Tax refers to a mandatory contribution of a person towards the country’s revenue, which is imposed by the government (central or state) on the income or wealth of the persons or included in the cost of goods, services or transactions. Every assessee wants the tax liability to be minimum and for this, he/she can take recourse to tax planning through which tax burden can be reduced to a minimum, by using legitimate ways and means.
Tax planning is often misconstrued with tax management, which simply means the process of systematically dealing with taxes.
The basic difference between tax planning and tax management is that tax planning stresses on reducing the tax liability, tax management is all about minimizing the taxes. For further differences, let’s take a look at the article below:
Content: Tax Planning Vs Tax Management
|Basis for Comparison||Tax Planning||Tax Management|
|Meaning||Tax planning devises a person's financial affairs by taking advantage of all the allowable deductions, exemptions, allowances and rebates, legitimately, so that the tax liability is the least.||Tax Management implies well timed and regular adherence to the tax laws and arrangement of financial affairs, in a way that reduces the taxes.|
|Deals with||Planning of taxable income and planning of investments.||Maintaining accounting records, filing of returns, audit of accounts and payment of taxes on time.|
|Objective||To reduce the tax liability to a minimum.||To adhere to the provisions of tax laws.|
|Emphasis||It lays emphasis on reducing tax liability.||It lays emphasis on reducing taxes and penalties.|
|Obligation||It is not compulsory.||It is compulsory for every assessee.|
Definition of Tax Planning
Tax Planning can be understood as the practice of minimizing tax liability by making the effective use of all applicable allowances, deductions, exemptions, concessions, and rebate, within the framework of law, to lessen the overall income and/or capital gain of the assessee. For this purpose, the financial activities of the person or entity are thoroughly analysed, to seek the maximum possible tax benefit, which is feasible as per the statute.
In finer terms, tax planning is a legal method of reducing the tax burden that covers all kinds of efforts made by the assessee to save taxes, through ways and means that conform to the legal obligations and are not intended to deceive the law, by false pretences. The primary objective of tax planning is to reduce tax liability, maximizing productive investment, minimize litigation, etc.
So, in tax planning arrangements are made in a way that maximum possible tax benefits can be availed, by making use of all favourable provisions in the act, which facilitates the assessee to get rebates and allowances, without violating the law.
Definition of Tax Management
Tax management connotes the effective management of finances of a person, to file the returns and pay taxes on time while complying with the provisions of the relevant Income tax law and allied rules regularly and timely, so as to avoid the imposition of interest and penalties.
Tax Management is the complete management of tax-related activities, that took place at any point in time, as in:
- Past: Assessment Proceedings, Appeal to the Commissioner, Revisions of return etc.,
- Present: Proper maintenance of the books of accounts, getting the accounts audited periodically, preserving data and vouchers that support the transactions, timely filing of income tax return, deducting tax at source, collecting tax at source, self-assessment tax, payment of advance taxes, following procedural requirements, responding to notices received (if any), etc.
- Future: Taking corrective actions and planning investments to save taxes.
Key Differences Between Tax Planning and Tax Management
The difference between tax planning and tax management are presented in the points below:
- Tax planning can be defined as the systematic planning of assessee’s financial and business affairs by adhering to the taxation provisions, in a way that complete benefit can be availed of all the applicable deductions, exemptions, allowances and rebate. On the contrary, tax management implies the practice to avoid defaults and penalties and adhere to the legal provisions of the Income-tax Act.
- Tax Planning is all about planning of taxable income and planning of investments of the assessee. As against, Tax Management deals with the proper maintenance of financial records, audit of accounts, timely filing of the return, payment of taxes and appearing before the appellate authority, whenever required.
- Tax Planning aims at reducing the tax burden of the assessee to a minimum by utilizing all the permissible tax deductions, exemptions, and allowances. Conversely, the main purpose of tax management is to comply with the provisions of the relevant tax statute and allied rules.
- In tax planning emphasis is laid on reducing the tax liability, by legitimate means, i.e. by using those ways and means that do not deceive the intent of the law. On the flip side, in tax management the focus is made on reducing the taxes, by the timely filing of the return, payment of advance taxes, payment of taxes and appearing before the stipulated authority, so as to prevent penalties, interest and so forth.
- While tax planning is not a compulsory activity, tax management is compulsory for all the assessee.
Tax planning is an honest and legal method of availing the full advantages of taxation laws. It is a way of effectively managing the income and taxes so that the tax liability arising on the assessee is minimum. As against, Tax Management is an art of handling the financial affairs, while complying with the tax provisions, so as to avoid the payment of interest and penalties.