Module-2 Corporate Tax 2015 Introduction

8/15/2019 Module-2 Corporate Tax 2015 Introduction

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Tax Planning

Tax Planning

BU Thirdsemester


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Tax Planning

Tax Planning

Tax planning is thearrangement of Availingthe tax benefits by makinguse of all beneficial

provisions in the tax lawsThe assesse Avails certainexemptions, deductions,rebates and reliefs, to minimize

his tax liability.•Tax planning imply compliance withthe Tax Laws


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Tax Avoidance

Tax Avoidance

Tax avoidance the advantage is taken byfinding out loopholes in the laws. Theshortest definition of tax avoidance is thatit is the art of dodging tax withoutbreaking the law.

In the case of tax avoidance, the taxpayer circumvents the law, without givingrise to a criminal offence, by the use of ascheme, arrangement or device, often ofa complex nature but where the mainpurpose is to defer, reduce or completelyavoid the tax payable under the law. .


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Tax Evasion

Tax Evasion

Evasion, once proved,not only attractsheavy penalties butmay also lead toprosecution.

Falsification ofaccounts

Concealment ofincome

Inflation of expensesto suppress income

Conscious violation ofrules


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TAX !A""I"# TAX A$%I&A"CE TAX E$A'I%"

Legal Legal Illegal

thical !nethical !nethical"o intention to defeat legalspirit

Intention to defeat legalspirit

Intention to defeat legalspirit

#y ta$ing legitimate benefitsof Income tax law

#y ta$ing benefit ofloopholes of law

%isstatement andfalsification of accounts,

incomes and expenses"o Litigation in courts Leads to litigation in courts Leads to litigation in courts

"o &enalty' &rosecution "o &enalty' &rosecution Attracts penalty'prosecution

(ood for "ational)evelopment' *ociety+

creates employment etc

It is evil for "ation'*ociety It is evil for "ation'*ociety

&romotes professionalismand strengthens economicand political situation

ncourages bribery andwea$ens economic andpolitical situation

ncourages bribery andwea$ens economic andpolitical situation

&lanning before tax liabilityarises &lanning for avoidancebefore tax liability arises Tax evasion involvesavoidance of payment of tax


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Objectives of Tax Planning

Objectives of Tax Planning

Reduction of tax

liabilityMinimization oflitigationProductiveinvestmentHealthy growth ofeconomyEconomic stability


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Factors on thebasis of which Taxplanning is done

Factors on thebasis of which Taxplanning is done

The following factors arehelpful for e ective tax

planning: – Residential status

and citizenship of

the assesse. – Heads ofincome/Assets to eincluded incomputing netwealth.

– !atest legal position. – "orm v #u stance


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Tax Planning Areas under $ncome Tax Tax Planning Areas under $ncome Taxetting u!

new"usiness

#ith res!ectto $inancialManagement decision

!eci%cmanagerialdecisions

Em!loyeeremuneration

&onresidence

%ecisionregard to

Tax$mplicationwith respect

to

%ecision withregard to

!ocation &apitalstructure

'a(e or )u*

+ature %ividendPolic*

,wn or lease

"orm oforganization )onus #hares Purchase *installment -sHire

Precommencement expensesand incomes

)usinessRestructuring

RepairReplacerenewal orrenovation


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$mportantsections

+ew )usiness

$mportantsections

+ew )usiness

+ew )usiness


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ew Businessew Business

&ew "usiness' (ocation of"usiness) The correct selectionof location of usiness alsopla*s an important role in'anagement decision ma(ing.

There are a few locational taxadvantages in the $ncome Tax Actwhich must e considered whilearriving at the decision. $n otherwords when one is tr*ing to starta new usiness or start a newunit in the existing usiness itcan consider locating usiness ina place so that it get some tax

exemption which will reduce the


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Tax Planning as perlocation

Tax Planning as perlocation


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1.Section 10A: Newly establishedundertaking in Free Trade Zone,Electronic Hardware Technology Park

or Software Technology Park 2.Section 10AA: Newly established

undertaking in Special Econo!y Zone

.Section 10!: Newly established"##$ Export %riented &ndertaking

".Section 10!A: Newly established

!anufacturing unit producing hand!ade article or things or artistic 'aluewith wood (not being i!ported) as the!ain raw !aterial *t least +#$ !ust

be exported

Sections in T*ct for taxPlanning



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Section #0$!: ndustrial undertakinglocated in industrial backward state or

district %.Section #0$&: &ndertakings or

enterprises located in notified area in North Eastern State, State of Sikki!,Hi!achal Pradesh, &ttranchal Forunits co!!encing productionor undergoing substantial expansionon or after " - .##/ and located in

North Eastern States or Sikki!, the pro'isions of section 0# E shall be

applicable instead of this section




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#.Section #0$E: &ndertaking located in NorthEastern states or state ofSikki! who begun toco!!ence production orco!plete substantialexpansion on or after1"st !arch .##/ but before

1"st 2arch .#"/ are co'eredunder this section insteadof section 0# 3

#0$E#0$E


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'.Section #0$(: &ndertakingdoing business of hotel or

con'ention centre in National 4apital Territory of 3elhi

and the districts of Faridabad,5urgaon, 5auta! 6udh Nagar and5ha7iabad, where the new hotel or

the con'entional centre isconstructed on or after "st of *pril.##/ and before 1"st 2arch .#"#

#0$(#0$(


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Tax Planning as per Nature of businessTax Planning as per Nature of business


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$mportantsections

$mportantsections

"inancial 'anagement%ecisions


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+ature ofusiness

+ature ofusiness

'ec &escription01 AA 2nits newl* esta lished at #pecial economic zones01) 2nits newl* esta lished 0113 4,25export oriented

underta(ing66A) Tea &o ee and Ru er development

66A)A #ite restoration fund67A% 4xpenditure on speci8ed usiness674 999))

4xpenditure on mineral mineral oil

99) #hipping


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+ature ofusiness

+ature ofusiness

'ec &escription99% Ro*alt* income of foreign companies;1$A P


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Tax ene8ts "irm !!P andcompan*

Tax ene8ts "irm !!P andcompan*

$irm ((P *om!any

Tax Rate 61.? 3 61.?3 61.?3Applica ilit* ofsurcharge

+A +A @.73 if 0 crore

'AT +A +A Applica le

%ividend Tax +A +A %ividend TaxB0C.C1; Tax treatment inthe hands of #Holder

#hare of pro8tnot taxa le in thehands of partner

#hare of pro8tnot taxa le in thehands of partner

%ividend in thehands ofshareholder isnot taxa le

$nterest oncapital

Des if permitted* agreement if

not 0 3

Des if permitted* agreement if

not more than0 3

+o interest toshare holder


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8hile selecting a particular capitalstructure the entrepreneur has to keep in'iew the following considerations9

– ser'ing the capital base withconsistent di'idend policy

– cost of capital to be raised fro! the!arket

– chargeability or otherwise of taxes,i.e., direct and indirect taxes

– keeping a !argin for ploughing backof profits for future plan towards

di'ersification, expansion,!oderni7ation and otherde'elop!ent aspects

Specific )anage*ent(ecisions1. &apital Str+ct+re

Specific )anage*ent(ecisions1. &apital Str+ct+re


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)eans of financing 9

5enerally, the following !eans of

finance are a'ailable for a new pro:ect9 – E;uity share capital, – 3ebentures


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,ease (efined,ease (efined

=ease is a contractunder which a lessor, the owner ofthe assets, gi'es right to use theasset to a lessee,the user of the assets,for an agreed period of ti!e

for a consideration called the leaserentals

-


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n recent years, leasing has beco!ea popular source of financing in

ndia Fro! the lessees point of'iew, leasing has the attraction ofeli!inating i!!ediate cashoutflow, and the lease rentals can

be clai!ed as ad!issibleexpenditure against the businessinco!e %n the other hand, buyinghas the ad'antages of depreciation

allowance and interest on borrowedcapital being tax>deductible Thus,an e'aluation of the twoalternati'es is to be !ade in order

to take a decision

=ease or buydecisions9=ease or buydecisions9


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Exam!leExam!le

?irtex has decided to go for fork lift costs"#!illion Econo!ic life @ years Sal'age As" !illion 3ep rate -#$ Tax 1B$ Theco!pany can borrow "# !illion at "B @$*nupa! leasing co!pany can gi'e on leasingfor rental As . - !illion per year ?irtex willha'e to bear all !aintenance, operating andinsurance expenses


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4ash flow For =ease4ash flow For =ease

cash Jow for !ease Rs $n million1 0 6 9 7 C

A &ost of for( !ift 01.11) %ep B913 9.11 .91 0.99 1.;C 1.7 1.60

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!oss ondepreciation tax

shield E0.91 E1.;9 E1.71 E1.61 E1.0; E1.00

% !ease E .91 E .91 E .91 E .91 E .91 E .914F%I1.67

Tax shield onlease 1.;9 1.;9 1.;9 1.;9 1.;9 1.;9

"!oss on salvage

value E0.11=FAK&

K%K4K" 01.11 E .?C E .91 E .1C E0.;C E0.@9 E .C@

Post Tax cost of orrowing of -irtex 07.9G0E1.67 F 01.13

+P- ,f lease F L .?C/G0Kr M K L .91/G0Kr M K L .1C/G0Kr 6MKL0.;C/G0Kr 9MKL0.@9/G0Kr 7M K L .C@/G0Kr CM.$RR F 01.11 F +P- ,f lease F L .?C/G0Kr M K L .91/G0Kr M KL .1C/G0Kr 6M KL0.;C/G0Kr 9M KL0.@9/G0Kr 7M K L .C@/G0Kr CM.I)) 0+.9 This means that the firm chooses purchasing as -ith borro-ing andas it incurs post tax cost 0+.+


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&ash "low&ash "low

?itrx can borrow As "# !illion at "B -$ The after tax"B -("># 1B)C "# #$

NP? %f lease C D. +@


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,ease !enefits to ,essor and,essee

,ease !enefits to ,essor and,essee

•* lease can benefit both when their tax ratediffers•=easing pays if the lesseeGs !arginal taxrate is less than that of the lessor n fact in alease, the lessee sells his depreciation taxshield to the lessor•5ain of both is loss to the go'ern!ent in

for! of taxes

.+


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•*n asset costing As ",##,### is to beac;uired> two alternati'es> 6uy asset takinga loan of As ",##,###, payable in Binstall!ent .#,### and "- $ interest*ssu!ing lease rentals, processing fees,interest and principal a!ount payable at theyear end•Second lease option of lease rent As 1#,###upto B years and "$ processing charge*ssu!e AA to be "#$ and P? factor "#$is

1#

:ears 0 9 5 7 6

& /act 0.101 0.2 3 0.456 0.32- 0.3 6


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1"

+ , - . /

0.!oanRepa*ment

1 111 1 111

1 111

1 111 1 111

. $nterest 093 09 111 00 11

;911 7 C11 ;11

6. &ash out Jow0K

69 111 60 11 ; 911

7 C11 .;11

9. %epreciation073 N%-

07 111 0 @71

01 ;6;

? 0 @ ;61

7. Total K9 ?111 6?71 0? 6; 09;0 01C61

C. Tax saving61.?3 of 7

;?C0 @910 7?97 97@@ 6 ;7

@.Ad>usted cash"low 56ECO

716? 6@?? 977 01 6 0?707

Purchasing the Asset

Total Rs ;7@C1

!


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1.

+ , - . /

0. !ease Rentals 61 111

61 111

61 111

61 111

61 111

. Processing "ees 01116. &ash "low 50K O 6011

161 11

161 11

161 11

161 1

119. Tax saving B61.?3 of 6

?7@? ? @1 ? @1 ? @1 ? @1

7. Ad>usted cash Jow56E9

090

1@61

1@61 1@61 1@61

C.P- "actor 1.?1? 1.; C 1.@70 1.C;6 1.C0

@. P- of ad>ustedcash Jow 57xCO

0?9@ 0@06

077C; 0907? 0 ;@6

!ease

Total Rs @?0?7


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,easing !enefits &o*e fro*-,easing !enefits &o*e fro*-

6oth, lessor and lessee, gain at go'ern!entGs expense because of the difference in their tax rates

The go'ern!ent gains fro! the tax on lease rentalswhile it loses on depreciation and interest tax shields The i!plicit principal pay!ents in a lease rental areshielded by depreciation, while interest deductions

pro'ide for i!plicit return on the lesseeGs capital

11


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1.Lease rental is a revenue expense can be claimed.2.Obsolescence of risk if hi h then lease!.Non depreciable assets " leasin

1.#urchase " depreciation $%s !22.Loan interest amount claimed as revenue or

capitali&ed. But when the interest is paid after usin ofasset then it is revenue expense.

!.'esidual value more " purchase(.1)*+ 1)B " 1) assessment ,ears-. estation period /0 ,ears special benefits


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"# * and "#6"# * and "#6

The benefit inrespect of newlyestablished

ndustrial&ndertaking in FTZ,EHTP SEZ or STP is*'ailable to all

*ssessee on Exportof 4ertain *rticlesor things or software>

0. #hould not e formed *splitting up or reconstructionof unit alread* in existence

. #hould not e formed *transferring machiner* orplant previousl* used.

6. $n certain conditions asspeci8ed in the Act secondhand machiner* is allowed.

9. #ale proceeds should erought in converti le forex

within C months from the endof P.D. Giv Report in "orm+o.7C" E


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+0Tax Holiday) 1 $or units which have begun!rior to 34 ,55-65.' 0113 pro8t from export of such

article thing software for 01 consecutive A.D. from theA.D. relevant to P.D. in which it egun to manufacturesu >ect to some conditions and restrictions mentionedin the Act..However for AD 116E19 it is ?13. $or unitswhich have begun on or after 34 ,55-65. thededuction is 0113 for 8rst 7 *ears and 713 for next *ears and next 6 *ears 713 su >ect to creation of

#pecial 4conomic Qone Reinvestment Allowance

Reserve Account and ful8llment of conditions relatingthereto failing which the unutilized or wrongl* utilizedReserve would e deemed income as per theprovisions of the Act and the Rules.

-0 &o deduction for 3040,5+, 1 +- or thereafter


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Now a decision regarding the!anufacturing of these co!ponents isto be taken t is decided whether the

product


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R !imited Produces most of its own parts#tandard wage rate Rs C per hour -aria lemanufacturing ,h is Rs 9.7 "ixed ,h Rs01.71 per hour. The compan* reSuires a

new part and can e made with out an*4xpansion. )ut the testing cost Rs 07111pm . The material cost is Rs 9 per unit. Thepurchase cost is Rs 6C from outside.

&ompan* estimate that it will need11 111new parts%ecide *ou u* or ma(e


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A i


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Repairs/Renewal: 3eduction for expenditureon repairs


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$mportantsections

$mportantsections

4mplo*ee Remuneration


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$ndivid+al/s invest*ent: Taxpayer

can plan in'est!ent in a !anner sothat o'erall return is opti!u!

This !ay in'ol'e analy7ing

different in'est!ent options takeninto consideration, a'ailability oftax deduction u


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E*plo ee/s re*+neration: There is no effect on the taxliability in the hand of the e!ployer on account of

designing of salary package of e!ployees Still, e'erye!ployer wants to design the salary package in a way sothat the incidence of tax on the e!ployee is kept to!ini!u!

6y doing this, the take ho!e pay of the e!ployee isincreased

To design such a package it is necessary to understandhow per;uisites and benefits are taxed and which arethose per;uisites or benefits which are not taxed or taxed

at concessional rate t is also necessary to understand, how Fringe 6enefittax is payable, as it !ay be ad'isable for the e!ployer to

pay F6T instead of letting that benefit be taxed in thehand of the e!ployee through allowances

E * p

l o 0 e e

. e *

+ n e r a t i o n

E * p

l o 0 e e

. e *

+ n e r a t i o n


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This re;uires consideration fro! the pointof 'iew of I

Employer: 8hile calculating the business inco!e of the e!ployer, there!uneration payable to the e!ployee, inwhate'er for!, should be fully deductibleotherwise the e!ployer will ha'e to paytax on such re!uneration also as the sa!e

will not be allowed as deduction whileco!puting his business inco!e n so!ecases, the e!ployer shall ha'e to payfringe benefit tax on certain benefitsgi'en to the e!ployees

Tax planning incase of e!ployeeGsre!uneration

Tax planning incase of e!ployeeGsre!uneration


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Employee: The salary recei'ed by the e!ployee, whetherin cash or kind, should attract !ini!u! inco!e>tax

liability He should be in a position to a'ail !axi!u!exe!ptiontax *ct

Employee: The salary recei'ed by the e!ployee, whetherin cash or kind, should attract !ini!u! inco!e>tax

liability He should be in a position to a'ail !axi!u!exe!ptiontax *ct

T ll T f

T t ll T f


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Totally Tax freeTotally Tax free'ection Categories

60 768 Agriculture Income607 8 9eceived from :!/607 A8 &artner;s *hare of profit from partnership60760AA8 Leave ncashment on retirement sub to

limits 7 max - La$hs8 . Leave encashmentto legal heirs

607 638 *cholarship for ducation607628 &ension ' /amily pension received by the

(allantry awardee

607- 8 Income of minor up to 9s 6500 p.a607-


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Exe!ptionsExe!ptions*l "o IT *ection xempted Allowance'&er$s Amount =f xemption >ategories

6 60758 Leave Travel Actual or Amount prescribed All employees

6076087i8 )eath'9etirement gratuity Actual (overnmentmployee

- 607607ii8 (ratuity under gratuity act Least of ? month salary fornumber of years served or 60La$hs

< 60760A87i8 >ommuted &ension /ull Amount *tate' >entral ')efence employees

5 60760A87iia8 >ommuted &ension, whereemployee is eligible forgratuity

--.--@ of commuted &ension mployeesexcluding sl no <

4 60760A87iib8 >ommuted &ension, whereemployee is not eligible forgratuity

50@ mployeesexcluding sl no <

2 60760b8 >ompensation by wor$menunder industrial dispute act

>ompensation as computedunder * 5/ 7 b8 of industrialdispute act or @ La$hswhichever is less

Individual


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Exe!ptionsExe!ptions

'l"o

IT 'ection ExemptedAllo-ance/ er s

Amount %f Exemption Categories

1 60760c8 oluntary 9etirementbenefits approved by IT)ept

%ax 9s 5 La$hs All employees .xemption not

allowed if relief isprovided under *21

60 6076-A8 :9A !nder 9ule A All employees

66 60760)8 %aturity alue receivedunder LI>

/ull All employees

6 607668 Amount 9eceived from&/ approved and &&/

/ull All employees


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*gricultural nco!e*gricultural nco!e

)ent

• Any rent received from land which isused foragriculturalpurpose

%peration

• Any incomederived from suchland by agriculturaloperationsincludingprocessing ofagriculturalproduce, raised orreceived as rent in$ind so as torender it fit for themar$et, or sale ofsuch

Farm ;ouse

• 7iii8 Incomeattributable to afarm house sub ectto the conditionthat building issituated on or inthe immediatevicinity of the landand is used as adwelling house,store house etc


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k d


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Perks Exe!ptedPerks Exe!pted

B 4on'eyance between office andresidence and 'ice 'ersa

@ Training 4ost/ 5o'ern!ent e!ployees I any

perks being citi7en of ndia,

working outside india0 E!ployerGs contribution to groupinsurance, pension sche!e, ordeferred annuity

k d


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Perks Exe!ptedPerks Exe!pted

+ 2edical facility at office

"# 2edical rei!burse!ent up to 07 111"" Periodical and :ournals". Telephone or !obile facility"1 Free education facility up to "###p! I

no restriction on children"- Health club and sports club facility


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Perks exe!ptedPerks exe!pted"B 4o!puter and lap top"@ AF* to high court < supre!e court

:udges,"/ AF* I 2P, &nion 2inister, leader

of opposition"0 AF* to e!ployer> a !ining site,

onshore exploration, pro:ectexecution, da! site, powergeneration site, offshore site

"+ AF* to chair!an or retiredchair!an &PS4


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Specified e!ployeeSpecified e!ployee

3irector e'en for a day in PJ

specified e!ployee*n e!ployee who has substantialinterest in the co!pany( .#$or!ore 'oting power)5ross taxable salary of B#### or!ore in PJ


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nflation of expenses to suppress inco!e is an act of

KKKK" Tax Planning. Tax *'oidance1 Tax E'asion- Tax 2anage!ent

The filing of return of loss u


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The filing of return of loss u


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2r *ditya, an e!ployee of Shri Aa! Lrishna Se'a2andal, stays in housing facility pro'ided by thetrust This is an act of KKKK(*) Tax Planning(6) Tax *'oidance(4) Tax E'asion(3) Tax 2anage!ent


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)r. ash a b+siness*an p+rchases 3ational Saving&ertificates of s.40 000 so as to red+ce his inco*echargeable to tax fro* s." 00 000 to s. 40 000. This is

an act of -----..5A6 Tax Planning5!6 Tax Avoidance5&6 Tax Evasion5(6 Tax )anage*ent


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*n assesse cannot clai! the benefit of KKKK for

the purpose of tax deduction if he M%wnG the asset" 3epreciation on asset. Aepair expenses of re'enue nature1 nterest on !oney borrowed to purchase the asset- None of the abo'e


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8hen the asset is owned by the assessee, he canclai! benefit of KKKK for tax deduction

(*) =ease rental(6) Aepair and 2aintenance expenses of capitalnature(4) 3epreciation(3) 4ost of *sset


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8hich of the following will be not be allowed as

deduction in case of M=easeG of an asset(*) 3epreciation(6) 4ost of 4apital(4) nterest on loan borrowed for ac;uiring the asset(3) Aental paid to lessor


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=ease rental can be clai!ed as OOOOOOOO against business inco!e" *d!issible expenses. nad!issible expenses1 6oth (*) and (6)- None of the abo'e


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3eduction for expenses on repair and renewal is

allowed as OOOOOOOOO " 4apital expenditure. Ae'enue expenditure1 3iffered Ae'enue expenditure- 6oth (*) and (4)


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Ae!uneration paid to e!ployee will beKKK" Fully deductible. Partly deductible1 Non deductible- 3epends on situation


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Thank JouKThank JouK

Documents

Module-2 Corporate Tax 2015 Introduction