When financial transactions are arranged in a way that it becomes obvious that they were entered with a malafide intention of either not paying taxes or with a view to defeat the genuine spirit of law, they can not be accepted as legitimate Tax Planning. Twisting of facts or taking a very strict and literal interpretation of law without understanding the basic purpose of the law can only lead to punishable Tax Avoidance and not Tax Planning. An attempt is made in the following pages to present a bird eye's view of the Indian Income Tax laws so that you can avoid making trips to your chartered accountant and by taking advantage of the available legal avenues for tax planning, reduce your tax liability. This material does not deal in procedural matters such as assessment, appeals and revisions. To begin with lets understand the structure of tax regime in the country.
Taxes are the basic source of revenue to the government.
Revenue so raised is utilised for meeting the expenses of government as well as to carry out developmental works. There are basically two types of taxes, Direct and Indirect taxes. Direct taxes are those, which are, collected by the government directly from the tax payer through levies such as income tax, wealth tax and interest tax. Whereas indirect taxes comprise of excise duty, sales tax, customs duty and value added tax. While direct taxes form 30 per cent of government's revenue indirect taxes contribute a larger chunk of 70 per cent.