COPORATE TAX PLANNING

PROJECT ON TAX PLANNING

WRT. MANAGERIAL DECISIONS
SEMESTER V,3RD YEAR
SUBMITTED TO: SUBMITTED BY:
MR.RAMESH KUMAR GAGAN AGRAWAL
PROFESSOR , ROLL NO. 82
HANSRAJ COLLEGE SECTION 1
 Lease or Buy Decision
• Lease or buy decision involves applying capital budgeting principles to
determine if leasing as asset is a better option than buying it.
• Leasing in a contractual arrangement in which a company (the lessee) obtains an asset
from another company (the lessor) against periodic payments of lease rentals. It may
typically also involve an option to transfer the ownership of the asset to the lesseeat the
end of the lease.
• Buying the asset involves purchase of the asset with company’s own funds or
arranging a loan to finance thepurchase.
• In finding out whether leasing is better than buying, we need to find out the periodic
cash flows under both the options and discount them using the after- tax cost of debt to
see where does the present value of the cost of leasing stands as compared to the
present value of the cost of buying. The alternative with lower present value of cash
outflows isselected.
 ADVANTAGES W.R.T. TAX PLANNING
• Advantages when Assets are taken on Lease :Lease Rental can be
claimed as deduction asrevenue expenditure. However Depreciation cannot
be claimed since assets are not owned by the assessee.
• Advantage when Assets are Purchased :Depreciation on specified assets
can be claimed as deduction u/s 32. the Assets may be purchased out rightly
or may be taken on loan. Where the asset is taken on loan interest amount
can either be claimed as revenue expenditure or can be capitalized. But where
interest is paid after the asset is first put us use, the deduction on account of
interest shall be claimed as revenue expenditure, i.e. such interest cannot be
capitalized.
 Purchase by instalment or Hire
• Hire purchase system refers to the system wherein, the seller of
goods delivers the goods to the buyer without transferring the ownership
of goods. The payment for the goods will be made by the buyer in
installments. If the buyer pays all the installments, the ownership of the
goods will be transferred, on payment of the last installment.

• Installment payment system (also called the deferred installments)

is a system where the buyer is given the ownership as well as the
possession of the goods at the time of signing the contract. The buyer has
the facility to pay the price in installments
 ADVANTAGES W.R.T. TAX PLANNING
• Advantages when Assets are taken on Hire :In the case of obtaining an
asset on hire, deduction can be claimed in respect of hire charges.
• Advantage when Assets are Purchased on instalment basis :
Depreciation on assets can be claimed as deduction under section 32.
Besides interest payable on unpaid purchase price can also be claimed as
deduction.
 Make Or Buy decision
 Now a decision regarding the manufacturing of these components is to be
taken.
 It is decided whether the product/part/component of product should be
bought from the market or should be m anufacture d by having ne ce ssary
manufacturing facilities.
The main consideration affecting such a decision is cost
The various considerations are:-
a) Utilisation of capacity
b) Inadequacy of funds
c) Latest technology
d) Variable cost of manufacturing
e) Dependence upon supplier
f) Labour problem in the factory , etc.
 Tax Planning With Reference To
‘Make Or Buy’ Decision
• ESTABLISHING A NEW UNIT: if the decision to manufacture a part or
component involves setting up a separate industrial unit, then tax incentives
available under sections 10A,10B,32,80-IA,80-IB,80-IC one has to keep in
mind.
• SALE OF PLANT AND MACHINERY: if buying is cheaper than
manufacturing and the assessee decides to “buy” parts/components for a long
period of time, he may like to sell the existing plant and machinery. Tax
implications , as specified by section 50 , one has to consider for taking the
decision.
7
Tax Planning w.r.t. Repair/Renewal
or Replacement of an asset:
Repairs/Renewal: Deduction for expenditure on
repairs/ renewal will be allowed as revenue expenditure in
computation of business income as under:
 If the building is a rented building, any expenditure on repairs
shall be allowed as deduction.
 It may be noted that if the repairs expenditure are of capital
nature it shall not be allowed as deduction either under section
30, 31or 37.

Replacement of assets:
If the assets are to be replaced, the expenditure incurred on
replacement shall be capital expenditure and the assessee shall only
be entitled to depreciation on such assets and as such, the entire
expenditure cannot be claimed as deduction which was allowed in
case of repairs.