Beruflich Dokumente
Kultur Dokumente
12
Taxation Planning
PDP
Tax Planning
here is nothing which hurts more than payment of taxes. One question that goes through every tax
payers mind is how can I reduce my tax liability? Reducing tax liability is not always a bad or illegal
exercise. There are legitimate ways to reduce taxes through proper tax planning and such methods are
always encouraged. But unfortunately, there is also a tendency to reduce tax through illegal or colourable
methods. They are not accepted practice and can invite problems.
There are three methods which are commonly used by the taxpayers to reduce their tax liabilities
2:1
Tax evasion,
Tax Planning
Tax evasion
Dishonest taxpayers try to reduce their taxes by concealing income, inflation of expenses, falsification of
accounts and willful violation of the provisions of the Income-tax Act. Such unethical practices often
create problems for the tax evaders. Tax department not only imposes huge penalties but also initiate
prosecution in such cases.
2:2
Tax Avoidance
Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that although
it is within the four corners of the laws, it is done with a purpose to defraud the revenue. It is the act of
dodging without directly breaking the law. For example if A gives gift to his wife, the income from the asset
gifted will be clubbed in the hand of A. But to avoid this clubbing provision A decides to give gift to Bs
wife and B reciprocates it by giving gift to As wife. This is not tax planning but tax avoidance.
Such practices are not acceptable. In the words of Justice Rangnath Misra of Supreme Court in the case
of McDowell & Co Limited v CTO [1985] 154 TR 148,
tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be
part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid
payment of tax by resorting to dubious methods.
2:3
Tax Planning
Tax planning is arrangement of financial activities in such a way that maximum tax benefits, as provided in
the income-tax act are availed of. It envisages use of certain exemption, deductions, rebates and reliefs
provided in the act.
PDP
Taxation Planning
13
n Residential status: Sometime by better tax planning a taxpayer can avoid becoming resident in a
particular year. The advantage of this is that if he is non-resident in a particular year, he is not liable to
be taxed for his overseas income in India. In case he becomes resident in India for tax purpose, he is
taxed for his worldwide income. However, this may not have any effect if the tax paid abroad on
overseas income is equal to more than the tax payable on such income in India, as the taxpayer is
entitled to get credit of taxes paid abroad in case that income gets taxed in India.
n Individuals investment: Taxpayer can plan investment in a manner so that overall return is optimum.
This may involve analyzing different investment options taken into consideration, availability of tax
deduction u/s 80C, exemption of interest/dividend income on a particular investment, capital gain,
possibility of exemption from capital gain, rate of return, risk factor, liquidity etc.
n Employees remuneration: There is no effect on the tax liability in the hand of the employer on
account of designing of salary package of employees. Still, every employer wants to design the
salary package in a way so that the incidence of tax on the employee is kept to minimum. By
doing this, the take home pay of the employee is increased. To design such a package it is
necessary to understand how perquisites and benefits are taxed and which are those perquisites
or benefits which are not taxed or taxed at concessional rate. It is also necessary to understand,
how Fringe Benefit tax is payable, as it may be advisable for the employer to pay FBT instead of
letting that benefit be taxed in the hand of the employee through allowances.
n New Business, What should be the form of ownership? : While starting his business, taxpayer
can plan his taxes by evaluating tax implication in different choices available like individual
proprietorship, partnership firm or company.
Proprietorship is easy to establish with less cost and with no restriction on enjoyment of profit.
The tax rate is also less because of slab system of taxation. However, it is suitable for small
business only.
Partnership firm: If there is more than one person having common interest in the business then it
makes sense to incorporate it as partnership firm. The tax liability may be a little more than
proprietorship but firm can reduce this tax liability by taking advantage of initial exemption available
in the hand of various individual partners by providing for their salary and interest within the given
limit. This will work if the partners have no other source of income.
In the case of company the tax rate is highest and the dividend is further subjected to tax.
However, the limited liability and ability to raise finance are also important factors other than
taxes. Also there is no limitation on the salary payable to Director.
Taxation of individual, firms and companies is discussed in chapter 16 and 17 of this book.
n New Business, Location of Business: the correct selection of location of business also plays
an important role in Management decision making. There are a few locational tax advantages in
the Income Tax Act which must be considered while arriving at the decision. In other words, when
one is trying to start a new business or start a new unit in the existing business, it can consider
locating business in a place so that it get some tax exemption which will reduce the tax liability.
Important sections of income-tax act which will help in this tax planning are:
1.
14
Section 10A: Newly established undertaking in Free Trade Zone, Electronic Hardware
Technology Park or Software Technology Park.
Taxation Planning
PDP
2.
3.
4.
Section 10BA: Newly established manufacturing unit producing hand made article or
things or artistic value with wood (not being imported) as the main raw material. At
least 90% must be exported.
5.
6.
Section 80IC: Undertakings or enterprises located in notified area in North Eastern State,
State of Sikkim, Himachal Pradesh, Uttranchal. For units commencing production or
undergoing substantial expansion on or after 1.4.2007 and located in North Eastern States
or Sikkim, the provisions of section 80IE shall be applicable instead of this section.
7.
8.
n New Business: Nature of business: Before starting a business it is important to know various
tax incentives available under the Income Tax Act for some specific types of business. Most of
such exemptions have now become non-existent. However, in the following cases, fresh business
may still get tax exemption.
1.
2.
3.
4.
5.
Hotel or conventional centre in National Capital Territory of Delhi and the districts of Faridabad,
Gurgaon, Gautam Budh Nagar and Ghaziabad, where the new hotel or the conventional
centre is constructed on or after 1st of April 2007 and before 31st March 2010.
PDP
Taxation Planning
15
n Management Decision: Make or buy: In Financial management course, students are taught to
understand the basis of arriving at the make or buy decision considering capacity utilization,
inadequacy of fund, cost of fund, latest technology, variable cost of manufacturing etc. While
arriving at this decision due consideration must also be given to tax implication as this will
certainly influence the decision. One must consider that if one decides to make, there is less
outflow due to tax benefit on depreciation/interest and tax advantage available due to location of
manufacturing in a particular area. These tax advantages have already been listed earlier. If the
company is able to take advantage of any of these tax incentives, the decision to make may
come out better in comparison to decision to buy.
n Capital Gain: It is important to understand that long term capital gain tax is less than normal tax
on business or interest income. Further in case of equities, where security transaction tax is
paid, there is no long-term capital gain and short-term capital gain is only charged at 10%. Even
if the taxpayer has long term capital gain he has the opportunity to reduce it by properly investing
it in approved bonds of National Highway Authority or Rural electrification Corporation under
section 54EC or investing in house property under section 54 and 54F. Thus if some one has an
option to earn regularly or through capital gain, the earning through capital gain will attract less
tax. This will influence the investment decision of the taxpayer.
n Amalgamation: There is limitation in the Income-tax Act for carry forward of losses. It is quite
possible that one of the group companies is making profit and another group company is making
losses. Some of these losses may be getting lapsed due to time limitation. One can not transfer profit
of one Group Company to another just like that as it would amount to tax avoidance and can invite
trouble. The tax planning in such cases could be to merge the two companies. However, it must be
ensured that the conditions of merger as given in the Income-tax Act are satisfied. These are:
16
1.
2.
Shareholders holding not less than 75% in value of the shares in the amalgamating
company or companies become shareholders of the amalgamated company by virtue
of the amalgamation.
3.
Conditions as prescribed in section 72A of the Income-tax Act are satisfied by both
amalgamating company and the amalgamated company.
Taxation Planning
PDP
Chapter Review
Tax Avoidance
Tax Evasion
Tax Planning
Tax Planning
Residential Status
Individuals Investment
Employees Remuneration
Form of Ownership
New Business
Location
Nature of Business
Companies
Capital Structuring
Make or Buy
Own or Lease
Capital Gain
Amalgamation
Deduction
Rebates
Reliefs
PDP
Taxation Planning
17
Exercise
1.
A person manipulates his book of account to exclude some amount of sales and thereby
reducing his tax liability. This is termed as ______________.
a.
b.
c.
d.
2.
A person invests some money from his income in PPF in order to reduce his tax liability. This
is termed as:
a.
b.
c.
d.
3.
Tax evasion
Tax avoidance
Tax Planning
None of the above
Which of the following undertakings are eligible for exemptions under the Income Tax Act, on
account of their location?
a.
b.
c.
d.
4.
Tax evasion
Tax avoidance
Tax Planning
None of the above.
All undertakings exporting article or things are eligible for exemption under section 10B. The
statement is ________.
a. True
b. False
5.
Both developers of SEZ as well as units located in the processing area of SEZ are eligible for
tax exemption. The statement is ________.
a. True
b. False
6.
In partnership firm, the share of partners from partnership firm assessed as such, is taxable in
their individual hand. The statement is ________.
a. True
b. False
7.
Fringe Benefit Tax is payable by the employer and like TDS on salary, it is deducted from the
salary of the employees The statement is ________.
a. True
b. False
8.
Resident individual is taxable for his income earned outside India. The statement is ________.
a. True
b. False
18
Taxation Planning
PDP
Anwers:
1.
2.
3.
4.
5.
6.
7.
8.
PDP
a.
c.
d.
a.
a.
b.
b.
a.
Taxation Planning
19