"Tax" is defined as the mandatory payment made by people and companies to the government without reference to any direct benefit in return. Thus, no one can refuse to pay it. A taxpayer cannot expect that the tax amount will be used for his/her direct benefit. There are two types of taxes-direct taxes and indirect taxes. Direct taxes refer to taxes imposed on property and income of individuals and companies, and their burden cannot be shifted to another person/entity. Indirect taxes are defined as those taxes that can be shifted to another person or entity. Their monetary burden is also ultimately borne by final users of goods and services rather than the person on whomever the tax is levied. Two concepts that are often misunderstood regarding tax payment are tax planning and tax management. Tax management is defined as the practice of maintaining and paying taxes as per the laws and requirements. Tax planning is an exercise which is done to maintain tax efficiency. It is essential that an individual evokes a clear understanding of the two related concepts. This article attempts to draw the differences between the two concepts and present a detailed explanation of both concepts.
Tax Planning vs Tax Management
The key difference between tax planning and tax management is that tax planning is an optional exercise for tax aversion, whereas tax management is a general term used to describe the practice of timely payment of taxes according to the allied norms. Tax planning is concentrated on reducing tax liability. However, tax management is about minimizing taxes. Tax planning includes tax management, while tax management does not include tax planning. Tax planning is utilized for the future, while tax management can be done for the past, present and future. Tax planning is done to minimize the tax liability, while tax management is done to avoid penalties and additional interest payments. Tax planning is optional, while tax management is compulsory. Tax Planning is about the planning of taxable income and the planning of investments of the taxpayer. On the other hand, tax management is concerned with the proper maintenance of financial records and the audit of accounts. It is also involved with the timely filing of the return, payment of taxes and appearing before the appropriate authority, as and when required. Tax management includes auditing accounts, filing tax returns etc. Tax planning aims to reduce the tax burden of the payer to a minimum level by utilizing permissible tax deductions, exemptions, and even tax allowances. The main aim of tax management is to comply with the provisions of the relevant tax statute and allied rules.
Difference Between Tax Planning and Tax Management in Tabular Form
|Parameters of Comparison
|Tax planning is defined as the reduction of tax liability by way of exemptions, deductions, and benefits.
|Tax management is defined as the management of finances for the purpose of paying taxes.
|Tax planning involves the planning of taxable income and the planning of investments.
|Tax management is concerned with maintaining accounting records, filing returns, audit of accounts and payment of taxes on time.
|The main aim of tax planning is to reduce the tax liability of the taxpayer and also to plan his investments in a systematic manner by making use of the legally permissible deductions, allowances, exemptions, rebates etc.
|The main aim of tax management is to comply with the existing rules and regulations of relevant tax statutes.
|Tax planning includes tax management.
|Tax management does not include tax planning. It includes accounts and auditing, and filing tax returns.
|Tax planning is done for the future.
|Tax management is done for the past, present and future operations.
|Tax planning is done to minimize tax liability for both the short term and long term.
|Tax management is done to avoid penalties and additional interest payments.
|Tax planning is an optional exercise.
|Tax management is a compulsory exercise.
What is Tax Planning?
Tax planning is defined as the reduction of tax liability by way of exemptions, deductions, and benefits.
It is a legal method of reducing the tax burden that covers all kinds of efforts made by the taxpayer to save taxes through ways and means that conform to the legal obligations and do not violate legal provisions by false pretences. The main objective of tax planning is to reduce tax liability, maximise productive investment, minimize litigation, etc. Thus, in tax planning, arrangements are made so that the maximum possible tax benefits can be availed by an individual by making use of all favourable provisions in the act that facilitate the taxpayer to get rebates and allowances without violating the law. The main aim of tax planning is to reduce the tax liability of the taxpayer and plan his investments in a systematic manner by making use of the legally permissible deductions, allowances, exemptions, rebates etc.
Types of Tax Planning
- Short Term Tax Planning- It is the type of tax planning executed at the end of the year to enjoy tax benefits.
- Long Term Tax Planning-It is done at the beginning of the year, and it is also followed throughout the financial year.
- Purposive Tax Planning- It is done with a particular objective in mind. It includes a selection of the perfect programme to maximise benefits and earnings.
- Permissive Tax Planning- Planning that focuses on using permissive laws for maximum exemptions and savings.
Objectives of Tax Planning
- Reduced tax liability
- Productive investment
- Growth of economy
- Litigation minimization
- Economic stability
Advantages of Tax Planning
- Minimise litigation: To litigate means to resolve tax disputes with local, federal, state, or even foreign tax authorities. Often, there is friction between tax collectors and taxpayers as tax collectors attempt to extract the maximum amount of tax possible while the taxpayers desire to keep their tax liability at a minimum level. Minimising litigation also saves the taxpayer from legal liabilities.
- Reduce tax liabilities: Every taxpayer aims to reduce their tax burden and also save money for their future. Payable tax can be reduced by arranging investments within the scope of various benefits offered under The Income Tax Act, 1961. This Act offers many tax planning investment schemes that can significantly reduce tax liability.
- Ensure economic stability- The money of the taxpayers is devoted for the betterment of the nation. Effective tax planning and tax management provide a healthy inflow of white money. This results in the sound progress of the economy. This benefits the citizens and even the economy.
- Leverage productivity: One of the core tax planning objectives is to channelise funds from taxable sources to different income-generating plans. This ensures optimal utilisation of funds for productive causes.
Tax Planning in India
In India, there are several tax-saving avenues for all categories of taxpayers. These avenues allow a wide range of exemptions and deductions that aid in limiting the overall tax liability. These deductions are available from Sections 80C through to 80U and can be claimed by all eligible taxpayers. These deductions are made in comparison to the quantum of tax liabilities. There are several other sections under the Income Tax Act 1961 that can reduce tax liabilities, such as exemptions and tax credits. When tax planning is done inside the frameworks defined by the respective authorities, it is fully legal and, in fact, a smart decision. However, using shady techniques to avoid tax payments is illegal. Tax saving practices include tax avoidance, tax evasion and tax planning. Out of these, tax planning is the only legal manner of reducing your tax liabilities. The government offers different opportunities to save on taxes with the intention of reducing the tax burden on a taxpayer through legal income tax planning methods.
What is Tax Management?
Tax management is defined as the management of finances for the purpose of paying taxes. Tax management is concerned with maintaining accounting records, filing returns, audit of accounts and payment of taxes on time. The main aim of tax management is to comply with the existing rules and regulations of relevant tax statutes.
Time: Tax Management is the total management of tax-related activities that took place in the:
- Past- Assessment Proceedings, appeal to the Commissioner, revisions of return etc.
- Present- Proper maintenance of the books of accounts and getting the accounts audited periodically. It also involves preserving data and vouchers that support the transactions, timely filing of the income tax return, as well as deducting tax at source and collecting tax at source, besides self-assessment tax and payment of advance taxes, responding to notices received etc.
- Future- Taking corrective actions and planning investments to save taxes.
Elements of Tax Management
- Filing return.
- Source deduction.
Areas of Tax Management
- Tax deducted at source (TDS)- Persons responsible for deducting tax at source should deduct from the income, and that should be paid to the central government on time. Moreover, he should issue deduction certificates to the individual and file them on the income tax website.
- Payment of Tax- includes payment of advance tax, payment of tax on self-assessment, and payment of tax on demand (payment after receiving notice from authorities).
- Maintenance of books of accounts-Every businessman or a professional individual must maintain books of accounts and other necessary documents so that the tax can be computed accurately and verified by the assessing officer. Maintenance of account books, vouchers, bills, correspondence, agreements, etc., is a part of tax management.
- Furnishing return of income-The tax manager must ensure that the return of income is furnished on time; otherwise, the taxpayer will lose the right to carry forward and set off losses and may even become liable to pay interest, penalty, prosecution or fine or both.
- Documentation and maintenance of tax records-A taxpayer should keep updated tax files to ensure that the documentary evidence can be made available in case any queries arise. Form 16, filed returns, documentary evidence in support of deductions, rebates and relief, and court orders are included in tax files.
Main Differences Between Tax Planning and Tax Management In Points
- Tax planning can be defined as the reduction of tax liability by way of exemptions, deductions, and benefits. Tax management may be defined as the management of finances for the purpose of paying taxes.
- Tax planning involves the planning of taxable income and the planning of investments. Tax management is concerned with maintaining accounting records, filing returns, audit of accounts and paying taxes on time and appearing before the appropriate authority as and when required.
- Tax planning is optional, while tax management is compulsory.
- Tax planning is done to minimize tax liability, while tax management is done to avoid penalties and additional interest payments.
- Tax planning is done for the future, while tax management may be done for the past, present or future.
- Tax planning includes tax management, while tax management does not include tax planning. Tax management is concerned with accounts and auditing, and filing tax returns.
Tax is a mandatory payment made by people and companies to the government without reference to any direct benefit in return. Thus, no one can refuse to pay it. A taxpayer cannot expect that the tax amount will be used for his/her direct benefit. Two concepts widely associated with tax are tax planning and tax management. The concepts of both have been misconstrued. The difference between tax planning and tax management lies in the approaches they adopt in the process of minimizing the taxes applicable to them. There is a line of difference between the two concepts where the scheme of tax planning emphasizes the approach of making the best possible use of the deductions, exemptions, rebates, and allowances offered by the statutes and allied rules and regulations without indulging in the practices of tax evasion or non-payment of taxes. On the other hand, the practice of tax management is concerned with adhering to the provisions of the tax statute and fulfilling all the necessary compliances so that penalties and costs are not imposed on the taxpayer, thereby reducing or minimizing taxes for the taxpayer. This article has attempted to explain the key differences between the two concepts. Further, it has explained both concepts in detail. It is essential that an individual evokes a clear understanding of the two related concepts.