PRESTIGE INSTITUTE OF MANAGEMENT

Presentation

On

Corporate Tax Planning

Presented by :

Alok Srivastava

Tax treatment on issue of bonus share

When bonus share are issued to the equity shareholders, the value of the share is not taxed as dividend distributed.

Where Redeemable preference share are issued as bonus share on their redemptions, the amount shall be taxed distributed.

Where bonus are issued to the preference share holder , on their issue it is deemed to be dividend and liable to tax.

Expanses on issue on bonus share is allowed as deductions as per supreme court judgment .

Tax planning

A company may capitalized its profit by converting partly paid share into fully paid up share instead of issues of bonus share. This conversion will not be a deemed dividend,further benefit of indexation for the price paid by the share holders will be available from the date of allotment of share.

Inter Corporate Dividend

When any domestic companies receives dividend from another domestic company (expect loan from a closely held company ) it is exempted u/s 10(34), however the domestic companies who is declaring ,distribution or paying dividend is liable to pay tax on u/s 115-O in addition to tax on total income.

Tax Planning

When s companies issue shares to its equity shareholder it is not a deemed dividend are not liable tax on such deemed dividend .hence domestic companies may issue bonus share to its equity share to its equity share holder instead of cash dividend in cash to reduce the tax liability.

Capital Structure

A mix of debt, preferred stock, and common stock with which the firm plans to finance its investments.

Objective is to have such a mix of debt, preferred stock, and common equity which will maximize shareholder wealth or maximize market price per share

WACC depends on the mix of different securities in the capital structure. A change in the mix of different securities in the capital structure will cause a change in the WACC. Thus, there will be a mix of different securities in the capital structure at which WACC will be the least.

An optimal capital structure means a mix of different securities which will maximize the stock price share or minimize WACC.

How Firms Establish Capital Structure?

Most corporations have low debt-asset ratios Changes in Financial Leverage affect Firm Value There are differences in the Capital Structures of

Different Industries Most companies have a target debt ratio Target debt ratio is dependent on taxes, types of

assets, uncertainty of operating income, and pecking order and financial slack.

Optimal Capital Structure:

Optimal capital structure is achieved by finding the point at which the tax benefit of an extra dollar of debt = potential cost of financial distress. This is the point of:– Optimal amount of debt– Maximum value of the firm– Optimal debt to equity ratio– Minimal cost of WACC

This will obviously vary from firm to firm and takes some effort to evaluate. No single equation can guarantee profitability or even survival

Tax Planning

If rate of return < rate of interests, maximum debt fund since it shall increase the rate of return on equity capital.

If rate of return on investment < rate of interest, minimum debt fund should be used.

Where assesses enjoys tax holidays under various provisions of income tax case minimum debt fund should be used,

The choice of structure shall depend upon maximizing the return on capital employed which is computed by using follwing formula

= distributiable profit

equity capital * 100