions, like short-term capital gains on the transfer of shares through recognised stock exchanges. It is taxed only at 10% flat. Investment on shares can be made in any members name as it do not result in any differential tax outflaw. Investment on Business Premises An investment can be made in office/ business premises in the name of a member who is not the proprietor of the business. Take an example, a person carrying a retail business can buy a shop in the name of another member and then take it on rent. The

rent paid is tax-deductible. The rent earned by the member of the family paying lesser or negligible tax suffers lesser tax than the tax paid by the owner of the business. Salary Earners and HRA A salary earner can reduce tax liability by paying rent to a member of his family who owns his house in which the former resides, provided the member falls in lower tax bracket. But before practising this one must take into consideration the place where the house is located, the local laws on letting out property on rent, like stamp duty, registration charges, leave and license agreements. The rent should be perfectly paid by cheque and on regular basis through the year to prove authenticity of the transaction. Joint Ownership of a Residential House In case of joint ownership where the shares are in an agreed ratio, each co-owner's share of the income from the property will be included in his/her total income while filing returns. While taking loans, the co-owner can take in any ratio, irrespective of the sharing ratio. Hence, it is beneficial for the person in higher tax bracket to borrow more. It helps him/her to save more tax on interest deductions. Owning House Property A self-occupied house should always be bought by the person with highest tax bracket. This will not fetch any return and the fall in his investible surplus will reduce his future income and future tax liability.

TAX EVASION Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions). Tax evasion is an activity commonly associated with the underground economy and one measure of the extent of tax evasion the amount of unreported income, namely the difference between the amount of income that should legally be reported to the tax authorities and the actual amount reported. In the 1970's and 80's, The IRS undertook the Taxpayer Compliance Measurement Program (TCMP) in an attempt to measure unreported income and the tax gap. The tax gap is the difference between the amount of tax legally owed and the amount actually collected by the government. The TCMP program was believed to produce the most reliable information about non compliance, but these "audits from hell" were deemed to be overly intrusive and were discontinued in 1988. The National Research Program was undertaken in the 1990's as a less intrusive means of measuring noncompliance and was described as "the most careful and comprehensive estimates of the extent and nature of tax noncompliance anywhere in the world". However, critics point out numerous problems with the tax gap measure. The IRS direct audit measures of noncompliance are augmented by indirect measurement methods, most prominently currency ratio models.

Simply put, tax evasion occurs when any trust, individual, or firm, seeks to avoid paying taxes by illegal and unfair means, by, for example, deliberately hiding income from the tax authorities to reduce the tax liability. People have been known to submit dishonest reports, including declaring less gains, profits, or income than what was actually earned. Other means of evading tax are smuggling, and avoiding paying out customs duty, value added tax, and income tax.

Smuggling involves the export or import foreign goods through unauthorised routes, to avoid paying customs duties, or to bring in contraband. Importers evade paying customs duty by submitting false declarations of the description of the product and the quantity imported. Producers or retailers that collect VAT from consumers evade paying taxes by showing lowered sales amounts. The double-taxation system that includes VAT and service tax has resulted in a lack of clarity with respect to tax-related issues. What is the direct result of evading tax? Tax evasion results in the loss of revenue for the government. It generates more and more black money -- money that is acquired through illegal means -- that people try and offload as quickly as possible by purchasing real estate, jewellery, gold, automobiles, paintings, expensive clothes and accessories, and so on. This distressed purchasing artificially inflates prices and therefore the market. The greater the income in the black money circuit, the greater the freedom of external economic transactions, and the greater the leakage into foreign financial institutions and markets. Not only is tax evasion detrimental to the progress of the economy, but also harmful to the individual. Paying taxes, and on time, means better healthcare and education. The risk-reward for tax evasion is highly unfavourable. It's better to pay your taxes on time and sleep well. If you are a salaried employee, then TDS (Tax Deducted at Source), helps you to pay your taxes. If for any reason it is found that taxes have not be accurately paid the individual or tax payer can come under scrutiny.

Types Illegal Income It is interesting to note that in the United States, the Supreme Court has determined that illegal income (such as monies obtained from embezzlement, theft, drug trafficking, illegal gambling, etc.) are still subject to tax law and must be reported as taxable income when filing annual tax returns. However, reporting of illegal income rarely occurs because doing so would be an admission of the original crime. Therefore, the person who fails to report illegal income can then be prosecuted for tax evasion in addition toor sometimes, in cases of lack of evidence, instead ofthe original crime. Customs Duties Another typical area of tax evasion is the attempt to evade customs duties. Typically, importers try to evade customs duties by either under-invoicing (reporting that less items were ordered than actually were), or by changing the product description (changing it to a description of a product that has a lower rate of duty).Of course, the ultimate evasion of taxes and customs duties would be smugglingthe importing or exporting of products through an unauthorized route. Employment Tax Unscrupulous employers may try to evade paying employment taxes.Most often, this is done by intentionally failing to remit to the IRS the employment taxes it collected from its employees. After a certain amount of time, the employer would then dissolve the company or claim bankruptcy, leaving the employment taxes unpaid.Some other methods of employment tax evasion are: paying employees in cash; filing false payroll tax returns; or failing to file payroll tax returns. Examples of tax evasion:

failing to: report all income report cash wages forward tax withheld from employee's wages to the ATO withhold tax from a worker's wages (for example, paying in cash) pay employee super entitlements lodge tax returns, in an attempt to avoid payment lodge a tax return in order to avoid child care or other obligation claiming: deductions for expenses not incurred or legally deductible Input credits for goods or services that GST has not been paid on.

Tax Evasion in India It entails the efforts that are made by trusts, individuals, firms, and various other entities to avoid paying taxes by illegal and unfair means. The Evasion of Tax usually takes place when taxpayers deliberately hide their incomes from the tax authorities in order to reduce their liability of tax. Evasion Tax takes place when the people report dishonest tax that includes declaring less gains, profits, or income than what has been actually earned and they even go for overstating deductions. The Evasion of Tax level depends on certain factors such as fiscal equation which means that people's tendency to pay less tax declines when the payment due from taxes becomes obvious. The level of Tax Evasion is also dependent on the tax administration's efficiency and corruption levels. The level of Evasion Tax also depends on the chartered accountants and tax lawyers who help companies, firms, and individuals evade paying taxes. Tax Evasion is a crime

in all major countries and the guilty parties are subjected to imprisonment and fines. The various methods of Tax Evasion are:

Smuggling Customs duty evasion Value added tax evasion Illegal income tax evasion

Smuggling is a method of Tax Evasion, following which people export or import foreign goods through routes that are unauthorized. People resort to smuggling for they want to avoid paying total customs duties that are chargeable and also when they want to import items that are contraband. Customs duty evasion is another method of Tax Evasion under which the importers evade paying customs duty by false declarations of the description of the product and quantity. The importers in order to evade paying customs duty also resort to under-invoicing. Another method of Tax Evasion is value added tax evasion under which the producers who collect from the consumers the value added tax evade paying taxes by showing less sales amount. Many people earn money by means that are illegal such as theft, gambling, and drug trafficking and so they do not pay tax on this amount and thus this is another method of Tax Evasion that is called illegal income tax evasion. Tax Evasion results in the loss of revenue for the government and so ideally, no one should be indulging in it and the Indian government must also take steps in order to stop Evasion of Tax by the people.

REALITY OF TAX EVASION IN INDIA In India, Tax Evasion Is a National Sport- as Rama Murthy completes the sale of his apartment in the Indian city of Hyderabad, he accepts from the buyer a bag full of rupeespart of the purchase price the tax man will never see. Almost 40 percent of the sale price I got in hard cash, says Murthy, 39, who works at a software company. Its illegal, but its rampant in India to avoid paying tax. India loses 14 trillion rupees ($314 billion) from tax evasion annually, depriving it of funds for investment in roads, ports, and power, says Arun Kumar, author of The Black

Economy in India. General government tax revenue is an estimated 18 percent of

Indias $1.5 trillion in gross domestic product, the lowest among the four BRIC nations, International Monetary Fund data show. With so little revenue coming in, Prime Minister Manmohan Singh is now attempting Indias biggest overhaul of the tax code in half a century. Investors say tax reform would boost their confidence. If the government does end up making a substantial amount in revenue as a result of the tax overhaul, their deficit requirements should come down and the interest burden will also come down, says Killol Pandya, Mumbai-based head of fixed income investments at Daiwa Asset Management (India). As finance minister in 1991, Singh accelerated tax cuts and reduced the bureaucracy that many businesses found so suffocating. Thanks to his efforts, the top individual income tax rate is now 30 percent, down from 97.5 percent in 1971. With his Direct Taxes Code legislation, Singh hopes to cut the corporate rate to 30 percent from 33 percent. The new law, if passed, would also phase out tax holiday periods, which many companies exploit. For years, the north Indian state of Uttarakhand, for example, has had a tax holiday for manufacturers. Companies from elsewhere in India have booked their profits in Uttarakhand-based subsidiaries to lower their tax liability, says Kavita Rao, an economist in New Delhi at the National Institute of Public Finance and Policy.

When you give these kinds of tax incentives there is always the possibility for misuse, says Sunil Gupta, a Finance Ministry official who helped write the legislation. Gupta estimates India loses as much as 800 billion rupees a year because of corporate tax incentives. The bill aims to turn more individuals into taxpayers by dismantling key exemptions. Two of the biggest are the break investors get for buying Indias infrastructure bonds and that they get for putting money into equity mutual funds. In a separate proposal, Singh hopes to impose a nationwide goods and services tax that would replace similar taxes at the state level. Finally, the government wants to rewrite its tax treaty with Mauritius, an Indian Ocean island that authorities in New Delhi believe harbors a lot of unreported income from India. These reforms will need extra enforcement. People have to believe that if they dont pay taxes they will get caught, says Rao, who will lead one of three studies commissioned by the government of the black market economy. Theres already a proposal to boost the number of tax collectors, and a group has been set up to track untaxed transactions in the underground economy. One challenge is the paralysis thats afflicted Parliament since this years scandal over irregularities in the sale of valuable mobile-phone licenses. The government must start the reform process once again, says Adi Godrej, chairman of Godrej Consumer Products, a maker of household and consumer products. Another reason for lawmakers reluctance is that part of Indias unreported cash bankrolls election campaigns, says N. Bhaskara Rao, chairman of the Center for Media Studies in New Delhi. Political parties will only be curtailing their spending power by backing proposals to curb black money, he says.