Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency, with the elements of the financial plan working together in the most tax-efficient manner possible.
Required: (6 marks)
Briefly explain the following terms with respect to tax planning:
i) Tax holiday
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A tax holiday is a temporary reduction or elimination of a tax. Tax holidays may be granted by government at national, regional, and local levels. In developing countries, governments sometimes reduce or eliminate corporate taxes for the purpose of attracting foreign direct investment or stimulating growth in selected industries.
ii) Tax Exemptions
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Tax exemption generally refers to removal from taxation of a particular revenue item or class of people. It generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances. Tax exempt status may provide a potential taxpayer complete relief from tax, tax at a reduced rate, or tax on only a portion of the items subject to tax.
iii) Tax Reliefs
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A tax relief is an approved deductible allowance intended to reduce taxable income and thereby lessen tax burden. Personal circumstances are always taken into consideration when allowing reliefs.
iv) Tax rebates/refund
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A tax rebate may be a partial sum of money refunded to taxpayers from paid taxes, or it may be an amount by which the tax payer reduces his/her taxes before paying them. To many the term tax rebate connotes the happy idea of a government sending back some amount of taxes already paid.