What are the factors that are helpful for effective tax planning

Answer : Factors Affecting the Tax Planning

The following factors are essential for effective tax planning:

1. Residential status and citizenship of the assessee: We know that a non-resident in India is not liable to pay income-tax on incomes which accrue or arise and are also received outside India, whereas a resident in India is liable to pay income-tax on such incomes. Therefore, every assessee would like to be a non-resident in India, if he has any income which accrues or arises outside India.

2. Heads of income/assets to be included in computing net wealth: Before the Tax-planner goes in for his task; he has to have a full picture of the sources of income of the tax payer and the members of his family. Though total income includes all income from whatever source derived, the scope of tax planning is not similar in respect of all sources of income. The assessee can avail the benefits of exemption and deductions under each head of income. Further he can avail the benefit of rebate and relief under the Act.

3. Latest legal position: It is the foremost duty of a tax-planner to keep him fully conversant with the latest position of the taxation laws along with the allied laws and also the judicial pronouncements in respect thereof. For this purpose he must have a thorough and up-to-date understanding of the annual Finance Acts, the Taxation Laws Amendments, the amendments, if any, of the allied laws, the latest judicial pronouncements of the High Courts and the Supreme Court, various Circulars of the Central Board of Direct Taxes which seek to clarify the legal position in so far as the Revenue is concerned.

4. Form vs Substance: A tax planner has to bear in mind the following principles enunciated by the courts on the question whether form or substance of a transaction should prevail in Income-tax matters.

(a) Form of transaction: When a transaction is arranged in one form known to law, it will attract tax liability while, if it is entered into another form which is equally lawful, it may not.

(b) Genuineness of transaction: It is important to observe whether the transaction is a genuine or not. If in case it is not then in such a situation depiction of truth is needed and it is not the question of form and substance. It will be open to the authorities to pierce the corporate veil and look behind the legal façade, at the reality of the transaction.

(c) Expenditure: In the case of expenditure, the mere fact that the payment is made under an agreement does not preclude the department from enquiring into the actual nature of the payment.