MF0012 Taxation Management

Q1. Explain the objectives of tax planning. Discuss the factors to be considered in tax planning. Ans. Objectives of Tax Planning a. Reduction of tax liability by utilising the benefits available in the tax laws. b. Informed and pragmatic financial decisions: A person adds the dimension of tax incidence in his decision-making on financial matters, and this helps him optimise his decisions. c. Multi-dimensional investment decisions: In a democratic welfare state like India the government requires substantial investment in infrastructure, education and healthcare. d. Discharging a citizens 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. e. 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.

Factors to be Considered in 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 stay 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 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 Sales Tax Act, Excise Act and Customs Act. 4. Form v. Substance: The taxpayer should be focussed on the substance of a transaction, the real intent, and not only with the form. He should at no time try to change the form for the only purpose of reducing or eliminating tax. It is often seen that a transaction that in substance should result in a tax liability does not

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Q2. Explain the categories in Capital assets. Mr. C acquired a plot of land on 15th June, 1993 for 10,00,000 and sold it on 5th January, 2010 for 41,00,000. The expenses of transfer were 1,00,000. Mr. C made the following investments on 4th February, 2010 from the proceeds of the plot. a) Bonds of Rural Electrification Corporation redeemable after a period of three years, 12,00,000. b) Deposits under Capital Gain Scheme for purchase of a residential house 8,00,000 (he does not own any house). Compute the capital gain chargeable to tax for the AY2010-11. Ans. Categories of capital assets For taxation purposes, the capital assets have been, divided into (a) short-term capital assets and (b) long-term capital assets. (a) Short-term capital assets: According to Section 2(42A), a short-term capital asset means a capital asset held by an assessee for not more than: a. 12 months before its transfer in case of company shares, (equity or preference), or any other security listed in a recognized stock exchange, or units of UTI and mutual funds or a zero coupon bond, and b. 36 months before its transfer in the case of any other asset Capital gains arising from the transfer of short-term capital asset are called short-term capital gains. (b) Long-term capital assets: Any capital asset other than a short-term capital asset is termed as a long-term capital asset. Gains arising from the transfer of long-term capital assets are called long-term capital gains. Long-term capital gains qualify for concessional tax treatment under the Income Tax Act.

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Q3. X Ltd. has Unit C which is not functioning satisfactorily. The following are the details of its fixed assets:

The written down value (WDV) is Rs. 25 lakh for the machinery, and Rs.15 lakh for the plant. The liabilities on this Unit on 31st March, 2011 are Rs.35 lakh. The following are two options as on 31st March, 2011: Option 1: Slump sale to Y Ltd for a consideration of 85 lakh. Option 2: Individual sale of assets as follows: Land Rs.48 lakh, goodwill Rs.20 lakh, machinery Rs.32 lakh, Plant Rs.17 lakh. The other units derive taxable income and there is no carry forward of loss or depreciation for the company as a whole. Unit C was started on 1st January, 2005. Which option would you choose, and why?

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Q4. What do you understand by customs duty? Explain the taxable events for imported,warehoused and exported goods. List down the types of duties in customs. An importer imports goods for subsequent sale in India at $10,000 on assessable value basis. Relevant exchange rate and rate of duty are as follows:

Calculate assessable value and customs duty. Ans. Customs Duty Customs duty is the duty imposed on goods imported into the country. In the years before globalisation it was difficult to import goods on account of stiff duty rates and procedures, especially for less developed and developing nations like India. Ajoke used to be that the word customs was said to come from Sanskrit kashtam meaning difficulty. Taxable event for imported goods The taxable event with respect to imports is the day of crossing of the customs barrier and not the date on which goods land in India or enter its territorial waters. Taxable event for warehoused goods The taxable event in case of warehoused goods is when goods are cleared from customs-bonded warehouse by submitting sub-bill of entry. Taxable event for exported goods Taxable event arises for exported goods when the proper officer makes an order permitting clearance and loading of the goods for exportation under Section 51 of the Customs Act, 1962. Types of duties in customs: Basic customs duty Additional customs duty Special additional duty of customs Protective duties Safeguard duty Countervailing duty on subsidised articles Anti-dumping duty Solution of Pratical

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Q5. Explain the Service Tax Law in India and concept of negative list. Write about the exemptions and rebates in Service Tax Law. Ans. Service Tax Law in India Service tax was introduced in India in 1994 by Chapter V of the Finance Act, 1994. It was imposed on an initial set of three services in 1994 and the scope of the service tax has since been expanded continuously by subsequent Finance Acts. There is no separate Service Tax Act, but all pronouncements relating to service tax are in the annual Finance Acts. Service Tax Rules, 1994 were enacted to begin with, and with notifications from time to time the law has been amended and updated. The new section 65B introduced in the Finance Act, 2012 defines services in Clause 44. The list has 38 items and a few other rebates and special treatments, and except for these all other services are taxed. Service tax is levied @ 12% plus education cess 3% i.e., 12.36% for financial year 2012-13. Export service is not taxable, and so if the assessee has no output service that is taxable, he/she can apply for and receive refund of the service tax collected from him/her on his/her input services when he/she paid for those services. A transaction will qualify as export when it meets the following requirements: The service provider is located in taxable territory Service recipient is located outside India Service provided is a service other than in the negative list The place of provision of the service is outside India The payment is received in convertible foreign exchange The Concept of Negative List A comprehensive and elaborate note from Tax Research Unit of the Ministry of Finance (Dept. of Revenue), issued on 16th March, 2012 sets the tone for a major paradigm shift in regard to service tax. 1. Negative list of services A list of 17 services that will be exempt from service tax, as per notification no. 19/2012-ST dated 5/6/2012. 2. Exemptions under mega notification A list of 34 services have been notified for exclusion from service tax vide a Mega notification N.12/2012 dated 17.03.2012 with effect from 1.7.2012.These are exemptions related to the kind of services being provided. Exemptions and Rebates in Service Tax Law Exemptions (Section 93) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, or individual special order, exempt generally or subject to such conditions as may be specified, taxable service of any specified description from the whole or any part of the service tax. Rebate (Section 93A Where any goods or services are exported, the Central Government may grant rebate of service tax paid on taxable services which are used as input services for the manufacturing or processing of such goods or for providing any taxable services.

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Q6. Explain major considerations in capital structure planning. Write about the dividend policy and factors affecting dividend decisions.
Ans. Major considerations in capital structure planning

1. Risk of two kinds, that is, financial risk and business risk: In the context of capital structure planning, financial risk is more relevant. Financial risk is of two types: (a) Risk of cash illiquidity: (b) Risk of variation in the earnings to equity shareholders in relation to expectation: . 2. Cost of capital: Cost of capital is an important consideration in capital structure decisions. It is obvious that a business should be at least capable of earning enough revenue to meet its cost of capital and finance its growth. 3. Control: Along with cost and risk factors, the control aspect is also an important consideration in planning the capital structure. When a company issues fresh equity, for example, it may dilute the controlling interest of the present owners.
4. Trading on equity: A company may raise funds either by issue of shares or by borrowing. Borrowings entail interest cost, which is payable irrespective of whether there is profit or not. Returns to shareholders on the contrary arise only when the company makes profits, but the return expected by them is much higher since they bring in risk capital.

5. Tax consideration: While dividend on shares is declared and paid out of profit after tax, interest paid on borrowed capital is allowed as deduction for computing taxable income. Cost of raising finance through borrowing is deductible in the year in which it is incurred.
6. Government monetary and fiscal policy: The annual review by Reserve Bank of India, the nations central bank, gives shape to the monetary policy for the subsequent 12 months, which takes into account issues such as inflation, economic growth and sectoral aspects.

Dividend Policy Two approaches need to be considered simultaneously in dividend decisions: 1. Retention as a long-term financing decision: Payment of cash dividends reduces funds available to finance growth and either restricts growth or forces the firm to find other financing sources. So a company might decide to retain earnings if: a) Profitable projects are available and need finance and b) Capital structure needs infusion of equity funds, and a fresh issue of equity is not advisable.
2. Dividend payment as an aid to maximisation of wealth: In this approach, a company recognises that favourable impact of dividend payment on the market price of the share.

Factors affecting dividend decisions: The two types of return from the purchase of common shares are: 1. Capital appreciation: The investor expects an increase in the market value of the common shares over time. For example, if the stock is purchased at ` 40 and sold for ` 60, the investor realises a capital gain of ` 20.
2. Dividends: The investor expects at regular intervals distribution of the firms earnings.

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