Components of Balance of Payment | Objectives of Tax Planning

Components of Balance of Payment | Objectives of Tax Planning.

Components of Balance of Payment  Objectives of Tax Planning

Components of the balance of payment

Components of Balance of Payments are generally grouped under the following heads
1) Current Account
2) Capital Account
3) Unilateral Payments Account
4) Official Settlement Account.

1) Current Account: “The Current Account includes all transactions which give rise to or use up national income.” The Current Account consists of two major items, namely: i) Merchandise exports and imports, and ii) Invisible exports and imports.

Merchandise exports, i.e., the sale of goods abroad, are credit entries because all transactions giving rise to monetary claims on foreigners represent credits. On the other hand, merchandise imports, i.e., purchase of goods from abroad, are debit entries because all transactions giving rise to foreign money claims on the home country represent debits.

Merchandise imports and exports form the most important international transaction of most of the countries. Invisible exports, i.e., sales of services, are credit entries and invisible imports, i.e. Purchases of services, are debit entries.

Important invisible exports include the sale abroad of such services as transport, insurance, etc., foreign tourist expenditure abroad, and income paid on loans and investments (by foreigners) in the home country from the important invisible entries on the debit side.

2) Capital Account: The Capital Account consists of short- terms and long-term capital transactions A capital outflow represents a debit and a capital inflow represents a credit. For instance, if an American firm invests Rs.100 million in India, this transaction will be represented as a debit in the US balance of payments and credit in the balance of payments of India.

The payment of interest on loans and dividend payments are recorded in the Current Account since they are really payments for the services of capital. As has already been mentioned above, the interest paid on loans given by foreigners or dividends on foreign investments in the home country is debiting for the home country, while, on the other hand, the interest received on loans given abroad and dividends on investments abroad credits.

3) Unilateral Transfers Account: Unilateral transfers are another term for gifts. These unilateral transfers include private remittances, government grants, disaster relief, etc. Unilateral payments received from abroad are credits and those made abroad are debits.

4) Official Settlements Accounts: Official reserves represent the holdings by the government or official agencies of the means of payment that are generally accepted for the settlement of international claims.

Objectives of tax planning

1. Reduction of tax liability by utilizing the benefits available in the tax laws.

2. Informed and pragmatic financial decisions: A person adds the dimension of tax incidence in his decision-making on financial matters, and this helps him optimize his decisions.

3. Multi-dimensional investment decisions: In a democratic welfare state like India the government requires substantial investment in infrastructure, education, and healthcare. The tax laws give attractive benefits to investors in these areas, and by taking up these investments one can contribute to nation-building and at the same time enjoy normal returns on one’s investment.

4. Discharging a citizen’s duty: No one likes to pay tax, and it is indeed a temptation to hide income earned and skip paying income tax, or make purchases without bills and escape sales tax.

But these are unlawful methods of reducing tax liability and result in economic evils like black money. Tax planning provides the perfect avenue to remain a responsible citizen while paying the least amount of tax.

5. Reducing pressure on the legal infrastructure: The long arm of the law invariably catches up with economic offenders, but the process is tedious and puts an enormous burden on the legal system. This can be successfully prevented by sensible tax planning.

You may also like to read Computer GK Objective Questions in Hindi

Factors in tax planning

The following factors are essential in effective tax planning.

1. Residential status and citizenship of the taxpayer: It is important for the taxpayer to know whether he is a resident or a non-resident in a country in which he earns income. The number of days stays in the country is usually the deciding factor for residential status.

2. Heads of income/assets to be included in computing net income/wealth: Income Tax Act provides specific heads of income under which income earned has to be declared, and the Wealth Tax Act specifies the heads under which wealth has to be declared. Knowledge of the items covered by each head of income/wealth is essential.

3. The tax laws: The basic Acts of law that stipulate taxes on income, wealth, products, etc. are the Income Tax Act, the Wealth Tax Act, and a set of indirect tax acts such as the Sales Tax Act, Excise Act, and Customs Act.

4. Form v. Substance: The taxpayer should be focused on the substance of a transaction, the real intent, and not only on the form. He should at no time try to change the form for the only purpose of reducing or eliminating the tax.

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