ASSIGNMENT ON TAX PLANNING AND FINANCIAL MANAGEMENTMASTERS OF BUSINESS ADMINISTRATION(2016-2018) Submitted to: Submitted By:Prof: HARPREET SINGH TANIKA MBA –II(B) 16421063SCHOOL OF MANAGEMENT STUDIESPUNJABI UNIVERSITY PATIALATAX PLANNING AND FINANCIAL MANAGEMENT DECISIONSTAX PLANNINGTax planning is defined as the methods used by a tax payer to reduce his burden of taxes in a legal manner. It is an exercise carried out by the taxpayer to meet his tax obligations in proper. Systematic and orderly manner availing all permissible exemptions, deductions and reliefs available under the act as may be applicable to his case.
WHY IS TAX PLANNING NECESSARY?The tax paid is an addition to the cost. Just as every businessman tries to maximize his profit by reducing the cost, he should also arrange his affairs in such a way, that he pays the least amount of tax.IS TAX PLANNING CONFINED ONLY TODIRECT TAXES?• No. The effect of other taxes like sales-tax, customs duty and excise duty, are to be taken into account.
The main objectives of tax planning:-• Avail all concessions and reliefs and rebates permissible under the Act.• Arrange the affairs in a commercial way to minimize the incidence of tax.• Claim maximum relief where taxes are paid in more than one country.• Become tax compliant and avoid penalties, prosecutions and interest payments.• Fruitful investment of savings.
• Timely compliance of procedural requirements like tax audit, TDS, TCS, etc.• Appropriate record keeping• Avoidance of litigation.TAX MANAGEMENTPlanning which leads to filing of various returns on time, compliance of the applicable provisions of law and avoiding of levy of interest and penalties can be termed as efficient tax management. Tax management includesCompiling and preserving data and supporting documents evidencing transactions, claims, etc.Making timely payment of taxes. TDS and TCS compliance. Payment of expenses or acceptance of loans or repayment thereof.
Compliance with the prescribed requirements like tax audit, certification of international transactions, etc. Timely filing of returns, statements, etc. Responding to notices received from the authorities. Preserving record for the prescribed number of years. Mentioning PAN, TAN, etc. at appropriate places. Responding to requests for balance confirmation from the other assessees.
FINANCIAL MANAGEMENT DECISIONManagement decisions, which have a bearing on the bottom line are analyzed below from the point of view of income-tax implications.New Capital Investments Make or Buy Own or Lease Retain or ReplaceRepair/Scrap or ReturnExport or Domestic SaleAccounting Standards for Taxes on IncomeExpand or Contract Shut Down or ContinueTAX MANAGEMENT WITH REFERENCE TO ‘CAPITAL STRUCTURE’ There are different sources of funds depending upon the needs, availability, terms, etc. However for availing the tax benefits, there should be proper debt- equity mix in the capital structure and a clear policy on return on capital employed.What is the Optimum Capital Structure ?The optimum capital structure is a mix of equity capital and debt funds. Their composition depends upon many factors :Cost of Capital and also expenditure incurred in rising of such capital.Expectation of shareholders by way of dividend, growth etc.Expansion need of the business i.
e. the rate by which profits of the business shall be again ploughed back in the business.Taxation policy ; andRate of return on investment (Equity + Debt funds).TAX CONSIDERATIONSInterest on debt fund is allowed as deduction as it is business expenditure. Therefore, it may increase the rate of return on owner’s equity.TAXABILITY OF DIVIDEND1.
Dividend received from a foreign company:Dividend received from a foreign company is taxable in the hands of shareholders.2. Dividend received from a domestic company:a. Actual dividend:Actual dividend received from a domestic company is exempt in the hands of shareholders under section 10(34).
However, the company declaring dividend has to pay corporate dividend tax under section 115-O @ 20.358% (17.647% + 12% + 3%) for the assessment year 2016-17 and 2017-18. Rate of CDT (Corporate dividend tax) is 15% but computation of effective corporate dividend tax rate is makes this rate as 17.647%.
b. Deemed dividend: If deemed dividend is covered under clause 2(22)(a), (b), (c) or (d), then it is exempt in the hands of shareholders under section 10(34). However, the payer company has to pay CDT/ DDT (corporate dividend tax/ dividend distribution tax) under section 115-O @ 20.358% for the assessment year 2016-17 and 2017-18.If Deemed dividend under section 2(22)(e):Deemed dividend under this clause is taxable in the hands of shareholders under the head “Income from other sources”.
On such dividends, company paying dividend has to deduct tax at source under section 194 @ 10% on behalf of the assessee and assessee has to include this income as deemed dividend income under the head “Income from other sources” which will be taxable depending upon the tax slab applicable for the assessee.3. With effect from assessment year 2017-18, aggregate dividend income from domestic companies except deemed dividend under section 2(22)(e) in excess of Rs. 10,00,000 is chargeable to tax @ 10% + Surcharge (if applicable) + Cess @ 3% under section 115BBDA. This section is applicable for resident individuals, resident HUFs and resident firms.
The Cost of raising owner’s fund is treated as capital expenditure therefore not allowed as deduction. However if conditions of Sec. 35D is satisfied then specified expenditures can be amortized.
The Cost of raising debt fund is treated as revenue expenditure. It can be claimed as deduction in computing the total income.Where interest on debt fund is payable outside India, tax should be deducted at source otherwise deduction is not allowed.TAX PLANNINGIf the return on investment > rate of interest, maximum debt funds may be used, since is shall increase the rate of return on equity.
However, cost of raising debt fund should be kept in mind.If rate of return on investment < rate of interest, minimum debt funds should be used.Where assessee enjoys tax holidays under various provisions of Income-Tax in such case minimum debt fund should be used, since the profit arising from business is fully exempt from tax which increase the rate of return of equity capital. But the borrowed fund reduces the profits (profits less interest) before tax and to the extent exemption is reduced.BONUS SHAREBonus shares are given free of cost to the shareholders. But for the purpose of capital gains, cost of acquisition of bonus shares received on or after April 1, 1981 is taken as nil. But cost of acquisition of bonus shares received before April 1, 1981 is taken as fair market value of such shares on April 1, 1981.
Bonus to equity shareholders –The table given below highlights the tax consequences of bonus shares given to equityshareholders –Note –While computing capital gains, if securities transaction tax is applicable at the time of transfer of long-term capital gain is not chargeable to tax under section 10(38) and short-term capital gain is taxable under section 111A @ 15% + surcharge, if any + cess @ 3%.Bonus to preference shareholders –The table given below highlights the tax consequences of bonus shares given to preference shareholders. Though bonus shares to preference shareholders are rarely issued but if issued, the following are the tax consequences –PURCHASE OF ASSETS BY INSTALMENT SYSTEM OR HIRE SYSTEMUnder instalment system, assessee becomes the owner of the asset and thus, depreciation can be claimed. Further, interest payment on outstanding instalments are also allowed as deduction.However, in case of hire system, assessee does not become the owner of the assets and thus,depreciation cannot be claimed as deduction.
Further, hire charges are allowed as deduction like lease rent.SALE OF ASSETS USED FOR SCIENTIFIC RESEARCHIf an assessee purchases an asset for scientific research related to its business, the expenditure incurred is deductible during the previous year in which it is incurred. If such asset ceases to be of any use for scientific research purposes, the assessee can sell it or use it in the business for some other purposes.
From tax planning point of view, we should consider whether it is beneficial to sell such asset immediately or it should be sold after using it for some time in the business for some other purposes. Following are the tax implications:1. Sold the asset without having been used for other purposes:Where the scientific research asset is sold off without having been used for other purposes,then the net sale price or the cost of the asset, which was earlier allowed as deduction undersection 35, whichever is less, shall be treated as business income of the previous year in which such asset is sold.
Any excess1 of the sale price over cost shall be subject to theprovisions of the capital gains. This shall apply even if the business is not in existence in that previous year.2.
Sold the asset after having been used for business:Where the scientific research asset is used in the business after it ceases to be used forscientific research, the actual cost of such asset to be included in the relevant block of assetshall be taken as nil as the full amount has been allowed as deduction under section 35. Ifthis asset is later on sold, the money payable shall be deductible from the block in whichsuch asset was earlier included.TAX PLANNING WITH REFERENCE TO ‘INVESTMENT’ DECISIONSome important benefits in Investment in new plant and machinery:Additional depreciation as per section 32(1) (iia): 20% of actual cost shall be allowed in respect of new plant or machinery acquired and installed after 31.1.2005 and used in the manufacturing or production of any article or thing.Depreciation is a significant deduction from taxable income.
Plant and machinery relating to generation of power and pollution control equipment, and those relating to Research and Development, etc., are eligible for 100% deduction. Plant and machinery can be acquired, replaced, repaired, purchased or hired or assembled with different tax consequences.Investment allowance will be available for the A.Y. 2014 – 15 and 2015-16 as follows:A.Y. 2014-15 – If the aggregate amount of actual cost of new asset exceeds Rs.
100 crore, investment allowance will be available for the A.Y. 2014-15. The amount of allowance will be 15 per cent of actual cost of new asset acquired and installed during the previous year 2013- 14.The time limit has increased from 31 March 2015 to 31 March2017 for claiming investment allowance at 15 per cent of the investment made by a manufacturing company in new plant and machinery (acquired and installed).
Further, in respect of investment made on or after 1 April 2014, the threshold of INR 1 billion has been reduced to INR 250 millionIf Asset is obtained on lease, deduction can be claimed in respect of lease rentals and lease management fees and in the case of obtaining an asset on hire, deduction can be claimed in respect of hire charges. By comparing present value of cash outflows a correct decision can be taken.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 10AA, 32, 80-I one has to keep in mind.Provision of Section 10AA: if the conditions are satisfied, the assessee can claim deduction under section 10AA from his total income, for a period of 10 consecutive assessment years.Amount of deduction: deduction depends upon quantum of profit derived from export of articles or things or services.First 5 years – 100 % of profits and gains derived from the export of articles or thing or from services is deductible.Deduction from sixth A.
Y. to tenth A.Y. – 50% of profits and gains derived from the export of articles or thing or from services is deductible.Deduction for 11th A.Y. to 15thA.Y.
– For the next 5 years, a further deduction would be available to the extent of 50 % of the profit provided an equivalent amount is debited to the profit and loss account of the previous year and credited to special Economic Zone Re-investment Allowance Reserve Account.Additional depreciation as per section 32(1) : 20% of actual cost shall be allowed in respect of new plant or machinery acquired andinstalled after 31.1.2005 and used in the manufacturing or production of any article or thing.Amortisation of certain preliminary expenses sec. 35d: After the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall be allowed a deduction of an amount equal to one-tenth (1/10 th. ) of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or the new industrial unitcommences production or operationUnder section 80-IAB of the Income-tax Act, a deduction of 100% is allowed in respect of profits and gains derived by an undertaking from the business of development of an SEZ notified on or after1.4.
2005 from the total income for any 10 consecutive A.Y. out of fifteen years beginning from the year in which the SEZ is notified by the Central Government.Deduction in respect of profits and gains of certain undertaking in certain special category of states Sec. 80-ICAmount of deduction: 100% deduction is available for the first 10 years however, in the case of Himachal Pradesh or Uttaranchal, it is 100% for the first 5 years and 30% (25 % in the case of noncorporate assessee) for the next 5 years.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. But it should be beginning of the year to realise the fund without affecting the existing efficiency.