MF0012 Taxation Management

1. Explain the concept of tax planning. What are the objectives of tax planning? Ans. Under the different direct and indirect tax laws, a taxpayer is entitled to plan his taxes in such a manner that the tax incidence in relation to his income is minimal i.e., his net income after tax is the maximum. Tax planning involves a study of the exemptions, rebates, deductions and reliefs given under the direct and indirect tax laws for specific business decisions in the case of business persons, and personal financial decisions in the case of individuals in such a way that the tax amount as percentage of his income is the least. This does not mean that every rebate or relief should be made use of, because it will certainly have other ramifications. Tax planning is the art and science of evaluating the alternatives and picking the one that maximizes the income, but not necessarily by minimizing the tax. Objectives of Tax Planning The prime objectives of tax planning are: a. Reduction of tax liability by utilizing 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 optimize his decisions. c. 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. 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 bill s 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. 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

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MF0012 Taxation Management

burden on the legal system. This can be successfully prevented by sensible tax planning.

Q 2. R owns two buildings, the depreciated value of the block on 1-4-2007 being 22.50 lacs of the said buildings which had been purchased on 30-4-1996 for Rs.18 lac is compulsorily acquired by the government on 15-5-2007 for which a sum of Rs. 50 lacs is paid as compensation on 20-3-2008.The said building was being used by the company as a tenant for about 4 years prior to the date of acquisition of the same by the company. The company purchases a new building on 10-4-2009 for Rs.14 lac for the purpose of setting up another industrial undertaking. Compute the amount of capital gains for the assessment year 2010-11. What would be the capital gains if the new building was purchased on 8-5-2008? Hint: Short-term capital gain chargeable to tax for AY 2010-11 = 1350000 Ans.

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MF0012 Taxation Management

3. What is value added tax? How does it operate? Write about the purchase eligibility for input tax credit. Ans. A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. Value-added tax (VAT) is most often used in the European Union. The amount of value-added tax that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed. It is basically providing set-off for the tax paid at every stage of value-addition to the goods. The VAT liability, according to the 'white paper' released on Monday, is calculated by deducting input tax credit from tax collected on sale during the payment period. In the present regime, inputs worth Rs 100,000 are purchased for producing final goods worth Rs 200,000 in a month. Then input tax is paid at 4 per cent and output tax is paid at 10 per cent. In this, the input tax works out to Rs 4,000 and output tax on sales works out to Rs 20,000. Under the VAT regime, the levy on sales of final goods worth Rs 200,000 would work out to Rs 16,000 (output tax of Rs 20,000 minus Rs 4,000 set off as input tax). The input tax credit will be given to both manufacturers and traders for purchase of inputs and supplies meant for, both, sale within the states as well as sale in other states. The cascading effect of tax will come down after introduction of VAT, bring down the price level, and stop the unhealthy tax rate war and trade diversion among states.

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4. Discuss the tax planning for amalgamation/merger and demerger of companies. Ans. Definition of amalgamation/merger and demerger Amalgamation/merger Amalgamation or merger under the Income Tax Act, 1961 is said to occur when two or more companies combine into one company. Al assets and liabilities of the amalgamating company or companies become assets and liabilities of the amalgamated company. Shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies, become shareholders of the amalgamated company. Demerger Demerger in relation to companies refers to the divestment of its assets or undertakings by one company to another on a going concern basis. Income Tax implications of mergers and demergers a. Depreciation Deduction is allowed subject to the following conditions: The assets in respect of which depreciation is claimed are building, machinery, plant, furniture or intangible assets. The assessed must be the owner of the assets. The assets must be used for business or profession. If it used for less than 180 days, depreciation is allowed to the extent of 50%. No depreciation is given on land. No deduction is al owed if the asset is sold during the year, or if it is used for scientific research, or for exploitation of mineral oil.

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MF0012 Taxation Management

5. List and describe a few important accounting standards for tax audit. Ans. While offering books of accounts for tax audit, corporate and non-corporate entities should know that some accounting standards are important in making the financial reports. The accountants of these entities should make sure these standards are complied with. While the statutory audit usually covers all accounting standards applicable, the following lists are standards of special importance for tax accounts: Accounting standard 1: Disclosure of accounting policies The following disclosures are required: Al significant accounting policies should form part of financial statements. If there is a change in policies with material impact, it should be disclosed. If the fundamental assumptions are not followed, the fact must be disclosed. Accounting standard 2: Valuation of closing stock The following disclosures are required: If the measurement of inventory is at cost or net realizable value. If the cost formula to be used is First In, First Out (FIFO) or weighted average.

Accounting standard 5: disclosure Any material effect should be disclosed. Where it is not ascertainable, the fact should be indicated. Accounting standard 22: Income tax Accounting standard 9: Revenue recognition The focus of tax authorities will be on revenues that may escape assessment. To this extent the entity should state its accounting policy on revenue recognition clearly and ensure consistent compliance with the policy. Accounting standards 10 & 6: Fixed assets and depreciation respectively The only method of depreciation permitted for tax accounts is the written down value method (WDV). So, if the company uses straight line for statutory accounting, the depreciation has to be re-calculated using WDV method. The rates of depreciation are also provided for different classes of assets.

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Filing of tax audit report and penalty The tax audit report u/s 44AB has to be filed along with the return of income of the assessed. However, the audit report may be filed first before the due date of filing even if the return of income is not filed. This is done to avoid the penal provisions of Section 271B. If the tax audit report is not filed before the due date of filing of return, penalty would be levied u/s271B. 6. Discuss the exemptions and rebates from service tax. Ans. 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.

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