Tax Planning vs Tax Management: Difference and Comparison

Taxes are financial charges imposed by the government to fund the public sector and meet other expenses. Countries and economic systems have independent tax systems.

Failing to pay taxes is a punishable offence.

Key Takeaways

1. Tax planning involves devising strategies to minimize tax liabilities and maximize after-tax income, while tax management focuses on the proper administration and compliance with tax laws and regulations.
2. Tax planning is proactive, as it involves anticipating future tax implications, while tax management is reactive, as it deals with current tax obligations and reporting.
3. Tax planning can help individuals and businesses save money by using deductions, credits, and tax-efficient investment strategies. In contrast, tax management ensures the timely and accurate filing of tax returns to avoid penalties.

Tax Planning vs Tax Management

The difference between tax planning and tax management is that tax planning is an optional exercise for tax aversion. In contrast, tax management is a general term that describes the timely payment of taxes per the allied norms.

Individuals and businesses must pay the taxes imposed per the country’s laws. The extra expenses incurred by individuals and organizations in the form of taxes can be significantly controlled by simple practices.

Tax management refers to the practice of maintaining and paying taxes as per the laws and requirements.

Tax Management involves effective financial management for taxation. Tax planning, on the other hand, is a systematic method of tax aversion.

Tax planning enables the saving of taxes by redirecting taxable amounts towards investments.

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Comparison Table

Parameter of Comparison	Tax Planning	Tax Management
Objective	Tax planning is done to minimize liability.	Tax management is done to function in ordinances with Income-tax Law and Allied rules.
Relationship	Tax Planning includes tax management.	Includes auditing accounts, filing tax returns etc.
Time	it is done for the future.	It can be done for the past, present and future.
Usage	It enables minimizing tax liability for both the short and long term.	If done well, one can avoid penalties and interests.
Relevance	It is an optional exercise.	It is essential.

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What is Tax Planning?

Tax planning is an exercise that is done to ensure tax efficiency. Investors develop a tax plan to optimize their financial situation tax-efficiently.

It is done so that the available resources are utilised appropriately and efficiently. Proper tax planning helps investors in availing tax benefits and exemptions.

Tax planning majorly involves redirecting taxable money into places such as retirement plans or other investments, relieving tax liability. If well done, it can help individuals and organisations save a lot of money.

This method helps in locking in the amount that would have otherwise been deducted as tax. The locked-in amount can be used later under retirement plans.

Tax planning enables streamlined returns adding to individuals’ overall financial planning. Tax planning is legal and done in ordinance with the existing tax norms.

Tax planning has different benefits. Different types of tax planning have other pers.

The four major types of tax Planning are;

1. Short-Term Planning- Planning executed at the year’s end to reap tax benefits.
2. Long-Term Planning- Planning is done at the beginning of the year and followed throughout the year.
3. Purposive Tax Planning- Purposive tax planning is done with a specific objective. This includes the selection of the perfect programme to maximise benefits and earnings.
4. Permissive Tax Planning- Planning that focuses on using permissive laws for maximum exemptions and savings.

 

What is Tax Management?

Tax management is an exercise that involves the management of personal finances, payable taxes. It is a routine procedure that people follow to ensure the timely payment of taxes.

Payment of taxes must be made instead of the economy’s tax norms and law.

The procedure includes filing returns and getting accounts audited. The process is holistic as it entails the transactions of the past, management of current taxes and planning for the future.

Unlike tax planning, it is not a voluntary exercise and is essential for everyone. Not managing taxes or failing to file returns can lead to penalties.

The elements of tax management are;

1. Reduce Adjusted Gross income- Adjusted Gross income is the amount one is liable to pay income tax. A legally reduced amount would automatically reduce payable taxes.
2. Increase Number of Tax Deductions- Deductions are claims of expenses that can help reduce tax liability. Knowing the type of deductions that apply to your annual plan is essential.
3. Tax Crediting- Tax crediting helps reduce the payable tax amount by introducing certain activities that entail such credits.
4. Retirement Plans- The easiest way to stock income is to plan an individual’s retirement. Experienced investors suggest investing 5-6 years before the scheduled retirement date.

The tax filing system becomes particularly complex because of the various slabs, rates and conditions. Each slab has different types of exemptions and conditions associated with it.

Tax planning, if done, becomes a part of task management. However, not all people engage in tax planning. Tax management enables reducing the net amount paid as taxes by filing timely returns, paying advance taxes, and avoiding penalties by reporting to concerned authorities.

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Main Differences Between Tax Planning and Tax Management

1. Tax planning refers to the practice of planning finances for optimal tax savings, while tax management is the practice of avoiding penalties by making timely tax payments. Tax Planning uses existing provisions to evade unnecessary taxes.
2. Tax planning is about planning and filing tax returns, while management is about maintaining financial records and taxes.
3. The primary purpose of tax planning is to reduce payable taxes to evade the burden on the taxpayer, while tax management is about following income tax rules and making timely payments.
4. Tax planning is about reducing tax liability, while tax management reduces taxes by filing returns and avoiding penalty payments.
5. Tax planning is optional, while tax management is compulsory for all.

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References

1. https://staff.blog.ui.ac.id/martani/files/2019/11/2010-corporate-governance-and-tax-management-minick-noga.pdf
2. https://www.sciencedirect.com/science/article/pii/S0020706311000264