ASSIGNMENT

PROGRAM
SEMESTER
SUBJECT CODE & NAME

MBA
III
MF0012& TAXATION MANAGEMENT

Q1. Explain the objectives of tax planning. Discuss the factors to be considered
in tax planning.
Objectives of tax planning
Factors in tax planning
ANS :Objectives of tax planning
The prime objectives of tax planning are:
1 Reduction of tax liability by utilizing the benefits available in the tax laws.
2 Informed and pragmatic financial decisions
A person adds the dimension of tax incidence in his decision-making on financial matters
and this helps him optimize his decisions.
3 Multi-dimensional investment decisions
In a democratic welfare state like India the government requires substantial investment in
infrastructure, education and healthcare. The tax laws give attractive benefits to investors in
these areas and by taking up these investments one can contribute to nation-building and at the
same time enjoy normal returns on ones investment.
4 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 purchase without bills and escape sales tax.But these are unlawful
methods of reducing tax liability and result in economic evils like black money.Tax planning
provides the perfect avenue to remain a responsible citizen while paying the least amount of
tax.
5 Reducing pressure on the legal infrastructure
The long arm ofthe law invariably catches up with economic offenders but the process is
tedious and puts an enormous burden on the legal system. This can be successfully prevented
by sensible tax planning.

Factors in tax planning

The following factors are essential in effective 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 in which he earns
income. The number of days stay in the country is usually the deciding factor for residential
status.If a person resident in the US in a particular financial year earns income in India and pays
tax in India on such income, he can set it off against his tax liablity in his tax return in the US.
This kind of set off is subject to Double taxation Avoidance Agreement entered into by different
countries with each other.

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. These laws are amended and improvised from time to time through
notifications and circulars and every year a finance Act is passed during the Central Budget and
brings in significant changes. Knowledge of the relevant Acts and updates is essential.
4 From Substance
The taxpayer should be focused 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 do so because it is structured in a manner that allows it to escape the tax.
For instance customs duty is payable on equipment being imported but the equipment is sought
to be imported under an exempt chapter heading .Such actions are clearly illegal and to be
eschewed.

Q2.Explain the categories in Capital assets.

Mr. C acquired a plot of land on 15th June,1993 for Rs.10,00,000 and sold it on 5 th
January,2010 for Rs 41,00,000.The expenses of transfer were Rs 1,00,000.Mr C
made the following investments on 4 th February,2010 from the proceeds of the
plot.
a) Bonds of Rural Electrification Corporation redeemable after a period of
three years,Rs 12,00,000
b) Deposits under Capital Gain Scheme for purchase of a residential house Rs
8,00,000(he does not own any house)
Compute the capital gain chargeable to tax for the A.Y.2010-11
Explanation of categories of capital assets
Calculation of indexed cost of acquisition
Calculation of long term capital gain
Calculation of taxable long term capital gain
ANS
Explanation of categories of capital assets
For taxation purposes the capital assets have been divided into

1 Short-term capital assets

According to section 2(42A) a short-term capital asset means a capital asset held by an
assesse for not more than

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
- 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.
2 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 asset. Gains arising from the transfer
of long-term capital assets are called long-term capital gains. Long-term capital assets are
called long-term capital gains. Long-term capital gains quality for concessional tax treatment
under the income tax act.
Calculation of indexed cost of acquisition
Indexed cost of acquisition=
Cost of Acquisitions cost inflations index for the year in which asset in sold
Cost of inflation index for the first year in which the asset was held by the assesse or cost
inflation index in 1.4.81 whichever is later.
Calculation of long term capital gain and taxable long term capital gain
Assessment Year 2010-11
Rs
Total consideration
Less
i)
Expense on transfer
ii)
Index
cost
of
10,00,000X551/244
Long-term capital gain
Less
Exemption u/s 54EC
Exemption u/s 54 F
(17,41,803X8,00,000/40,00,000)
Taxable long-term capital gain

Rs
41,00,000

acquisition

1,00,000
22,58,197

12,00,000
3,48,361

23,58197
17,41,803

15,48361
1,93,442

Q3. Explain major considerations in capital structureplanning. Write about the

dividend policy and factors affecting dividend decisions.
Explanation of factors of capital structure planning
Explanation of dividend policy
Factors affecting dividend decisions
ANS : Explanation of factors of 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: As a firm raises more debt, its risk of cash illiquidity increases. This is
for two reasons. First, higher proportion of debt in the capital structure increases the
commitments of the company with regard to fixed charges that is, interest on borrowed capital
and instalments in which it has to be repaid. If the cash is not enough to meet these
commitments the company will be in a liquidity crunch.
(b) Risk of variation in the earnings to equity shareholders in relation to expectation: In case a
firm has higher debt content in capital structure, the risk of variations in expected earnings
available to equity shareholders will be higher. When there is a liquidity issue this will be
adversely affected and the share prices of the company could take a beating.
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. A company is said to
trade on equity when it brings infunds by borrowing at lower cost and thereby enhances the
return to shareholders. This is also called Capital Gearing. Capitalization of a company is highly
geared when the proportion of equity to total capitalization is small and it is low-geared when the
equity capital dominates the capital structure.
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. Thus, if interest
is 12 per cent and the tax rate is 30 per cent, the companys effective cost of interest is only 8.4
per cent (12%*[1-30%]). This important distinction between the tax treatments of the two
financing methods should play an important role in determining the sources of funds.
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. This should
be factored into a companys capital structure decisions. Similarly, rule changes by the
Securities and Exchange Board of India (SEBI) impact the share market and companies can
take cues from these changes on when to raise equity capital and when not to.
Explanation of 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.
With either of the guidelines, cash dividends are viewed as a remainder.
2. Dividend payment as an aid to maximization of wealth: In this approach, a company
recognizes that favorable impact of dividend payment on the market price of the share.
Factors affecting divideqnd 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 Rs 40 and sold for Rs 60, the
investor realizes a capital gain of Rs 20.
2.Dividends: The investor expects at regular intervals distribution of the firms earnings.

Q4. X ltd has unit C which is not functioning satisfactorily. The following are the
details of its fixed assets :
Asset

Date of Acquisition

Book value(Lakh)

Land
Goodwill (raised in books on
31st March,2005)
Machinery
Plant

10th February,
2003
5th April,1999
12th April,2004

30
10
40
20

The written down value (WDV) is 25 lakh for the machinery and 15 lakh for the plant. The
liabilities on this Unit on 31st March,2011 are 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 sales of assets as follows :Land 48 lakh, goodwill 20 lakh machinery
32 lakh, Plant 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?
Computation of capital gain for the both the option
Computation of tax liability for the Bothe options
Conclusion
ANS :
Solution
Option 1:Slump sale
Computation of net worth of Unit C

RS (in lakhs)

Land (Book value)

30

Goodwill (Book Value)

10

Machinery (WDV)

25

Plant (WDV)

____15___

Total
Less : Liabilities

80
____35___

Net worth

____45____

Computaion of Capital Gain

Sales consideration

85

Less : Net worth

45

Long-term capital gain

40

Computation of tax liability

Tax on Rs 40 Lakh at the rate of 20%
Add:Surcharge 10% of tax

8.0
0.8

Tax and surcharge

8.8

Add: Education cess 3%

0.264

Tax liability under option 1

9.064

Option 2
Sale of Individual assets
Rs(In lakhs)
Sale
consideraton
Less
Cost
of
acquisition/writte
n down value
Long-term capital

Land

Goodwill

Machinery

Plant

48

20

32

17

30

25

15

18

20

gain/short term
capital gain

Computation of tax liability

Rs(In lakhs)

Tax on long-term capital gains 20% on Rs 20 Lakh

Tax on short-term capital gains 30% on 918+7+2) or Rs 27 Lack

4.0
8.1

Total

12.1

Add:Surcharge -10% of tax

Tax and surcharge
Add: Education cess 3%
Tax liability under Option 2

1.21
13.31
0.3993
13.71

Conclusion
Option 1 is better as it has a lower tax liability.

Q5. Explain the Service tax law in India and concept of negative list. Write about
the exemptions and rebates in service tax law
Explanation of Service tax law in India
Explanation of Concept of negative list
Explanation of exemptions and rebates in Service tax law
ANS :Explanation of 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 Faineance Act,2012 defines services in Clause 44.
In 2012 there has been a paradigm shift in government thinking. Instead of listing
services that are taxable, anegative list of services that are exempt has been brought out. The
negative list is much smaller and quite specific and so reduces room for debate. 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 201213.The tax operates on the principal of value addition. From the tax payable on the service

being sold(called output service),the assesse can deduct the service tax component of all
services used by him/her output service and pay only the balance.
In other words, theassesse is given Credit for the tax collected from him/her on
his/her input service. This system avoids cascading effect on taxes by taxing only the value
addition.
Export service is not taxable and so if the assesse 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 wills quality 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
No tax is payable on reimbursement received from the client for expenses
incurred on behalf of the client. The department has clarified that out-of-pocket expenses like
travelling,boarding,lodging etc. Areinto subject to service tax. Theassesse however has to
provide documentary evidence substantiating his/her claim for reimbursements.
In terms of Rule 6(2) of the service tax rules the service tax, liable to be paid by the
assesse shall be deposited together with form TR-6 only into a bank designated by the Central
Board of Excise and Customs.
The responsibility of payment of the tax is on the service provider. System of selfassessment by service tax assesse has been introduced form 2001.The jurisdictional
superintendent of Central Excise is authorized to verify the correctness of self-assessed returns.
Tax returns are to be filed half yearly.
Explanation of 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. To quote V.K.Garg (Joint Secretary) budgetary changes relating to service tax this
year are aimed at addressing a number of basic issues, Simplicity and certainty in tax
processes, neutrality of business to tax by mitigating cascading, encouraging exports,optimizing
compliance.
A major change that has been effected from 1 stJune 2012 is the concept of listing
out the exclusions instead of the services to be taxed.There fore any service to be taxed.
Therefore any service that is not part of the exclusions automatically gets taxed.
The exclusions have been defined in two lists
1 Negative list of services
A list of 17 services that will be exempt from service tax s per notification
no.19/2012-ST dt 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 dt 17.03.2012 with effect from 1.07.2012.These are exemptions related to
the kind of services being provided. Apart from theses we have some other exemptions related
to other aspects like scale and geography. Select abatements are also provided for specified
services.
Explanation of 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.
The rebate may be disallowed if the proceeds of export sales are not received
within the time specified by Reserve Bank of India.

Q6. What do you understand by customs duty? Explain the taxable events for
imported warehoused and exported goods. Listdown 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:
Particulars

Date

Date of submission
25th February, 2010
of bill of entry
Date of entry inwards 5th March, 2010
granted to the vessel
Calcute assessable value and customs duty

Exchange rate
declared by CBE &C
45/$

Rate of Basic
customs duty
8%

49/$

10%

Meaning and explanation of customs duty

Explanation of taxable events for imported, warehoused and exported goods
List of duties in customs
Calculation of assessable value and customs duty.
ANS :Meaning and explanation of customs duty
Customs duty is the duty imposed on goods imported into the county. In the years before
globalization it was difficult to import goods on account of stiff duty rates and procedures,
especially for less developed and developing nations like India. Joke used tp ne that the word
Customs was said to come from Sanskritkashtammeaning difficulty.

But the origin of the word is something else. Centuries ago it was customary for a
trader coming to sell his/her wares in a particular kingdom to offer gifts t the kinga and seek his
approval to sell his/her goods in that kingdom. This customary practice of gifts being collected
by the Government has come to be called Customs duty in the modern era. The practice has
now been extended to cover even exporters in the form of export duty.
Explanation
1 Taxable event for imported goods
The taxable event with respect to imports is the day of crossing of the customs
barrierand not the date on which goods land in india or enter its territorial waters.
2 Taxable event for exported goods
The taxable event in case of warehoused goods is when goods are cleared from
customs-bonded warehouse by submitting sub-bill of entry.
3 Taxable event for exported goods
Taxable event arises for exported goods when the proper officer makes an order
permitting clerance and loading of the goods for exportation under section 51 of the customs Act
1962.It was however held in india-UOI V.Rajindra Dyeing and printing mills (2005) 10 SCC
187=180 ELT 433(SC) that taxable event occurs when goods cross territorial waters of india.
List of duties in customs
1 Clearance for home consumption
- Bill of entry is presented before the entry inwards of the vessel or aircraft
The rate of duty and tariff valuation prevailing on the date on which entry inwards is
granted or arrival of aircraft will be applicable.
2 Bill of entry is presented after the entry inwards of the vessel or aircraft
- The rate of duty and tariff valuation prevailing on the date on which the bill of entry with
resepect to such clearance is presented will be applicable.
Clearance for warehousing
The rate of duty and tariff valuation prevailing on the date on which a bill of entry for
home consumption is presented will be applicable.
Types of duties in customs
- Basic cusotms duty
- Additional cusotms duty
- Special additional duty of customs
- Protective duties
- Safeguard duty
- Countervailing duty on subsidised articles
- Anti-dumping duty
Calculation of assessable value and customs duty.

Relevant rate of duty for the imported goods is 10%(i.e.date of submission of bill of entry
or date of entry inwards granted to the vessel whichever is later0
Exchange rate is Rs 45/$ (I.e the rate of CBE & C as on the date of submission of bill of entry
by the importer)
Assessable value
= Rs 450000(i.e $ 10000XRs 45)
Basic customs duty
= Rs 45000(i.eRs 450000 X 10%)
2% education cess
= Rs 900 (I.eRs 45000 X 2%)
1% secondary education cess
= Rs 450 (i.eRs 45000X 1%)
Total customs duty
= Rs 46,350

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