Tax management and Planning

Course Semester Marks Faculty : MFM : IV : 60+10+30

: Prof. Akshay Damani FCA, MBA, M.com, SET.

References
1) Corporate Tax Planning and Business Tax Procedures by Dr. Vinod Singhania and Dr. Monica Singhnia 2) Direct and Indirect Taxation By Dr. Singhania and Kapil Singhania 3) Students guide to Income tax by By Dr. Singhania and Dr. Kapil Singhania 4) www.ICAI.org 5) www.pwc.com 6) www.incometaxindia.gov.in

Learning objective
The objective of this paper is to give an exposure and understanding of tax management and planning, to keep the incidence of tax to a minimum with the framework of prevalent tax loss while handling matters affecting corporate management such as business, promotion, expansion, diversification and location. The paper looks at the international aspects of tax planning including tax implications of foreign collaborations, subsidiaries, tax incentives for export promotion, tax aspects of merger, demergers, etc, tax implications of bonus issues, dividend policy and other administrative aspects. It also includes the tax avoidance and evasion issues.

Recap of Basics of Tax What are the 2 things that are unavoidable in LIFE

Death & Taxes Are unavoidable

Classification of Taxes
Direct and Indirect taxes Direct taxes directly levied on source of income and wealth E.g. Income tax and Wealth tax Indirect taxes indirectly levied on activity/transaction which generates income or wealth E.g. sales tax, service tax, etc.

KINDS OF TAXES
Income-tax Sales tax Wealth tax Service tax Custom duties Securities transaction tax Excise duties and many more

What is Income
A periodical monetary return coming in with regularity or some sort of regularity from a definite source.

Session 1 : Brief Overview of the Indian Income Tax Act, 1961

Income: A periodical monetary return, coming in with regularity or expected regularity of from a definite source Previous year [3] Assessment year [2(9)] Person [2(31)] Assessee [2(7)] Taxability: Based on the residential status of an assessee, i.e. whether the assessee is Resident (ROR, RNOR) or Non-resident.

Exemptions u/s 10
Section 10 1 2 2A 4 10D 16 17A 23C(iiiab) 23C(iiiac) 23D 32 34 Nature of exemption Amount Agricultural income Full Receipts by members of HUF Full Share of profits from partnership firm Full Interest on Government bonds to NRI Full Proceeds of LIP and bonus on such policy Full Educational scholarships to meet cost of education Full Awards from state or central government Full Income of educational institutes Full Income of hospitals Full Income of Mutual Funds companies registered with SEBI Full Clubbed income of minor child Upto 1500 per child Dividend from domestic company Full

Deductions u/s 80
Are given from the gross total income of an assessee. All deductions are covered under chapter VIA, section 80 of the act. List of deduction related to companies are discussed below. For salaried employees the main deduction is under section 80C, where certain payments (investments) are listed as eligible for deductions. For example: a) The investments 1. Contribution to Provident Fund 2. Contribution to Public Provident Fund 3. Payment of life insurance premium 4. Investment in pension plans 5. Investment in Equity Linked Saving Schemes of mutual funds 6. Investment in Infrastructure bonds 7. Investment in National Savings Certificate etc; The overall limit is Rs. 100,000 for deduction u/s 80C

Computation of Total Income

PY 10-11
Particulars Income from Salaries Income from House property

AY 11-12
Rs. XX XX Rs.

Income from P & G of Business or profession Income from capital gains (short term)
Income from Other sources Add: Clubbed incomes GROSS total Income Less: deductions u/s 80 Net taxable income Add: Long term capital gains Net taxable income

XX XX
XX X X XX - X YY GG MM

Computation of Final tax payable :

Net taxable income Rates of tax (10 % 20% 30%) or as relevant Net tax payable Add: Surcharge (tax on tax)

YY ---------1 2

Tax payable
Add: {education cess 3%} FINAL tax payable Less: Tax already paid (T.D.S. / Advance tax) Assessed tax payable/refund

[1+2]
[1 x 3 %]

3
4 5

[5-6]

6 7

Income tax slab for AY 11-12 Income Tax Slabs for AY 11-12 for Resident Senior Citizens (FY 2010-11) S. No. Income Range Tax percentage 1 Up to Rs 2,40,000 No tax / exempt 2 2,40,001 to 3,00,000 10% 3 3,00,001 to 5,00,000 20% 4 Above 5,00,000 30% Income Tax Slabs for ay 10-11 for Resident Women (below 65 years) (FY 2009-10) 1 Up to Rs 1,90,000 No tax / exempt 2 1,90,001 to 3,00,000 10% 3 3,00,001 to 5,00,00 20% 4 Above 5,00,000 30% Income Tax Slabs for ay 10-11 Others & Men (FY 2009-10) 1 Up to Rs 1,60,000 No tax / exempt 2 1,60,001 to 3,00,000 10% 3 3,00,001 to 5,00,000 20% 4 Above 5,00,000 30%

 Levy of surcharge has been withdrawn for personal income tax payers Education Cess on Income-tax and Secondary and Higher Education Cess on income-tax shall continue to be levied at the rate of two per cent and one per cent respectively of income-tax.

X Ltd is engaged in the business of manufacture of goods for domestic market. The audited profit and loss account for the year ended 31.03.09 is as under: Cost of goods sold 15,00,000 Sales 42,00,000 General expenses 1,20,000 Rent from workers quarters 60,000 Salaries 12,00,000 Rent from comm. Property 1,20,000 Exp. on scientific research 80,000 Interest on debentures 70,000 Bad debts 10,000 Advertisement expenses 2,30,000 Traveling expenses 3,00,000 Interest 80,000 Advance fringe benefit tax 20,000 Income and wealth tax 90,000 Sales tax and excise duty 1,50,000 Municipal taxes Commercial property 10,000 Workers quarters 8,000 Repairs to workers quarters 12,000 Repairs to commercial prop 5,000 Depreciation 1,10,000 Net profit 5,25,000 Total 44,50,000 44,50,000 Other information 1. Cost of goods sold includes Rs.350000 purchased from R who holds 25% interest in X ltd. (Market price of similar goods Rs.300000). 2. Salaries include a) outstanding bonus Rs.50000 3. General expenses include Rs.10000 being capital expenditure on fixed assets. 4. Advertisement expenses include :a) Rs.5000 on advertisement in a political partys magazine. b) Club bills for entertaining customers Rs.10000 5. Indexed cost of acquisition of gold Rs.180000 Determine the taxable income of X Ltd.

Introduction to Tax Management, Purpose and Significance:

Over the last eight decades, since the introduction of income tax, it has been observed that there is a constant struggle between tax payers and tax collects, the former trying to reduce (if not negate) their tax liability, and the latter seriously struggling to plug in the loopholes in the statue.

Tax planning, Tax Management, Tax Avoidance and Tax Evasion

Since the inception of Income Tax Act, assesses are always trying to minimize their tax liability while the law makers are constantly trying to plug the loopholes in the system by making more & more stringent provisions.

Tax planning
Tax planning refers to availing the deductions, exemptions, rebates in such a way that the tax liability is minimized. Here all the tax laws are fully complied with and there is no intention of deceit. Tax planning can be defined as an arrangement of ones financial and economic affairs by taking complete legitimate benefit of all deduction, exemptions, allowances and rebates. No intention to deceit the legal spirit behind the tax law. Tax planning can also be defined as an arrangement of one`s financial and economic affairs by taking complete legitimate benefit of all deductions, exemptions, etc.

Tax avoidance
Tax avoidance refers to planning ones affairs in such a way by taking advantage of the loopholes in the system to minimize tax liability. Here also laws are complied with. The assessee takes the benefit of lacunae in the tax laws. Such actions cannot be called as illegal. Tax avoidance is tax hedging within the framework of law.

Tax evasion
Refers to avoidance of tax liability through illegal methods. Tax evasion may involve procedures such as submitting false/ misleading statements, non- disclosure of facts etc. It is an intentional attempt to avoid payment of tax.

Difference between Tax avoidance and Tax evasion

 Case 1: X is an individual for the assessment year 2011-12, his gross total income is Rs. 1240,000, tax on it is Rs. 232780. To reduce his tax liability, he deposits Rs. 70,000 in PPF and his tax liability reduces to Rs. 211,150. As the tax liability has been reduced within the legal framework, it is tax planning

Case 2: X ltd is a chemical manufacturing company. It has a factory in Haryana near Delhi border. Within the factory campus a piece of land of 2000 square meter is lying unutilized. The company wants to start a new unit to manufacture computer components. If this manufacturing unit is started they will NOT get a deduction u/s 80-IB.

However, if the new unit is strated in J&K, the company can claim deduction under the income tax act, if they do so. It is TAX PLANNING

Case 3: Suppose in case 2 the process of manufacturing actually takes place in Harayana. To get the benefit of deduction under section 80-IB, the company takes a factory building on rent in a village in Jammu and only on paper it is shown that the unit is situated in a village in Jammu.

As the company wants to reduce tax liability by making incorrect statements about he location it is TAX EVASION

 Case 4: If Rs. 50,000 is gifted by a husband to his wife, income generated there from is taxable in the hands of husband under the clubbing provisions of Sec. 64(1). Sec 64(1) is not applicable if gift is made by the same person out of the funds of his HUF in capacity as karta of family. If the gift is made by karta of the family to his wife, clubbing provisions can be avoided and ultimate tax liability will be reduced. However, the tax liabilities will be reduced by taking help of a loophole in the law but within the framework. It is tax avoidance.

 Tax Evasion and Tax avoidance are terms frequently referred to in economic and business relationships today that they constitute part of our conversational language and people in general language use these terms without knowing their exact meaning and difference. Whereas tax avoidance implies a situation in which the tax payer reduces his tax liability by making use of the loopholes in the tax laws and ambiguities in the in the legal provisions, in case of tax evasion, facts are deliberately misinterpreted or misrepresented and tax liability is understated. Thus tax avoidance is legal and is at times is also referred to as tax planning.

 The unsanctioned or black market economy is created due to evasion of both direct and indirect taxes, undervaluation of properties, anti-social activities like smuggling, foreign exchange racketeering, under and over invoicing of foreign trade, remittances from abroad through illegal means, etc.

Presentation topics-practical aspects

Group 1 Return of Incomes (1-6) Group 2 TDS (7-13) Group 3 Search, seizure and block assessment (14-19) Group 4 section 44 (20-26) Group 5 Assessment of co-operative societies (27-32) Group 6 Taxation of partnership firms (33-38) Group 7 Transfer pricing (39-44) Group 8 Business restructuring (45-50) Group 9 Wealth tax (51-55) Group 10 Tonnage tax (56-63)