Systems and methods of tax planning:
The systems and methods of tax planning in any case will depend upon the result sought to be achieved. Broadly, the various methods of tax-planning will either be short-range tax-planning or long-range tax-planning.
The short-range tax planning has limited objective. An assessee whose income is likely to register unusual growth in a particular year on account of say, sale of capital asset like house property, as compared to the preceding year might plan to invest the same in bonds of National Highway Authority of India or Rural Electrification Corporation Limited to claim exemption under section 54EC. This has a lock-in period of 3 years. Such a plan does not involve any permanent or long-term commitment and yet it results in substantial tax saving. This is an example of short-range tax planning.
The long-range tax planning, on the other hand, may not even confer immediate tax benefits. But it may pay-off in none too distant a future. For instance in case where an assessee transfers certain shares to his spouse, the income arising from the shares will, of course, be clubbed with the transferor‘s income. However, if the company subsequently issues bonus shares in respect of those shares the income arising from the bonus shares will not be clubbed with the transferor‘s income. Similarly the income arising out of the investment of the income from the transferred assets will not also be clubbed with the transferor‘s income. Long range tax planning may be resorted to even for domestic or family reasons.
In relation to income-tax the following may be noted as illustrative instances of tax-planning measures:
(a) Varying the residential status (of a limited application).
(b) Choosing the suitable form of assessable entity (individual, HUF, Firm, Co-operative society, Association of persons, Company, Trust, etc. to obtain the maximum tax concessions e.g. hotel industry in the form of a company to obtain tax holiday benefit.)
(c) Choosing suitable forms of investment (share capital, loan capital, lease, mortgages, tax exempt investments, priority sector, etc.)
(d) Programmed replacement of assets to take free advantage of the provisions governing depreciation and provisions governing investment allowance, investment deposit account scheme.
(e) Diversification of the business activities (hotel industry, agro-based industry, export oriented industries, etc.)
(f) Division of income by over-riding title (by the creation of sub-partnership etc.)
(g) The use of the concept of commercial expediency to claim deduction in respect of expenditure, in computing business income.