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KeyWords/Outline
Tax Planning underIncome Tax Laws
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Slide 1-2
Tax Planning
Tax planningmeans dealing with the tax matters o ataxpayer with a !iew to maximi"ing the ater-tax rate oreturn on in!estments ater ensuring !oluntary tax#omplian#e$ %or this purpose& ea#h taxpayer has to '
1$ ensure that proper re#ords are (ept)
2$ dedu#t tax at sour#e where it is ne#essary)
*$ pay ad!an#e tax in time& i appli#a+le)
,$ ile returns in time) $ #omply with noti#es re#ei!ed rom the tax
authorities) and
.$ +e aware o legal remedies where it does notha!e its rights under the law re#ogni"ed$
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Slide 1-*
Tax %un#tions
Tax function activities are those a#ti!ities whi#hare #on#erned with is#al issues$ These un#tionsare o twotypes
01 Tax omplian#e 3#ti!ities
Tax #omplian#e a#ti!ities are those a#ti!ities whi#hin#lude the un#tions or o+ligations a##ording to thepro!isions o !arious is#al statutes$
02 Tax Planning 3#ti!ities
Tax planning means dealing with the tax matters oa taxpayer with a !iew to maximi"ing the ater-taxrate o return on in!estments ater ensuring!oluntary tax #omplian#e$
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Slide 1-,
Tax 4!asion& 3!oidan#e 5 Planning
Tax 4!asionTax e!asion is e6ui!alent to tax #heating$
7Tax #heating des#ri+es deli+erate a#ts o
non#omplian#e and does not entail the dii#ulty olegal proo o tax e!asion8 0We+ley et al.1991$
7:n e!ading tax one is (nowingly +rea(ing the law$This has so#ial and psy#hologi#al #onse6uen#es
su#h as stigma and guilt and in!ol!es #onrontingdierent #osts sin#e there is a ris( o +eing #aughtand ined or sent to prison8 0We+ley et al.1991$
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Slide 1-
Tax 4!asion& 3!oidan#e 5 Planning
Tax 4!asion;; contd
7The expression Tax e!asion means illegally
hiding in#ome or #on#ealing the parti#ulars o
in#ome or #on#ealing the parti#ular sour#e orsour#es o in#ome or in manipulating the
a##ounts so as to inlate the expenditure and
other outgoings with a !iew to illegally redu#e
the +urden o taxation$ $
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Slide 1-.
Tax 4!asion& 3!oidan#e 5 Planning
Tax 3!oidan#e3##ording to ?usti#e ?agadisan ?$& 73!oidan#e
o tax is not tax e!asion and it #arries no
ignominy@with it& or& it is sound law andertainly& not +ad morality& or any+ody to soarrange his aairs as to redu#e the +runt@@otaxation to a minimum8 ' mentioned in the
!erdi#t oAruna Group of Estate v. State ofMadras (1965)#ase 0Pal(hi!ala and Pal(hi!ala19A.$
@pu+li# disgra#e or dishonor @@the main impa#t or or#e& as o an atta#(
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Slide 1-A
Tax 4!asion& 3!oidan#e 5 Planning
Tax 3!oidan#e;; contd
3!oidan#e in!ol!es e!ery attempt +y legal
means to pre!ent or redu#e tax lia+ility whi#h
would otherwise +e in#urred& +y ta(ingad!antage o some pro!ision or la#( o
pro!ision in the law ; it presupposes the
existen#e o alternati!es& one o whi#h would
result in less tax than the other 0Beport o the
Boyal ommission o Taxation 19..& *>) vide
We+ley et al.1991$
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Slide 1->
Tax 4!asion& 3!oidan#e 5 Planning
Tax 3!oidan#e;; contd
Tax a!oidan#e 7is the art o dodging taxes
without +rea(ing the law$ ;;tax a!oidan#e
means o tra!eling within the ramewor( o thelaw or a#ting as per the language o the law
only in orm& +ut murdering the !ery spirit o the
law and thus a#ting against the intention o the
law and deeating the purpose o the parti#ular
legal ena#tment8 0=a(hotia and =a(hotia 199>$
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Slide 1-9
Tax 4!asion& 3!oidan#e 5 Planning
Tax 3!oidan#e;; contdPerhaps the most #ele+rated statement made in deense o tax
avoidance#ame rom the pen o ?udge =earned
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Slide 1-1C
Tax 4!asion& 3!oidan#e 5 Planning
Tax Planning
7Tax planning ta(es maximum ad!antage o
the exemptions& dedu#tions& re+ates& relies
and other tax #on#essions allowed +y
taxation statutes& leading to the redu#tion o
the tax lia+ility o the tax payer8 0=a(hotia and
=a(hotia 199>$
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Slide 1-11
Tax 4!asion& 3!oidan#e 5 Planning
Tax Planning;; contd3##ording to S#holes and Wolson 01992&
7Traditional approa#hes to tax planning ail tore#ogni"e that effective tax planningand tax
minimizationare !ery dierent things$ The reasonis that in a world o #ostly #ontra#ting&implementation o tax-minimi"ing strategies mayintrodu#e signii#ant #osts along nonta"dimensions$ Thereore& the tax-minimi"ation
strategy may +e undesira+le$ 3ter all& a parti#ulareasy way to a!oid paying taxes is to a!oidin!esting in proita+le !entures$8 Thus& ee#ti!e taxplanning means not to minimi"e tax& +ut tomaximi"e ater-tax rates o return on assets$
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Slide 1-12
Tax 4!asion& 3!oidan#e 5 Planning
=egal 4thi#al Desira+le
Tax Evasion E E E
TaxAvoidance Fay or Faynot +e1 Fay or Faynot +e2Tax
Planning
1When used as an art of dodging taxes without rea!ing the law or acting
as per the language of the law onl" in form# ut murdering the ver" spirit
of the law and thus unethical from the viewpoint of polic"ma!ers
2When acting against the intention of the law $ ever" attempt " legal means
to prevent or reduce tax liailit" and thus avoiding profitale venture also%
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Slide 1-1*
Tax %ormula 5 Traditional Tax Planning
Tax Planning %ormula
3ggregate :n#ome
' 4x#lusions
G Hross :n#ome
' 3llowa+le Dedu#tions
G Taxa+le :n#ome
E Tax BateG Hross Tax
' Tax redit 5 Tax Be+ate
G Tax Paya+le
&aximize
&aximize
&aximize
&inimize
Tax Planning Action
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Slide 1-1,
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E
Sin#e the ultimate o+Ie#ti!e o traditional tax planning is the
minimization of the ottom line0i$e$& the minimization of thenet tax pa"ale& the rules o simple arithmeti# suggest that tax
planning must ne#essarily in!ol!e
J Faximi"ation o tax #redits/re+ates/relies&
J Finimi"ation o the appli#a+le tax rate0s& andJ Faximi"ation o dedu#tions and/or ex#lusions$
..contd
In other words# the items on all evennumered linesin the
aove formula constitute the critical varialesin tax
planning%
Traditional Tax Planning Techni3ues ased on Tax 4ormula
Traditional tax planning is +ased on maximizing the taxfavored
statusand minimizingthe taxdisfavored status$
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Slide 1-1
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E
J 4x#lusions are the in#omes whi#h are not in#luded in the tax-+ase o the
in#ome tax Ktotal in#ome as deined u/s 20.& the s#ope o whi#h is
outlined u/s 1A and #omputed u/s ,* a##ording to the heads o in#ome u/s
2C& +ut to +e reported under the heads mentioned in the %orm o Beturn o
:n#ome 04orm IT,Aor non-#ompany assessees and 4orm IT,.Aor#ompanies u/r 2,L$
J Mnder se#tion ,,01& any in#ome or #lass o in#ome or the in#ome o any
person or #lass o persons spe#iied in Part 3& Sixth S#hedule shall +e
exempt rom the tax& and shall +e ex#luded rom the #omputation o total
in#ome$J 3long with this list under Part 3& Sixth S#hedule& Ho!ernment has issued a
num+er o S$B$O$ u/s ,,0, o the :TO to extend this ex#lusion list$J Some SBOs issued u/s .C01 o the :n#ome-tax 3#t 1922 are still in or#e
or similar ex#lusion purpose$J The +usiness entities whi#h ha!e +een allowed tax holiday u/s ,.3 or
under any SBO are a+le to ex#lude their in#ome enIoying tax holiday$
..contd
1% &aximization of Exclusions5
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Slide 1-1.
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E
J Se#$ 2* or dedu#tions rom 7:nterest on se#urities8&J Se#$ 2 or dedu#tions rom 7:n#ome rom house property8&
J Se#$ 2A or dedu#tions rom 73gri#ultural in#ome8&J Se#$ 29 or dedu#tions rom 7:n#ome rom +usiness or proession8 Kalong
with se#tion *C or inadmissi+le expenses rom 7:n#ome rom +usiness or
proession8L&J Se#$ *201 or dedu#tions rom 7apital gains8 Kalong with se#tion *2012
or restri#ted dedu#tions rom 7apital gains8L& andJ Se#$ *, or dedu#tions rom 7:n#ome rom other sour#es8$
..contd
2% &aximization of (eductions5
4x#ept Salaries head u/s 21& all other statutory heads o in#ome ha!e
pro!isions o dedu#tions
3ll these dedu#tions are su+Ie#t to limits& and #onditions and su+Ie#t to
e!idential proos$ So a +usiness entity must +e #areul a+out these #onditions& limits and
authenti#ity o the transa#tions and there+y& disallowan#es may +e a!oided
and dedu#tions #an +e maximi"ed$
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Slide 1-1A
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E
J Mnder se#tion *A& in the year o loss& losses under any head other than two losses ' loss in
spe#ulation +usiness and #apital loss '#an +e set-o against other head0s ex#ept against
spe#ulation +usiness in#ome and #apital gain$J Nut one spe#ulation +usiness loss #an +e set o against other spe#ulation +usiness in#ome
only and one #apital loss #an +e set o against other #apital gain only$J 4rom A6 277879# :loss from usiness or profession; is restricted to set off against
:income from house propert"%;J Mnder other pro!isions o se#tions *>-,2& set-o o losses #an +e done in uture six su##essi!e
in#ome years only against the #on#erned head o in#ome and appli#a+le only or ollowing
in#omes
..contd
2% &aximization of (eductions5
Loss as a (eduction5
Spe#ulation +usiness in#ome 0u/s *9&
Other +usiness in#ome 0u/s *>&
..contd
J Nut in #ase o #apital loss& #arry-orward #an +e done ater dedu#tion o Ta(a &CCC Ku/s ,C0*L$J =oss will +e #al#ulated or #arry-orward ater dedu#ting any #ash su+sidy rom the Ho!ernment
Kse#ond pro!iso to se#tion *AL$J =oss due to depre#iation #an +e #arried orward or unlimited period Ku/s ,2L$J In case of loss# how to maximize the settingoff of the loss in the "ear concerned should
e given special attention and in case of unsetoff losses# special tax planning regarding
accounting method can help to set off those losses efore the expir" of the time limits $
apital gains 0u/s ,C& and
3gri#ultural in#ome 0u/s ,1
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Slide 1-1>
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E
J &arginal tax rate
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Slide 1-19
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E..contd
Alternative iew of Tax Planning )pportunities
3n alternati!e way o !iewing tax-planning opportunities is to o+ser!e
that in#ome tax is #onstrained +y
Time& Entit"& and Accounting method$
J Sin#e in#ome tax rates 7start o!er8 with ea#h new tax year and +e#ause
!ery ew taxpayers ha!e a #onstant le!el o taxa+le in#ome in ea#h year&
there tend to +e high-tax years and low-tax years$J The tax !alue o a dedu#tion is dire#tly dependent on the marginal tax
+ra#(et o the party reporting it$
J O+!iously& thereore& taxpayers tend to re#ogni"e losses and otherdedu#tions in high-tax years and to deer the re#ognition o taxa+le
in#ome to low-tax years$J To the extent that a taxpayer #an #ontrol tax timing& s/he should do so
only ater gi!ing ull #onsiderations to the time !alue o money$J Sometimes the inan#ial #ost o deerral is greater than the tax +eneit$
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Slide 1-2C
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E..contd
Alternative iew of Tax Planning )pportunities
ðod of Accounting in IT)5
3ll in#ome #lassiia+le under the head
shall +e #omputed in a##ordan#e with the method o a##ounting regularly
employed +y the +usiness entity Kse#$ *01L$
..contd
J 73gri#ultural in#ome8 Ku/s 2. 5 2AL&
J 7:n#ome rom +usiness or proession8 Ku/s 2>-*C& *C3L orJ 7:n#ome rom other sour#es8 Ku/s **& *,& *. 5 ,*L
J
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Slide 1-21
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E..contd
Alternative iew of Tax Planning )pportunities
ðod of Accounting in IT)5
The method o a##ounting may +e
CL& andJ 3d!an#e salary in#ome are taxa+le under #ash system Ku/s 2101
0+L su+Ie#t to a relie u/s 1A2$
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Slide 1-22
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E..contd
Alternative iew of Tax Planning )pportunities
)wner@)perator
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Slide 1-2*
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E
Traditional tax planning is e3uivalent to tax avoidance with the main
purpose of legal reduction of tax liailit"%
Tax Planning Principles5
J Taxes decrease if income earned " entit" is suBect to a low rate%J Taxes decrease if pa"ment can e deferred to a later "ear# ecause
tax deferred is tax reduced%J Taxes decrease if income is generated in a low rate Burisdiction%J Taxes decrease if income is taxed at a preferential rate%
'elevant Tax 'ate5
%or planning purposes only rele!ant rate is rate at whi#h the
transa#tion will +e taxed& i$e$&marginal tax rate
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Slide 1-2,
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E
4actors Affecting Tax Planning5J Choice of Entity:Whi#h entity underta(es the transa#tion Dierent entities ha!e
dierent tax rates$ Pass-through entities 0sole-proprietorship allow shiting in#ome
to owner and one le!el o tax$ on-pass-through entities 0#ompanies are su+Ie#t to
dou+le taxation& on#e at #orporate le!el and then again at the shareholder le!el$J Period of Transaction:O!er what period does transa#tion ta(e pla#e Tax deerred
is tax sa!ed +ased upon time !alue o money$ ommon te#hni6ues are to
a##elerate dedu#tions 0e$g$& ollowing a##elerated depre#iation and to deer in#ome
0e$g$& through installment sale$ 3 taxpayer has to #onsider when taxes are a#tually
paid 0e$g$& 6uarterly estimates !ersus end o year #omputation$J Tax Jurisdictions::n whi#h Iurisdi#tion does the transa#tion ta(e pla#e Tax lia+ility
depends whether the in#ome will +e a##rued in oreign #ountry 0su+Ie#t to
exemption or tax relie or Nangladesh or whether the in#ome will +e earned +y
esta+lishing the entity in a low tax "one or a high tax "one$J Character of Income:What is the #hara#ter o the in#ome Depending on the
in#ome #hara#ter& #ertain types o in#ome are exempted ully or partially$ ertain
types o in#ome are taxed at preerential rates 0e$g$& #apital gain on transer o
sto#(s and shares o non-listed pri!ate limited #ompany taxed Q 1R& di!idend
in#ome rom shares taxed to #ompanies Q 1R$
..contd
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Slide 1-2
T'A(ITI)*AL TA+ PLA**I*, TE-.*I/0ET'A(ITI)*AL TA+ PLA**I*, TE-.*I/0E
Tax is a 4unction of > ariales5
3 final tax liailit"is a functiono three = variales
..contd
J the law&J the facts& andJ the administrative
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TA+ PLA**I*, under the -.)LE
W)L4)*PA'A(I,&
cholesWolfson ha!e adopted a contractual perspectiveortheir paradigm 5 suggested * (ey aspe#ts o tax planning glo+ally
1$ Multilateral Approach:3ll #ontra#ting parties must +e ta(en
into a##ount in tax planning& whi#h allows a glo+al or
multilateral& rather than a unilateral& approa#h$2$ Importance of Hidden Taxes:3ll taxes 0+oth impli#it tax and
expli#it tax must +e ta(en into a##ount #onsidering the glo+al
measures o taxes$ #mplicit ta"is the de#rease in return due to
a!ailing tax a!ored in!estment and e"plicit ta"is the tax
deposited in the treasury$*$ Importance of ontax Costs:3ll #osts o +usiness must +e
#onsidered& not Iust taxes$
ALL PA'TIE# ALL TA+E# ALL -)T%
Thus& the paradigm is +ased on #onsideration o
These are also prere3uisites of Effective Tax Planning%
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Slide 1-2A
Why Tax Planning 3rises
Progressi!e Taxation& Su+sidy and Pro!ision to
arrange taxpayers aairs to minimi"e tax-+ite
!i"es rise to mar#inal tax rate $MT%& that 'idely "aries
4rom one
contracting
part" to the
next
4or a given
contracting
part" over
time
4or a given
contracting part" over
different economic
activities
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T"pes of corporate income tax planning activities5
' -onverting income from one type to another
0ordinary in#ome !s$ #apital gain) regular in#ome !s$
windall in#ome) domesti# in#ome !s$ oreign in#ome)
loss under one head !s$ set-o o the loss againstanother head or #arry-orward 5 set-o against same
head)
' hifting income from onepoc(et to another
0taxa+le !s$ tax-exempt sour#es) and
' hifting income from one time period to another
0delaying re#ognition o in#ome& i tax rates are
#onstant or de#lining o!er time& instant salary !s$
deerred #ompensation
T"pes of -orporate Tax Planning
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SOF4 PBO
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SOF4 PBO
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T3 =:4T4=4S
&arginal Investor5Taxpayers who are indierent +etween pur#hasing two
e6ually ris(y assets& the returns to whi#h are taxed dierently& are #alled the
marginal in!estors$
Tax -lientele
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Tax Aritrage Gthe purchaseo one asset 0a7long8 position and the saleo another 0a7short8 position to #reate a sure profit
despite a zero level of net investment$ T'otypeso tax ar+itrage
- Organi"ational-orm tax ar+itrage 0)4TA
- lientele-+ased tax ar+itrage 0-CTA
!uideline for ar)itra#e:Sin#e the #lientele or anin!estment is the taxpayer with 7marginal expli#ittax rates8 0F4TB+elow impli#it tax rate& soar+itrage will wor( when &ET'HImplicit tax rate$
T3 3BN:TB3H4
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Classification
3r+itrage Type otaxpayers
=ong Position in Short Position in
Organi"a-tional-orm
3ll taxpayers 3n asset orprodu#ti!e a#ti!itythrough a a!ora+lytaxedorgani"ational orm
3n asset orprodu#ti!e a#ti!itythrough anuna!ora+ly taxedorgani"ational orm
lientele-+ased
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Tax aritrageis pre!ented +y tax-rule
restri#tions and mar(et ri#tions$
&ar!et 4riction Gtransa#tion #osts in#urred +ytaxpayers in the mar(etpla#e that ma(e #ertain tax-planning strategies #ostly$
Tax'ule 'estriction Grestraints imposed +y thetax authority that pre!ent taxpayers rom using#ertain tax ar+itrage te#hni6ues to redu#e taxes inso#ially undesira+le ways$
T3 3BN:TB3H4
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Slide 1-*
4nd o the Presentation
Than! "ou%
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