General Planning is today indispensable. It involves deciding in the present what is to be done in future, how it is to be done and the timing thereof. The Government has to resort to economic planning in order to appropriate the resources available in the desired channels. A couple has to plan their family to conserve and effectively utilize the available resources for the benefit of the family members. Similarly, tax planning is resorted to by the tax-payers with a view to minimizing the outflow on account of tax. The assessees have realised today that with the increasing burden of direct taxes, they have no choice but to plan their tax payments.
The courts have helped the tax-payers by way of sympathetic treatment given to those who have been able to manage their affairs resulting in reduction of their tax liability. “Over and over again, Courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Every body does so, rich or poor and all do right, for nobody owes any public duty to pay more than the law demands… taxes arc enforced exactions… not voluntary contributions… to demand more in the name of moral is cant.” Judge Learned Hand in new Mans, AFTR, 875 USA.
Tax Planning is defined as a scheme whereby the tax-payer makes use of all the concessions available to him under various tax laws and pays the minimum possible tax. It implies full compliance of all tax laws and meeting the tax obligations. The focus is on taking full advantage of all the tax exemptions, rebates, deductions and allowances to minimize the tax liability.
Like any planning exercise, tax planning is to be done in advance of the event. Any tax planning exercise attempted after a transaction is, therefore, likely to be only partly successful.