Income Tax Taxation

Key differences between Tax Planning and Tax Management

Introduction  

Many people believe Tax planning and Tax Management to be the same thing. However, there is a big difference between the two concepts. The activity of reducing the tax liability to the minimum by taking recourse to legitimate and legal ways is called Tax Planning and Tax Management on the other hand is restricted to the process of systematically dealing with taxes in a timely manner in a way that minimizes taxes. The basic difference between Tax Planning and tax management is that tax planning emphasizes on reducing the tax liability on the taxpayer whereas tax management stresses on adherence to tax laws that reduces taxes.   

What are the key differences between Tax Planning and Tax Management?

Following are the key differences between tax planning and tax management:

1. Meaning    

Tax planning is the strategy of reducing tax liability of a taxpayer by making effective use of all the applicable allowances, deductions, concessions and rebates being within the framework of law to lower the overall income and/ or capital gain of the taxpayer. In this process, the financial activities of the taxpayer are examined and the best possible tax benefit which is feasible for such business is adopted within the boundaries of law. In simple words, tax planning is a legal way of reducing the tax burden where all kinds of efforts are made by the taxpayer to save taxes making use of all favourable provisions of the Tax statutes without intending to deceive law. The major objectives of tax planning are to reduce tax liability, maximize productive investment, reduce litigation etc.

Tax management on the other hand is the process of effective management of finances of a taxpayer, to file his returns and pay taxes in a timely manner in compliance with the applicable tax laws^[1] and associated rules with a view to avoid penalties and interests. Tax management is the complete management of tax related activities at any point of time as in the past, present and future events.

• Scope of dealings

Tax planning revolves around the planning of taxable income and investments of the taxpayer and tax management on the other hand deals with systematic maintenance of financial records, timely filing of returns, audit of accounts, timely filing of returns, payment of taxes and appearing before the appellate authority whenever the need arises.

• Objective

The objective of tax planning is to reduce the tax liability of the taxpayer and plan his investments in a systematic manner making use of the legally permissible deductions, allowances, exemptions, rebates etc. whereas the objective of tax management is to comply with the existing rules and regulations of relevant tax statutes.

• Emphasis 

The scheme of tax planning lays emphasis on reducing the tax liability of the taxpayer working within the four walls of the applicable tax statute, rules and regulations without the intent to deceive the law to evade taxes or non-payment of taxes. On the other hand, the scheme of tax management lays emphasis on reducing the tax liability by complying with provisions of the tax statutes so that interests and liabilities are not imposed or unnecessary, protracted litigation doesn’t get initiated which increases the tax liability of the tax payer. It includes timely filing of returns, payment of advance taxes, appearing before appellate authority, payment of taxes on time so as to prevent penalties, interest and so forth.  

• Obligation

Tax planning has not been made obligatory on a taxpayer whereas the same is not the case in the process of tax management. A tax payer is bound to do tax management.

Tax planning is the individual initiative of the taxpayer where he wishes to make best possible use of the deductions, rebates, allowances and exemptions offered by the statute and allied rules and regulations. The law does not make it mandatory on the part of the taxpayer to make use of such offerings. Instead the law only gives an option to the taxpayer that if he wishes to he can take advantage of such offerings. However, this is not the case with tax management. In the scheme of tax management there is no such option that the government offers. It is mandatory for the taxpayer to fulfil and comply with the necessary obligations provided in the statute and the allied rules and regulations. The taxpayer has to file his returns regularly, timely pay his taxes, conduct audits etc. Therefore, it can be safely concluded that tax planning is not obligatory whereas tax management is obligatory on the part of the tax payer.    

Conclusion 

Both the concepts of tax planning and tax management have been misconstrued. The aim of both the schemes of tax planning and tax management is to reduce and minimize taxes. However, the difference lies in the approaches they adopt in the process of reducing or minimizing the applicable taxes. There is a fine line of difference between the two concepts where the scheme of tax planning emphasizes on the approach of making the best possible use of the deductions, exemptions, rebates and allowances offered by the statutes and allied rules and regulations without indulging in the practices of tax evasion or non-payment of taxes. On the other hand, the practice of tax management is concerned with the adhering to the provisions of the tax statute and fulfilling all the necessary compliances so that penalties and costs are not imposed on the taxpayer thereby reducing or minimizing taxes for the taxpayer.    

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