After reading the chapter, review the following topics below, choose one (1) and

Question

After reading the chapter, review the following topics below, choose one (1) and contribute to either:

Tax Planning

Discuss the differences between tax planning, tax avoidance and tax fraud. What are some easy ways that a taxpayer can take advantage of tax deductions for/from AGI?

TaxTraps

What is a tax trap? Give some examples and discuss how to avoid possible problems?

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Tax Planning

Discuss the differences between tax planning, tax avoidance and tax fraud. What are some easy ways that a taxpayer can take advantage of tax deductions for/from AGI?

TaxTraps

What is a tax trap? Give some examples and discuss how to avoid possible problems?

Explanation / Answer

Hi Everyone,

Hope all is well. I would lke to choose the topic of "TAX PLANNING".

TAX PLANNING:

Tax planning is the process through which those clauses/sections of tax laws are used which are made to benefit taxpayers so that they coulld save more.

For example: As per Indian Income Tax Act, 1961, if an individual taxpayer spends on medicle expenditure of self, spouse or children, he/she could get a deduction of upto Rs. 25,000 from his total income (before calculation of tax). Plus if he/she spends on parents heath, he/she could get additional deduction of upto Rs. 30,000. In this way, the taxpayer spent Rs. 55,000 and his Total income got reduced from this much amount, so he could pay lesser tax (whatsoever % bucket of tax, he/she was in).

Similarly there are certain sections (Sec 80C, 80CCC and 80CCD), if taxpayers contribute to certain investment schemes, such FDs in Bank (for certain term), Pension Schemes etc., certain amount of deductions (total Rs. 2,00,000 for these sections) are allowed from their total income. In this way, taxpayers have invested to get the deuctions and have saved for their future as well.

What are the benefit to the Govt. for making such laws: Govt provides such laws to build a better nation, a better generation. People would opt for such expenses, donations, investments to get the deductions from their total income and to pay lesser tax.

TAX AVOIDANCE:

Tax avoidance occurs when loopholes in tax laws are used to minimise the tax liabilities. The authorities while creating or amending the law may leave some loopholes in the law which are exploited by the people. Loopholes can mean any ommission, any word which left undefined or anything which could be exploited by the people to get minimised tax liability.

For example, while proposing a new section in the law governing Sales Tax, authorities provided taxabilty of branches of Companies in different states. But in proposing the section, authorities didnt define branches in sme state. This would attract tax avoidance as people would exploit this and would create sales in the same stateto avoid their tax liability.

TAX EVASION:

Tax evasion is the use of unlawful, illegal methods to avoid tax liability. In simple words, tax evasion means breaking the law.

For eaxmple: Indian govt. has increased sales tax on sales of cigrettes and tobacco. People would accout for lesser sales for these products in their books of accounts and would pay lesser tax (means they would be paying tax with increased rate but on lesser sales which are accounted for in their books of accounts.

So, I hope I would have been successful in explaining these terms to you.

Thank you so much.

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