Impact of demographic profile of tax payers on awareness and knowledge of tax planning

IMPACT OF DEMOGRAPHIC PROFILE OF TAX PAYERS ON AWARENESS AND KNOWLEDGE OF TAX PLANNING Mahesh Bendigeri Global Business School, Hubli Email Id: maheshbendigeri@gmail.com

Ms. Vinuta Pratapan State Bank of Mysore, Hubli Email Id: vinuta.pratapan@gmail.com

Published research paper titled “"IMPACT OF DEMOGRAPHIC PROFILE OF TAX PAYERS

in Presidency Journal of Thought and Research, Vol VI, No2, ISSN: 2229-5275, July-Dec 2016 ON AWARENESS AND KNOWLEDGE OF TAX PLANNING"

Abstract The present work is carried out to know the level awareness and knowledge of tax planning among tax payers in Hubli Dharwad. The purpose of tax planning is to discover how to accomplish all of the other elements of a financial plan in the most tax-efficient manner possible.

The main objectives of the study is to test whether demographic profile of tax payers are has significant impact on the level of awareness and knowledge of tax planning and the kind of instruments selected for tax planning. Stratified random sampling method is used and in all 309 people gave the response. Statistical tools such as regression model & chi square test-cross tabulation is used for analysis. And it is found that no significant impact of Income, Occupation, Gender and Age on the awareness of tax planning. However, income has significant impact on the awareness of tax planning. Further it is also found that there is significant difference in the level of awareness of tax planning among different occupation group.

Keywords: Tax Planning, Financial Instruments, Demographic Profile

INTRODUCTION: The purpose of tax planning is to discover how to accomplish all of the other elements of a financial plan in the most tax-efficient manner possible. Tax planning thus allows the other elements of a financial plan to interact more effectively by minimizing tax liability.

Tax planning encompasses many different aspects, including the timing of both income and purchases and other expenditures, selection of investments and types of retirement plans, as well as filing status and common deductions. However, while tax planning is an important element in any financial plan, it is important to not let the "tax" tail wag the financial "dog."

This can ultimately be counterproductive, as virtually all courses of financial action will have some tax consequences, and they should not be avoided solely on this basis.

The study undertaken is about the awareness & knowledge about tax planning among the tax payers in Hubli-Dharwad. To do the same respondents have been chosen across the two cities & conclusions are made on the same.

Concept of Tax Planning: Tax Planning involves planning in order to avail all exemptions, deductions and rebates provided in Act. The Income Tax law itself provides for various methods for Tax Planning, Generally it is provided under exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief’s. Some of the provisions are enumerated below:  Investment in securities provided u/s 10(15). Interest on such securities is fully exempt from    

tax.

Exemptions u/s 10A, 10B, and 10BA Residential Status of the person Choice of accounting system Choice of organization.

For availing benefits, one should resort to bonafide means by complying with the provisions of law in letter and in spirit.

Where a person buys machinery instead of hiring it, he is availing the benefit of depreciation.

If is his exclusive right either to buy or lease it. In the same manner to choice the form of organization, capital structure, buys or make products are the assesse’s exclusive right. One

may look for various tax incentives in the above said transactions provided in this Act, for reduction of tax liability. All this transaction involves tax planning.

Need for Tax Planning Tax Planning is resorted to maximize the cash inflow and minimize the cash outflow. Since Tax is kind of cast, the reduction of cost shall increase the profitability. Every prudence person, to maximize the Return, shall increase the profits by resorting to a tool known as a Tax Planning.

Tax Planning should be done by keeping in mind following factors:  The Planning should be done before the accrual of income. Any planning done after the accrual income is known as Application of Income and it may lead to a conclusion of that there is a fraud.  Tax Planning should be resorted at the source of income.  The Choice of an organization, i.e. Taxable Entity. Business may be done through a Proprietorship concern or Firm or through a Company.  The choices of location of business, undertaking, or division also play a very important role.  Residential Status of a person. Therefore, a person should arrange his stay in India such a way that he is treated as NR in India.  Choice to Buy or Lease the Assets. Where the assets are bought, depreciation is allowed and when asset is leased, lease rental is allowed as deduction.  Capital Structure decision also plays a major role. Mixture of debt and equity fund should be balanced, to maximize the return on capital and minimize the tax liability. Interest on debt is allowed as deduction whereas dividend on equity fund is not allowed as deduction

METHODS OF TAX PLANNING: Methods of Tax Planning may be classified as follows: 1. Short Term Tax Planning: Short range Tax Planning means the planning thought of and 

executed at the end of the income year to reduce taxable income in a legal way.

Example: Suppose, at the end of the income year, an assessee finds his taxes have been too high in comparison with last year and he intends to reduce it. Now, he may do that, to a great extent by making proper arrangements to get the maximum tax rebate u/s 88. Such plan does not involve any long term commitment, yet it results in substantial savings in tax.

2. Long Term Tax Planning: Long range tax planning means a plan chaled out at the beginning or the income year to be followed around the year. This type of planning does not help



immediately as in the case of short range planning but is likely to help in the long run; Example: If an assessee transferred shares held by him to his minor son or spouse, though the income from such transferred shares will be clubbed with his income u/s 64, yet is the income is invested by the son or spouse, then the income from such investment will be treated as income of the son or spouse. Moreover, if the company issues any bonus shards for the shares transferred, that will also be treated as income in the hands of the son or spouse.

3. Permissive Tax Planning: Permissive Tax Planning means making plans which are permissible under different provisions of the law, such as planning of earning income covered by Sec.10, especially by Sec. 10(1), planning of taking advantage of different incentives and deductions, planning for availing different tax concessions etc.

4. Purposive Tax Planning: It means making plans with specific purpose to ensure the availability of maximum benefits to the assessee through correct selection of investment, making suitable programme for replacement of assets, varying the residential status and diversifying business activities and income etc

LITERATURE REVIEW:  Uma K. & Lingaperumal G (2013) says that "Tax is what we pay for civilization and with tax, we buy civilization" Golden words of Justice Holmes. Income tax is a composite Tax that is paid on all incomes received by or accruing or arising to a taxpayer during a year. As the Tax rate is high and due to the revision in the provisions of income tax, Tax planning play a vital role, which reduce the tax liability. Deduction from gross total income were allowed to assesses if they contribute to specified investments such as National Savings Certificate, Provident fund, Life insurance premium and the like. The most important problem of income Tax is that the Tax payers are in the infant stage of awareness. This research paper analyses the awareness of government employees in tax-planning and the prevailing deductions.  CA Shilpa Vasant Bhide (2012) says that the term income means regular source of monetary returns. The total income of a person is computed under the following five heads namely Salaries, income from house property, profits and gains from business and profession, capital gains and income from other sources. The objective of tax planning is to reduce the tax liability to the minimum. It is futuristic in approach. It is a wide concept and includes tax management. The benefits of tax planning are substantial in the long run. However many times the assessee do not seek professional advice, when they are salaried employees.

Professional advice is sought by business entities and business men especially when they are subjected to tax audit. However individual assessees do not seek such help. This results in tax planning done in a hapha-hazard manner. This in turn affects their investment management.

The paper tries to trace the awareness of income tax provisions and tax planning amongst 

salaried assesses.

Knut Eriksen & Lars Fallan (1996) say that the influence of specific tax knowledge on attitudes towards taxation was examined. The study reports significant changes in attitude to one's own tax evasion and attitude to fairness of the tax system. Following increases in tax knowledge, respondents consider their own tax evasion as more serious, the perceived fairness in taxation increased, and attitudes towards other people's tax evasion became stricter. In agreement with previous research, these tax attitudes have an influence on reforced inclinations towards tax evasion and tax compliance.



Sarfaraj Mansuri (2012) says Tax awareness is essential part of the tax planning for the individual assesses. Income tax takes away major chunks of hard earning money of an assessee. As every individual assessee who has income more than stipulated limit described

by income tax law is liable to pay tax. Therefore, it is important to do tax planning. For better tax planning by individual, awareness and knowledge of the recent tax laws and rules are inevitable. Tax planning doesn't mean not paying taxes, it just means being smart about where to place money to acquire maximum benefits by individual assessee. Here, an attempt has been made to know about tax awareness and tax planning practice of selected individual assesses.

OBJECTIVES:  To ascertain the level of awareness and knowledge among tax payers based on their demographic profile  To know the reasons for lack of awareness and knowledge with respect to tax planning  To test the relationship between demographic variable and tax planning.  To test whether awareness and knowledge have any relationship with respect to tools for tax planning  To know the reasons for tax planning  To understand the methods used for filing IT return

Methodology: Stratified random sampling is used for collection of data. Questionnaire was administered to tax payers working in different sectors like education, financial, water board, business, banking, insurance & professional have been selected for the study. From each of these sectors a random sample of on an average 35 respondent has been met for seeking the response. In all, a total of 500 respondents have given the response. Out of these few questionnaire were filled wrongly and some had missing information, which was not suitable for our study. Hence after filtration 309 respondents were considered for analysis. Of these 36 respondents are from education sector, 30 from financial sector, 21 from insurance sector, 16 from water board, 65 from banking, 67 from power board, 31 from professional and 43 from business. The location selected for the study is Hubli & Dharwad as it is one of the financial and education hub of North Karnataka. To test the relationship between demographic profile of tax payers and its impact on awareness and knowledge on tax planning a Multivariate Regression Model is developed and also Chi Square Test – Cross Tabulation technique is used. SPSS software is used for analysis purpose.

Regression Model Development: Awareness of Tax Planning = α+β1Age+β2Occupation+β3Gender+β4Income Dependent Variable: Awareness of Tax Planning Independent Variable: Age, Occupation, Gender and Income

Hypothesis Development: H1: Demographic Profile of respondent has no impact on the awareness of tax planning H2: Age has significant impact on the awareness of tax planning H3: Gender has no significant impact on the awareness of tax planning H4: Occupation has no significant impact on the awareness of tax planning H5: Income has significant impact on the awareness of tax planning H6: There is significant difference in the level of awareness & knowledge of tax planning among different occupation group.

ANALYSIS & FINDINGS: Table 1 shows the Age of the respondents.

Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

20-30

80

25.9

25.9

25.9

30-40

82

26.5

26.5

52.4

40-50

86

27.8

27.8

80.3

50-60

61

19.7

19.7

100.0

Total

309

100.0

100.0

From the table it is found that the age group of respondent drawn for the study is in more or less in equal proportion and slightly low percentage of age group is between 50-60 yrs with 19.7% of total sample group.

Table 2 shows the Gender of the respondents.

Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Male

255

82.5

82.5

82.5

Female

54

17.5

17.5

100.0

Total

309

100.0

100.0

From the table it is found majority of the tax payer i.e 82.5% selected for the study are male and less about 17.5% are female tax payers. This shows the proportion of female employees working in the selected sector is low.

Table 3 shows the occupation of the respondents.

Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Lecturers

18

5.8

5.8

5.8

Teachers

18

5.8

5.8

11.7

LIC

21

6.8

6.8

18.4

Water board

16

5.2

5.2

23.6

KPTCL & KEB

67

21.7

21.7

45.3

Business

43

13.9

13.9

59.2

KSFC

30

9.7

9.7

68.9

Govt.Banks

40

12.9

12.9

81.9

Pvt. Banks

25

8.1

8.1

90.0

Doctors

31

10.0

10.0

100.0

Total

309

100.0

100.0

It is found that 22% of the total sample of respondent are drawn from KPTCL & KEB, equal percentage of them around 14% of them are from business class and employees of Govt Banks and very low percentage 6% are from education sector.

Table 4 shows the income of the respondents.

Cumulative Income in Rs. Lakh Valid

Frequency

Percent

Valid Percent

Percent

100000-200000

35

11.3

11.3

11.3

200000-300000

91

29.4

29.4

40.8

300000-400000

136

44.0

44.0

84.8

400000 & Above

47

15.2

15.2

100.0

Total

309

100.0

100.0

From the above table it shows that 44% of tax payers are in the income ranging from 3 to 4 lakhs and 29% are between 2 to 3 lakhs, where as 15% of them are above 4 lakh. From the table we it is also found that about 11% of them will not qualify for filing of return and possibly they may be least bothered to do tax planning as their income is between 1 to 2 lakh.

Table 5 level of awareness of tax planning Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Yes

293

94.8

94.8

94.8

No

16

5.2

5.2

100.0

Total

309

100.0

100.0

From table 5 it is found that 95% of tax payers are aware of tax planning, the reason for such a high percentage of respondent to be aware of tax planning could be probably the influence of their demographic profile.

Table 6 Reasons for being Unaware of tax planning Cumulative

Valid

NA Too technical to understand

Frequency

Percent

Valid Percent

Percent

292

94.5

94.5

94.5

8

2.6

2.6

97.1

4

1.3

1.3

98.4

4

1.3

1.3

99.7

1

.3

.3

100.0

309

100.0

100.0

Return will be filled by tax consultant so not aware of tax planning No surplus income to invest in tax planning financial instruments Lack of time Total

From the table it is found that 2.6% of the respondents say that the reason for not being aware of tax planning is because it is too technical to understand which means that there is scope for the Income Tax department & the government make tax planning provision and return filing procedure more simple and easy for tax payer to understand.

Table 7 Filing of IT Return Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Yes

266

86.1

86.1

86.1

No

43

13.9

13.9

100.0

Total

309

100.0

100.0

86.1% of the respondents file income tax return which means that majority do follow the IT norms and adhere to filing of IT returns. Which also means there is a scope of people for doing tax planning.

Table 8 Methods of filing IT return Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

NA

35

11.3

11.3

11.3

Manual IT return

108

35.0

35.0

46.3

E-filing

166

53.7

53.7

100.0

Total

309

100.0

100.0

From the table it is evident that 54% of respondent file IT return online while still majority of them file manual. This shows that tax payer may not be comfortable or they may not be having knowledge of filing IT return online.

Table 9 Preparation and filing of IT return.

Cumulative Frequency

Percent

Valid Percent

Percent

NA

19

6.1

6.1

6.1

Me

86

27.8

27.8

34.0

Tax consultant

175

56.6

56.6

90.6

CA

29

9.4

9.4

100.0

Total

309

100.0

100.0

From table 9 it is clear that the since 57% of the tax payers returns are filed by Tax consultant and CA, due to this many of the tax payers may prefer to do tax planning based on their advice of tax consultant or CA and hence has little knowledge to understand and do tax planning.

Table 10: Instruments used for tax planning

Valid

Frequency

Percent

Valid Percent

Cumulative Percent

NA

8

2.6

2.6

2.6

Health insurance policy

10

3.2

3.2

5.8

Life insurance policy

37

12.0

12.0

17.8

Fixed deposit

10

3.2

3.2

21.0

PPF

7

2.3

2.3

23.3

Gold

1

.3

.3

23.6

Shares

2

.6

.6

24.3

More than one option

234

75.7

75.7

100.0

Total

309

100.0

100.0

From the table 10 it is found that 12% of the respondents consider life insurance as most important instrument for tax planning, followed by health insurance, fixed deposit and PPF. A low response to instruments like gold and shares indicate the respondent feels Gold and shares are also a part of tax instruments, this shows that the respondent have no proper knowledge about tax instrument.

Table 11: shows the utilization of the maximum deduction u/s 80C of Rs. 150000 Cumulative

Valid

Frequency

Percent

Valid Percent

Percent

Yes

236

76.4

76.4

76.4

No

73

23.6

23.6

100.0

Total

309

100.0

100.0

Table 11 shows that 76.4 % of tax payers have utilized max deduction u/s 80C of Rs. 150000 where as about 23.6 have not completely utilized the limit the reasons are well documented in table 12.

Table 12: shows reason for underutilization of maximum deduction u/s 80C Cumulative Frequency NA

Percent

Valid Percent

Percent

237

76.7

76.7

76.7

13

4.2

4.2

80.9

5

1.6

1.6

82.5

17

5.5

5.5

88.0

31

10.0

10.0

98.1

Other reasons

4

1.3

1.3

99.4

More than one option

2

.6

.6

100.0

309

100.0

100.0

No adequate investment in tax saving instruments Invested in non tax benefit financial instruments Low saving rate Unaware of various heads of investment

available

for

investments in 80C

Total

From the above table It is found that the major reason for underutilization of 80C deduction is due to lack of awareness of various heads of investment available under 80C, followed by low saving rate and low income and also investment made in non tax benefit financial instruments.

Table 13: shows ways through which tax payers enrich their knowledge of tax planning.

Cumulative Frequency

Percent

Valid Percent

NA

6

1.9

1.9

1.9

Reading newspaper

57

18.4

18.4

20.4

56

18.1

18.1

38.5

105

34.0

34.0

72.5

6

1.9

1.9

74.4

More than one option

79

25.6

25.6

100.0

Total

309

100.0

100.0

By taking advise from friends & relatives By taking help from tax consultant Through analysing different financial assets

Percent

From the table it is found that majority i.e. 34% of the respondents enrich their knowledge of tax planning by taking help from tax consultant. Followed by reading newspaper and taking advise from friends and relatives. This shows the influence of people in creating awareness and knowledge of tax planning.

H1: Demographic Profile of respondent has no impact on the awareness of tax planning Table 14: Descriptive Statistics Mean

Std. Deviation

N

Are you aware of Tax Planning?

1.05

.230

309

Age

2.41

1.077

309

Gender

1.17

.380

309

Occupation

4.95

2.528

309

Income

2.63

.875

309

Variables Entered/Removedb Variables Model

Variables Entered

Removed

1

Income, Occupation, Gender, Agea

.

Method Enter

a. All requested variables entered. b. Dependent Variable: Are you aware of Tax Planning?

Model Summaryb Model

R

R Square

Adjusted R Square Std. Error of the Estimate

Durbin-Watson

1

.230a

.053

.040

1.952

.225

a. Predictors: (Constant), Income, Occupation, Gender, Age b. Dependent Variable: Are you aware of Tax Planning?

Interpretation: From the table above it is found that R square value of 0.053 indicates 5.3% variation in the dependent variable i.e. awareness is explained by the changes in the independent variable i.e.

Income, Occupation, Gender & Age.

ANOVAb Model 1

Sum of Squares

df

Mean Square

F

Sig.

Regression

.859

4

.215

4.234

.002a

Residual

15.413

304

.051

Total

16.272

308

a. Predictors: (Constant), Income, Occupation, Gender, Age b. Dependent Variable: Are you aware of Tax Planning?

From the table above it is found that at 5% level of significance the p-value 0.002 is less than 0.05. Hence the null hypothesis is rejected that is there is no significant impact of Income, Occupation, Gender and Age on the awareness of tax planning. And the alternate hypothesis is accepted. There is a significant impact of income, occupation, gender and age on awareness of tax planning.

Coefficientsa Standardized Unstandardized Coefficients Model 1

B

Std. Error

(Constant)

1.168

.067

Age

-.022

.014

Gender

.005

Occupation Income

Coefficients Beta

Collinearity Statistics t

Sig.

Tolerance

VIF

17.431

.000

-.102

-1.573

.117

.740

1.350

.034

.008

.133

.894

.963

1.038

.007

.005

.072

1.282

.201

.992

1.008

-.040

.017

-.151

-2.329

.020

.741

1.349

Dependent Variable: Are you aware of Tax Planning?

From the above table is found that Age, Gender and Occupation individual have no impact on the awareness of tax planning as the p- values are more at 5% level of significance. However, income has significant impact on the awareness of tax planning which means people with higher income tend to be aware of tax planning as they need to invest the amount to sax their tax liability. This is evident from the p-value being 0.020 which is less at 5% level of significance.

Further, from the co linearity statistics it is found that all the values of the variables observed, the tolerance level is more then 0.20, meaning hereby that there doesn’t exist multi co linearity among the variables also the VIF (variance inflation factor) for all the variables is less than 5.This indicate the robustness of the test model applied.

Table 15: Chi-Square Test – Cross Tabulation Case Processing Summary Cases Valid

Occupation * Are you aware of Tax Planning?

Missing

Total

N

Percent

N

Percent

N

Percent

309

100.0%

0

.0%

309

100.0%

Cross Tabulation Are you aware of Tax Planning?

Occupation

Total

Yes

No

Total

Lecturers

18

0

18

Teachers

15

3

18

LIC

21

0

21

Water board

16

0

16

KPTCL & KEB

66

1

67

Business

37

6

43

KSFC

30

0

30

Govt.Banks

39

1

40

Pvt. Banks

22

3

25

Doctors

29

2

31

293

16

309

Monte Carlo Sig. (2-sided) 95% Confidence Interval

Asymp. Sig. (2Value

Df

Pearson Chi-Square

21.135a

9

Likelihood Ratio

22.002

9

Fisher's Exact Test

16.136

N of Valid Cases

309

sided)

Sig.

Lower Bound

Upper Bound

.012

.003b

.000

.010

.009

.003b

.000

.010

.010b

.000

.021

From the table above it is found that at 5% level of significance the computed value of pvalue i.e. 0.003 is less than the table reference value. Hence the null hypothesis H6 is rejected.

That is there is significant difference in the level of awareness of tax planning among different occupation group. This shows that irrespective of occupation background the tax payer is aware about the implication of taxation on his income. Hence the tax payer will be aware of tax planning tools.

Conclusion: Tax planning encompasses many different aspects, including the timing of both income and purchases and other expenditures, selection of investments and types of retirement plans, as well as filing status and common deductions. However, while tax planning is an important element in any financial plan, it is important to not let the "tax" tail wag the financial "dog."

It is found from the research that there is no awareness among the tax payers about the recent laws, deductions, exemptions, etc. that have been implemented by the Income Tax department. From the tools used, the study shows the impact of demographic profile on the awareness & knowledge of tax planning. Further it is to be noted that demographic profile of tax payer play very important role in tax planning and among the variable it is the income and the occupation which influence to a great level in educating once self with development in tax planning and instrument to be selected to minimize the tax implication. Efforts are made by various authorities to enhance the awareness level and also to educate the people but still it is in nascent stage.

Reference:



CA Shilpa & Vasant Bhide, 2012 “A Study Of Awareness Of Tax Planning Amongst Salaried Assessees, International Journal of Research in Computer Application & Management



Djawadi, Behnud Mir & Fahr, René, 2013. "The Impact of Tax Knowledge and Budget Spending Influence on Tax Compliance," IZA Discussion Papers 7255, Institute for the Study of Labor (IZA).



http://incometaxmanagement.com/Pages/Tax-Management-Procedure/5-1-Meaning-ofTax-Planning.html



Knut Eriksen & Lars Fallan, 1996. “Tax knowledge and attitudes towards taxation; A report on a quasi-experiment” Journal of Economic Psychology



Marketing research by Malhothra & Dash, 6th edition, chapter 1, 2, 3, 4, 5, 10, 11& 12, Pearson publications.



Sarfaraj Mansuri, 2012. “Tax awareness and tax planning among individual assessee” Radix International Journal of banking, finance and accounting



Uma K. & Lingaperumal G, 2013 “Awareness of tax planning - A study with special reference to government employees” International Journal of Research in Computer Application & Management