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Taxes are financial charges imposed by the government, to fund the public sector and meet other expenses. Countries and economic systems have their own independent tax systems. Failing to pay taxes is a punishable offence.
Tax Planning vs Tax Management
The difference between tax planning and tax management is that tax planning is an optional exercise for tax aversion while tax management is a general term used to describe the practice of timely payment of taxes as per the allied norms.
Individuals and businesses must pay the taxes imposed as per the laws of the countries. 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 the purpose of taxation. Tax planning, on the other hand, is a systematic method of tax aversion. Tax planning enables saving of taxes by redirecting taxable amount towards investments.
Comparison Table Between Tax Planning and Tax Management (in Tabular Form)
|Parameter of Comparison||Tax Planning||Tax Management|
|Objective||Tax planning is done to minimize liability.||Tax management is done in to function in ordinance with Income-tax Law and Allied rules.|
|Relationship||Tax Planning includes tax management.||Includes auditing accounts, filing tax return etc.|
|Time||it is done for the future.||It can be done for past, present and future.|
|Usage||It enables minimizing tax liability for both short term and long term.||If done well, one can avoid penalties and interests.|
|Relevance||It is an optional exercise.||It is essential.|
What is Tax Planning?
Tax planning is an exercise that is done to ensure tax efficiency. Investors often develop a tax plan to optimize their financial situation in a tax-efficient manner. It is done in such a way that the available resources are utilised properly and efficiently. Proper tax planning helps investors in availing tax benefits and exemption.
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 basically helps in locking in amount, that would have otherwise been deducted as tax. The locked-in amount can be used later under retirement plans.
Tax planning enables streamlines 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 different pers. The four major types of tax Planning are;
- Short Term Planning- Planning that is executed at the end of the year to reap tax benefits.
- Long Term Planning- Planning that is done at the beginning of the year and followed throughout the year.
- Purposive Tax Planning- Purposive tax planning is done with a specific objective in mind. This includes the selection of the perfect programme to maximise benefits and earnings.
- Permissive Tax Planning- Planning that focusses on using permissive laws for maximum exemptions and saving.
What is Tax Management?
Tax management is an exercise that involves management of personal finances especially payable taxes. It is a routine procedure that basically is followed by people to ensure timely payment of taxes. Payment of taxes must be done in lieu of the economies tax norms and law.
The procedure includes filing of returns and getting accounts audited. The process is holistic as it entails the transactions of 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;
- Reduce Adjusted Gross income- Adjusted Gross income is the amount on which one is liable to pay income tax. A legally reduced amount would automatically reduce payable taxes.
- Increase Number of Tax Deductions- Deductions are claims of expenses that can help reduce the tax liability. It is important to know the type of deductions that are applicable to your annual plan.
- Tax Crediting- Tax crediting helps in reducing the payable tax amount by introducing certain activities that entail such credits.
- Retirement Plans- The easiest way to stock income, is to plan an individuals retirement in advance. Experienced investors suggest investing at least 5-6 years before the planned date of retirement
The system of filing taxes becomes particularly complex because of the various slabs, rates and conditions. Each slab has different types of exemptions and condition 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.
Main Differences Between Tax Planning and Tax Management
- 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.
- Tax planning is about planning and filing tax returns, while tax management is about maintaining financial records and taxes.
- The main purpose of tax planning is to reduce payable taxes to evade burden on the taxpayer, while tax management is about following income tax rules and making timely payments.
- Tax planning is about reducing tax liability while tax management is about reducing taxes by filing returns and avoiding penalty payments.
- Tax planning is an optional activity while tax management is compulsory for all.
Taxes are compulsory payments that individuals or businesses need to make to concerned authorities usually the government. Tax money is usually reinvested in the public sector for the welfare and development of people.
It is the duty of all citizens to pay taxes as per the assigned slab rates. Taxes can significantly increase an individuals or organizations expenses. There are two ways in which this situation can be handled.
Tax planning is the practice of financial management done particularly to reduce tax liability. This is done by redirecting taxable money to other investments such as retirement plans. Tax management is the practice of timely and consistent tax payments. if done well, tax management can also help in saving tax money by filing returns.
It is imperative to understand that the two things are conceptually very different. Tax planning helps in evading taxes legally. It is about reducing an individuals tax liability. Tax management, on the other hand, is about maintaining and filling taxes regularly as per the allied laws. As per Tax management principles focus on reducing net tax amount by availing compliance benefits.
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