Question

What are Non-tax costs of tax planning?

Answer 1

Tax planning - it means using all the benefits, reliefs given by the govt. while calculating tax payable. it is a legitimate method of saving tax.

for example- If there is two types of deduction given for some expenditure. In one of the methods, there is a specific limit given. So we will use the section, which provides us more deduction.

Non tax costs - While doing tax planning, we have to incur additional expenses to avail the benefits.For example, paying legal expenses for changing the format of our organisation from company to partnership and vice-versa.

sometimes the non tax cost can be more than the benefit derived from the tax planning. So we have to compare these costs with the benefits.

Types of non tax costs

1) Implicit tax on tax favoured asset - If we invest in a tax favoured asset ( govt bond), tax will be less than other investments. But according to equilibrium, return on all assets should be equal. Hence the pre tax return on tax favoured asset will be less than the pre tax return on other investments. This difference in pre tax return is called Implicit tax or indirect tax.

Overall the benefit recieved from reduced tax on tax favoured asset will be compensated from the difference between pre tax returns.

2) Organisation forming costs - Sometimes tax benefits are given to specific kind of organisations like partnership firm or corporates etc. To change our business formation we have to incure additional expenses.

3) Administration costs - legal, accounting and data processing costs are included in these costs. For ex multiple organisation have to file multiple tax returns.

4) Risk - sometimes investments reflect the changes in assets and liabilities while corporate tax only levied on realizable income. Hence investent risk will not be affected by income taxes.

4) others - financial reporting costs, agency (incentive) costs. etc.