Income-tax planning: Is it a crime or is it legitimate

A question that commonly crops up in the minds of the tax paying public of India is with reference to Tax planning and the theme which comes in the mind is whether income-tax planning is legitimate or is it a crime.
Well the fact remains that the country needs money to fund its developmental programmes and one of the sources of such money is by way of payment of income-
tax by tax payers of India. It goes without saying that the country requires money for developmental work and collection of taxes constitutes one of the very important means of raising revenue for the country. It is also true that we should pay legitimate income-tax tax in respect of income derived by us.
But the question that again and again crops up in the minds of the tax payers is with regard to tax planning because sometimes when persons adopt tax planning, their friends, relatives and colleagues think that such a person by adopting tax planning is avoiding the incidence of income-tax. Hence, it is illegal. Hence, it is against the law. But let me tell you that legitimate tax planning is perfectly valid and it is legal.
Tax planning within the framework of the law by no way of justification it can be treated as a crime. However, I am strongly of the view that tax evasion is definitely a crime. Tax evasion leads to concealment of income and the consequential effect is extra tax liability, initiation of penalty and prosecution proceedings. Hence, it is always recommended that one should adopt tax planning within the ambit of available rules and regulations of the Government as contained in the statute book and one should never go in for illegal ways of avoiding income-tax.
Long back, about four decades ago the Supreme Court of India said in one of the leading judgments that “it is always open for a person to so arrange his affairs so as to pay least amount of income-tax”. This dictum of the Supreme Court is valid even today. Hence, after deep study of the provisions of the Income-tax Law as are prevalent as on today, one can try to evolve legitimate ways of reducing income-tax liability and such action taken by tax payers would definitely be legitimate and it cannot be treated as a wrong or illegal action or a crime on the part of the tax payer. It may be noted here that tax evasion is definitely illegal. It results into suppression of income and it also results into wrong misappropriation of funds, which definitely is punishable. In contrast with tax evasion the principles of tax planning envisage legal ways of arranging the tax affairs in such a manner that results into lower amount of income-tax.
Let us analyse in this article some aspects connected with certain issues wherein by adopting proper tax planning one can legally save income-tax and thus can cut down the payment of Income-tax.
Presently as per section 56 of the Income-tax Act any gift in excess of Rs. 50,000 received from a non-relative is added to the income of the recipient. Well this is the law for the last couple of years. But still there is an exception to this law. In case you receive any gift from your relative, the question of any tax thereon does not arise. Hence, if a person makes a gift to his major son, to his major daughter so also to his father and mother, then in such a situation there will be no liability to tax on the donor and the recipient will also not pay any income-tax because it is gift from relative. This would be fine example of tax planning adopted by a person. The other day on my TV Show of Tax Guru a similar query came from a TV viewer from Muscat. He has so planned his affairs before returning to India that he gave gifts to his wife, gifts to his major son, gifts to his major daughter and parents and now the income arising from these gifts will be assessed in the individual hands of the recipients. This is one example of tax planning. It is not the case of tax evasion. However, if a person were to make a gift to his spouse, then it will not be for the tax planning purpose mainly because of the provisions existing in the Income-tax Law whereby the income from gifts from the spouse or the father in law or mother in law is added as the income. Hence, financial transactions relating to gifts if made to relatives help in the process of saving income-tax which is definitely a legitimate law. The gifts on the occasion of marriage without any upper limit are also exempted from tax whether received from relatives or non relatives.
Every year under the current tax laws of the country one can invest up to Rs. 1 lakh in terms of the provisions contained in section 80C on Insurance, Fixed Deposit, ELSS and such other instruments. Well this tax planning is perfectly legitimate and valid in the eyes of the law. This is mainly because of the fact that the Income-tax Law empowers you and gives you right to make investments so as to reduce your taxes. In the past we have seen that the Government was also advertising on hoarding and in newspapers to say that save your tax, invest in the Postal Schemes. Well the advantage taken of tax concession by individual so as to cut down the income-tax liability is definitely an example of tax planning which is legal and valid in the eyes of the law.
Similarly, investment in Zero Coupon Bonds happens to be one such area which is really very good tool of strategy investment planning specially for people who are having minor children of the age group 8 plus because investments made today in Zero Coupon Bonds will not attract any income-tax today and the final liability will arise only after 10 years when the said Zero Coupon Bond matures. Thus, the investment in Zero Coupon Bond would be a valid theme of tax planning specially for individuals with minor children of the age group of eight plus. Finally, in most cases on maturity no tax is payable.
Similarly, investment in new Pension Scheme would result into good tax planning. This again is a very good tool of tax planning so that one can easily contribute year after year to the new Pension Scheme, enjoy tax deduction and finally in the golden years when there is no income then withdraw the income, pay the tax and relax. Generally speaking, persons investing today enjoy tax benefit today and the time when it comes for withdrawal of the money, at that time their income generally is below the exemption limit. So they save income-tax.
A large number of tax planning exercises will be undertaken by crores of tax payers of India hopefully next year specially when the Direct Taxes Code comes into operation. Now the new Government is in power. Direct Taxes Code may or may not see the light of the day but intelligent tax payers will keep their eyes & ears open to plan as and when the new investment opportunity arises due to change in the Tax Laws of the country.
When we talk of a salaried employee, we give two categories of salaried employees. The first category comprises of such persons who just make payment of income-tax on the total amount of salary comprising of all the benefits which are taxed as salary income. In simple words, a person may receive the entire salary amount under the concept of CTC i.e. “Cost to the Company”. For such employees the entire Salary income and certain perquisites etc. will be fully added to the total income and tax payable thereon. Well another category of intelligent employees will be such that they may adopt tax planning of salary income and may bifurcate the total salary package under different sub-headings based on the Income-tax Law and the Income-tax Rules concerning the taxation of salary income. If this planning is adopted, definitely large amount of money can be saved by the salaried employees. Well this action plan undertaken by the employees will be coming within the ambit of tax planning and should not cause any problem to the tax payers as it is not an act of tax evasion.
Similar is also the situation with regard to setting up industries in the backward areas, backward States, in SEZ etc. etc. The Income-tax Law provides for certain exemption in certain locations if the industry is set up in such locations. If a tax payer takes full advantage of setting up the unit in such backward areas etc., then surely one can adopt tax planning so as to avoid payment of income-tax on the business profit of an enterprise set up in one of these backward areas or in the SEZ etc.
The Hindu Undivided Family also adopts the concept of tax planning by making a full partition of the assets of the Hindu Undivided Family and thereby distributing and allocating the different assets to the different family members based on unequal partition. This is because of the fact that unequal partition of the Hindu Undivided Family is perfectly valid in the eyes of the law.
Another example whereby tax planning can be adopted to cut down income-tax is when you want to purchase agricultural land. If you buy the agricultural land today in your own name and you continue doing agriculture on the said land, it is true the income from agriculture would be exempt from tax. But another fact remains that tax planning wise it would have been better if the agricultural land was purchased in the name of such family member whose income is much below the exemption limit so that whatever agricultural income accrues, the same becomes completely tax free. Instead of adopting this theme of tax planning if a person were to buy agricultural land in his name and such a person let us assume has already a higher income which is taxed in his hand, then in such a case the impact of enjoying complete exemption on the agricultural income is vanished because of the fact that agricultural income is added for rate purposes with non-agricultural income.

When we talk of corporate tax planning and tax planning for all those persons who are in business or industry, then we find that if the businessman adopts the concept of LLP i.e. Limited Liability Partnership in contrast with tax entity in the form of a Private Limited Company, in that situation there is bound to be much lower income-tax liability in the case of all those tax payers who carry out Business Enterprise known as Limited Liability Partnership or LLP. This is mainly and only because of the fact that a corporate tax entity doing business by setting up a private limited company is also required to distribute “ dividend Distribution Tax” in respect of the amount to be distributed as Dividend and only thereafter the amount received by way of “Dividend” gets exempted in the hands of the shareholder. Now let us analyse the Limited Liability Partnership where we find that in the case of Limited Liability Partnership the firm alone makes payment of income-tax and the balance amount available after payment of income-tax which is being distributed. Thus, one can legally save dividend distribution tax by properly planning the affairs of the business under the concept of LLP.

Similar is also the situation with reference to the depreciation under the Income-tax Law. If plant and machinery and other equipments purchased on or before 30th September of the year, in that situation the tax payer enjoys depreciation for the full year whereas reversely if the plant, machinery, assets are purchased on or after 1st of October of each year, then the depreciation deduction is cut down by half. It would, therefore, be good tax planning to buy assets before 30th September so as to claim depreciation for the full year. This again is a theme of tax planning which should be taken into consideration specially by all those persons who are in business or profession.
In the conclusion, we can say that tax planning definitely is valid and legal within the framework of the law and what is illegal is only the activities and transactions concerning tax evasion. For your bright future and growth of the business enterprise keep adopting the legal way of income-tax planning to bring more income and less tax in the family.