The tax planning exercise ranges from devising a model for the specific transactions as well as for systematic corporate planning. These are:
(a) Short-range and Long-range Tax Planning
Short-range planning refers to year to year planning to achieve some specific or limited objective. For example, an individual assessee whose income is likely to register unusual growth in a particular year as compared to the preceding year may plan to subscribe to the PPF/NSC’s within the prescribed limits in order to enjoy substantive tax relief. By investing in such a way, he is not making a permanent commitment but is substantially saving his tax. It is one of the examples of short-range planning.
Long-range planning involves charting out a plan at the beginning of the income year to be followed around the year. This type of planning may not benefit immediately as in the case of short-term tax planning but it is likely to help in the long run. For example, when an assessee transfers his equity shares to his minor son, he knows that the income from the shares will be clubbed with his income. But clubbing would also cease after the minor attains majority. Also, if bonus shares are issued by the company, income from such bonus shares shall not be taxable in the hands of the assessee.
(b) Permissive tax planning
Permissive Tax Planning involves making plans which are permissible under different provisions of tax laws. Tax laws in our country offer many exemptions and incentives. Planning is simply to take advantage of different tax concessions, incentives, deductions, etc.
(c) Purposive tax planning
Purposive Tax Planning involves making plans with the specific purpose to ensure the availability of maximum benefits which are based on the measures which circumvent the law. This could be
- Through the correct selection of investment.
- Making a suitable plan for the replacement of assets.
- Varying the residential status.
- Diversifying business activities and incomes etc.
The permissive tax planning has the express sanction of the Statute while the purposive tax planning does not carry such sanction. For example, under Section 60 to 65 of the Act, the income of the other persons is clubbed in the income of the assessee. If the assessee is in a position to plan in such a way that these provisions do not get attracted, such a plan would work in favor of the taxpayer because it would increase his disposable resources. Such a tax plan would be termed as ‘Purposive tax planning’.