05 Corporate Tax Planning and Management

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SUNIL KUMAR YADAV MFC 4Th Sem.

UNIT-1
CONCEPT OF TAX PLANNING:

Definition: Tax Planning can be understood as the activity undertaken by the assessee to reduce the tax liability
by making optimum use of all permissible allowances, deductions, concessions, exemptions, rebates, exclusions
and so forth, available under the statute.
Put simply, it is an arrangement of an assessee’s business or financial dealings, in such a way that complete tax
benefit can be availed by legitimate means, i.e. making use of all beneficial provisions and relaxations provided
in the tax law, so that the incidence of the tax is minimum. This ensures savings of taxes along with conformity
to the legal obligations and requirements. Therefore, it is permitted by law.
Objectives of Tax Planning

 Reduction of Tax Liability: An assessee can save the maximum amount of tax, by properly arranging
his/her operations as per the requirements of the law, within the framework of the statute.
 Minimization of Litigation: There is a war-like situation between the taxpayers and tax collectors as the
former wants the tax liability to be minimum while the latter attempts to extract the maximum. So, a proper
tax planning aims at conforming to the provisions of the tax law, in such a way that incidence of litigation is
minimized.
 Productive Investment: One of the major objective of tax planning is channelisation of taxable income to
different investment plans. It aims at the optimum utilization of resources for productive causes and
relieving the assessee from tax liability.
 Healthy Growth of Economy: The growth and development of the economy greatly depend on the growth
of its citizens. Tax planning measures involve generating white money that flows freely and results in the
sound progress of the economy.
 Economic Stability: Proper tax planning brings economic stability by various techniques such as
mobilizing resources for national projects or availing ways for investments which are productive in nature.
Types of Tax Planning
1. Short-range and long-range Tax Planning: The tax planning which is made every year to arrive at specific or
limited objectives, is called short-range tax planning. Conversely, long-range tax planning alludes to such
practices undertaken by the assessee which are not paid off immediately.
2. Permissive Tax Planning: Tax planning, wherein the planning is made as per expressed provision of the
taxation laws is termed as permissive tax planning.
3. Purposive Tax Planning: Purposive tax planning refers to the tax planning method which misleads the law.
Under this type, there is no expressed provision of the statute.
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Tax Evasion: Tax Evasion is an illegal way to minimize tax liability through fraudulent techniques like
deliberate under-statement of taxable income or inflating expenses. It is an unlawful attempt to reduce one’s tax
burden. Tax Evasion is done with a motive of showing fewer profits in order to avoid tax burden. It involves
illegal practices such as making false statements, hiding relevant documents, not maintaining complete records
of the transactions, concealment of income, overstatement of tax credit or presenting personal expenses as
business expenses. Tax evasion is a crime for which the assesse could be punished under the law.
Tax Avoidance: Tax avoidance is an act of using legal methods to minimize tax liability. In other words, it is
an act of using tax regime in a single territory for one’s personal benefits to decrease one’s tax burden.
Although Tax avoidance is a legal method, it is not advisable as it could be used for one’s own advantage to
reduce the amount of tax that is payable. Tax avoidance is an activity of taking unfair advantage of the
shortcomings in the tax rules by finding new ways to avoid the payment of taxes that are within the limits of the
law. Tax avoidance can be done by adjusting the accounts in such a manner that there will be no violation of tax
rules. Tax avoidance is lawful but in some cases it could come in the category of crime.
Corporate Taxes
Indian taxation system is divided into two types: One is Direct Taxes and other is Indirect Taxes. Talking about
direct taxes, it is levied on the income that different types of business entities earn in a financial year. There are
different types of taxpayers registered with Income tax department and they pay taxes at different rates. For eg,
An individual and a company being a taxpayer are not taxed at the same rate. Therefore, Direct Taxes are again
subdivided as:
Income Tax: This tax is paid by the taxpayers other than companies registered under company law in India on
the income earned by them. They are taxed on the basis of slabs at different rates.
Corporate Tax: This tax is paid by the companies registered under company law in India on the net profit that
it makes from businesses. It is taxed at a
specific rate as prescribed by the income tax act subject to the changes in the rates every year by the IT
department.
Corporate Tax in India
Domestic as well as foreign companies are liable to pay corporate tax under the Income-tax Act. While a
domestic company is taxed on its universal income, a foreign company is only taxed on the income earned
within India i.e. is being accrued or received in India.
For the purpose of calculation of taxes under Income tax act, the types of companies can be defined as under :
Domestic Company: Domestic company is one which is registered under the Companies Act of India and also
includes the company registered in the foreign countries having control and management wholly situated in
India. A domestic company includes private as well as public companies.
Foreign Company: Foreign company is one which is not registered under the companies act of India and has
control & management located outside India.
What is meant as Income of a company?

Before understanding about the rate of taxes and how will the tax be calculated on income of the companies, we
should learn about the types of income which a company earns. Here it is :
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1. Profits earned from the business
2. Capital Gains
3. Income from renting property
4. Income from other sources like dividend, interest etc.
Tax rates applicable
Taxes on Income
The following rates are applicable to the domestic companies for AY 2019-20 based on their turnover
:
Particulars Tax Rate
Gross Turnover upto Rs. 250 Crore in FY 2016-17 25%
Gross Turnover exceeding Rs. 250 Crore 30%
The following rates are applicable to foreign companies for AY 2019-20 based on their turnover :
Nature of Income Tax

Rate
Royalty received or fees for technical services from government or any indian concern under an 50%
agreement made before April 1, 1976 and approved by central government
Any other income 40%
In addition to above rates :
Surcharge rate :
Particulars Tax Rate
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If total income exceeds Rs. 1 crore but 7% of tax calculated on domestic company/ 2 % of tax calculated on
not Rs. 10 Crore foreign company as per above rates
If total income exceeds Rs. 10 crore 12% of tax calculated on domestic company/ 5 % of tax calculated on
foreign company as per above rates
Health & education Cess :

Further 4 % of income tax calculated and applicable surcharge will be added to the amount of total tax liability
before this cess.
Minimum Alternate Tax (MAT)
Alternatively, all the companies (including foreign companies) are required to pay minimum alternate tax at the
rate of 18.5 % on book profits if the tax calculated as per above rates are less than 18.5% of book profits.
Dividend Distribution Tax (DDT)
Companies are required to pay tax on the dividend distributed to the shareholders in a particular year. This
dividend is exempted in the hands of shareholders upto an amount of Rs. 10 lakh but the companies have to pay
tax @ 20.56 %.
Everything about filing income tax return
Due date for filing Income tax return

Companies including foreign companies have to file their income tax return on or before September 30 every
year. Even if the company came into existence during the same financial year, then too, it has to file the income
tax return for that period on or before September 30.
Tax return forms to be filed by the company
ITR 6 : All the companies except companies claiming deduction under section 11 need to file their return using
Form ITR 6.
ITR 7 : All the companies registered under section 8 of companies act, 2013 are required to file their return
using Form ITR 7.
Tax Audit
Income tax act requires a class of companies to get their accounts audited and submit a audit report to the IT
department along with the Income tax return. This audit is known as Tax Audit. This tax audit report is also
required to be mandatorily submitted by eligible companies by September 30.
Dividend Tax:
is type of an income tax which is levied on the payments made as the dividend to the shareholders of
the company paying the tax. Dividends are the shares of the profit of the company which are the given
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to the shareholders.
The controversy arises here because dividend is nothing but the part of the profit of the company. The
profit is the income of the company and a tax is paid on that income. Again, when the dividend is paid
to the shareholders, a dividend tax is levied on them and so there is double taxation on the same income
- once, tax is paid by the company and then the shareholder pays the tax on the same amount as well.
The dividend tax has become one of the major issues of debate in the financial market. Many of the
countries are taking steps for abolishing the dividend tax as because the double taxation is not
considered good for the economy. The dividend tax also poses a problem for the senior citizens and the
retired personnel. Many financial experts are of the opinion that dividend tax should be abolished in
order to develop the economy and a fair practice of taxation should be followed.
Income Tax on Dividends
Dividend is the sum paid to a shareholder of a company proportionate to his/her shareholding in the company.
Dividends received by a taxpayer in India can be divided into three types as follows:
 Dividends from a domestic company.

 Dividends from a foreign company.
 Divided or any other income distributed by Mutal Funds.
Dividend Received from a Domestic Company

Dividend announced by a private limited company, one person company or limited company incorporated in
India fall under the category of “Dividend declared by a Domestic Company”. Under the Income Tax Act, any
amount declared, distributed or paid by a domestic company by way of dividends is exempt from Income Tax.
In India, dividend distribution tax is levied on the dividends declared or distributed in the hands of a dividend
paying company rate than the dividend receiving shareholder. Thus, when a dividend paying company has paid
dividend distribution tax on the dividends declared or distributed, the dividend would be exempted from Income
Tax in the hands of the recipient.
However, as per section 115BBDA, in the case of a “specified assessee”* dividend received by a shareholder
would be chargeable under Income Tax at the rate of 10%, if the aggregate amount of dividend received from a
domestic company during the year exceeds Rs. 10,00,000. A specified assessee means a person other than:
 A domestic company; or
 A fund or institution or trust or any university or other educational institution or any hospital or other
medical institution.
 A trust or institution registered under section 12A or section 12AA.
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Dividend Received from a Foreign Company
Dividend received from a foreign company is taxable under the head “Income from Other Sources” when
received by a resident taxpayer. As divided received from a foreign company is added to the head “Income from
Other Sources”, the taxpayer will be charged income tax at the rates applicable to the taxpayer.
Foreign Company Dividends Received by an Indian Company

Dividend received by an Indian company from a foreign company is charged under the head “Income from
Other Sources” and taxed at the Income Tax rate applicable for companies. Since, companies are normally
taxed at 30%, dividend received from a foreign company would also be taxed at 30% in the hands of an Indian
company.
However, a special concession in Income Tax rate is provided under section 115BBD for dividends received by
Indian companies that hold 26% or more shareholding in the Foreign Company that declared the
dividend. Dividend received by an Indian company from a foreign company in which the Indian company holds
26% or more in nominal value of the equity share capital is taxable at a concessional flat rate of 15% (plus
surcharge and cess as applicable).
Dividends Double Taxation Avoidance

Relief from double taxation on foreign company dividends can be claimed by taxpayers, if the dividend
received is taxed in India and in the country to which the foreign company belongs. Double taxation avoidance
of dividends received from a foreign company must be based on Double Taxation Avoidance Agreement,
entered into between the Government of India and that country (if any). If there is no Double Taxation
Avoidance Agreement with the foreign country, then the taxpayer can claim relief under section 91.
CRPORATE DIVIDEND TAX:
Dividend distribution tax OR CORPORATE DIVIDEND TAX is the tax imposed by the Indian
Government on companies according to the dividend paid to a company's investors.
At present, the dividend distribution tax is 15% on the gross amount of dividend as per Section 115O.
Therefore the effective rate of DDT comes out to 17.65% on the amount of dividend excluding surcharge and
cess.[1] according to the Union Budget 2007, India.
The company has to deposit DDT within 14 days of declaration, distribution or payment of dividend whichever
is the earlier. In case of non-payment within 14 days, the company shall have to pay interest at the rate of 1% of
the DDT.
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UNIT-2
(TAX PLANNING FOR NEW BUSINESS)
TAX PLANNING WITH REFERENCE TO LOCATION:
Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning
is to ensure tax efficiency. Through tax planning, all elements of the financial plan work together in the most
tax-efficient manner possible. Tax planning is an essential part of a financial plan. Reduction of tax liability and
maximizing the ability to contribute to retirement plans are crucial for success.
THE DIFFERENCE BETWEEN ‘TAX PLANNING’ AND ‘TAX MANAGEMENT’ .
Tax Planning Tax Management

(i) The Objective of Tax Planning is to minimize The objective of Tax Management is to comply with the
the tax liability provisions of Income Tax Law and its allied rules.
Tax Management deals with filing of Return in time, getting
(ii) Tax Planning also includes Tax Management
the accounts audited, deducting tax at source etc.
Tax Management relates to Past ,. Present, Future.
Past – Assessment Proceedings, Appeals, Revisions etc.
(iii) Tax Planning relates to future.
Present – Filing of Return, payment of advance tax etc.
Future – To take corrective action
(iv) Tax Planning helps in minimizing Tax Tax Management helps in avoiding payment of interest,
Liability in Short-Term and in Long Term. penalty, prosecution etc.
(v) Tax Planning is optional. Tax Management is essential for every assessee.
Tax planning and business structure
Business tax planning should be a key consideration for any business start up. Your choice of legal structure can
have a significant impact on likely tax bills.
If you set up in business as a sole trader or in a traditional partnership, you will be self-employed - and therefore
liable for income tax on your profits. So your tax planning should focus on income tax planning, along with
other personal tax planning issues, such as minimising any eventual inheritance tax.
By contrast, a limited company will require corporation tax planning as well as income tax planning. The effect
in terms of overall tax (and National Insurance) liabilities depends on a range of factors, including the level of
business profits and how much income you need to take from the business.
Of course, tax planning is not the only issue. You may want to take advice on other issues, such as the
significance of limited liability protection if you form a company.
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Key tax planning opportunities
Ongoing tax planning will include ensuring you make full use of allowable expenses so you can reduce your tax
liability. Effective tax planning can also enable you to bring forward expenses or defer income, so delaying tax
payments.
Income tax planning for company owners needs to take into account the most tax-efficient way to take income.
For example, dividends are not liable for National Insurance contributions (whereas income taken as salary is).
Both company owners and the self-employed should also consider the tax planning opportunities offered by tax
relief on pension contributions.
Tax planning can be particularly valuable if you are planning activities, for example, buying another
business or selling your business.
As usual, we have selected the best tools and advice online from official sources such as HMRC for you to use,
but you should also seek reliable independent tax planning advice to make sure you minimise your tax
liabilities.
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UNIT-3
(TAX PLANNNG AND FNANCAL MANAGEMENT)
#Capital Structure Management or Planning The Capital Structure:
Estimation of capital requirements for current and future needs is important for a firm. Equally important
is the determining of capital mix. Equity and debt are the two principle sources of finance of a business. But,
what should be the proportion between debt and equity in the capital structure of a firm now much financial
leverage should a firm employ? This is a very difficult question. To answer this question, the relationship
between the financial leverage and the value of the firm or cost of capital has to be studied. Capital structure
planning, which aims at the maximisation of profits and the wealth of the shareholders, ensures the maximum
value of a firm or the minimum cost of the shareholders. It is very important for the financial manager to
determine the proper mix of debt and equity for his firm. In principle every firm aims at achieving the optimal
capital structure but in practice it is very difficult to design the optimal capital structure. The management of a
firm should try to reach as near as possible of the optimum point of debt and equity mix.
Essential Features of a Sound Capital Mix
A sound or an appropriate capital structure should have the following essential features:
(i) Maximum possible use of leverage.
(ii) The capital structure should be flexible.
(iii) To avoid undue financial/business risk with the increase of debt.
(iv) The use of debt should be within the capacity of a firm. The firm should be in a position to meet
its obligation in paying the loan and interest charges as and when due.
(v) It should involve minimum possible risk of loss of control.
(vi) It must avoid undue restrictions in agreement of debt.
(vii) The capital structure should be conservative. It should be composed of high grade securities
and debt capacity of the company should never be exceeded.
(viii) The capital structure should be simple in the sense that can be easily managed and also easily
understood by the investors.
(ix) The debt should be used to the extent that it does not threaten the solvency of the firm.
Factors Determining the Capital Structure
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The capital structure of a concern depends upon a large number of factors such as leverage or trading on
equity, growth of the company, nature and size of business, the idea of retaining control, flexibility of capital
structure, requirements of investors costs of floatation of new securities, timing of issue, corporate tax rate and
the legal requirements. It is not possible to rank them because all such factors are of different importance and
the influence of individual factors of a firm changes over a period of time. Every time the funds are needed. The
financial manager has to advantageous capital structure. The factors influencing the capital structure are
discussed as follows:
1. Financial leverage of Trading on Equity: The use of long term fixed interest bearing debt and preference
share capital along with equity share capital is called financial leverage or trading on equity. The use of
long-term debt increases, magnifies the earnings per share if the firm yields a return higher than the cost of
debt. The earnings per share also increase with the use of preference share capital but due to the fact that
interest is allowed to be deducted while computing tax, the leverage impact of debt is much more.
However, leverage can operate adversely also if the rate of interest on long-term loan is more than the
expected rate of earnings of the firm. Therefore, it needs caution to plan the capital structure of a firm.
2. Growth and stability of sales: The capital structure of a firm is highly influenced by the growth and
stability of its sale. If the sales of a firm are expected to remain fairly stable, it can raise a higher level of
debt. Stability of sales ensures that the firm will not face any difficulty in meeting its fixed commitments of
interest repayments of debt. Similarly, the rate of the growth in sales also affects the capital structure
decision. Usually greater the rate of growth of sales, greater can be the use of debt in the financing of firm.
On the other hand, if the sales of a firm are highly fluctuating or declining, it should not employ, as far as
possible, debt financing in its capital structure.
3. Cost of Capital. Every rupee invested in a firm has a cost. Cost of capital refers to the minimum return
expected by its suppliers. The capital structure should provide for the minimum cost of capital. The main
sources of finance for a firm are equity, preference share capital and debt capital. The return expected by
the suppliers of capital depends upon the risk they have to undertake. Usually, debt is a cheaper source of
finance compared to preference and equity capital due to (i) fixed rate of interest on debt:
(ii) legal obligation to pay interest: (iii) repayment of loan and priority in payment at the time of winding
up of the company. On the other hand, the rate of dividend is not fixed on equity capital. It is not a legal
obligation to pay dividend and the equity shareholders undertake the highest risk and they cannot be paid
back except at the winding up of the company and that too after paying all other obligations. Preference
capital is also cheaper than equity because of lesser risk involved and a fixed rate of dividend payable to
preference shareholders. But debt is still a cheaper source of finance than even preference capital because
of tax advantage due to deductibility of interest. While formulating a capital structure, an effort must be
made to minimize the overall cost of capital.
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4. Minimisation of Risk: A firm’s capital structure must be developed with an eye towards risk because it
has a direct link with the value. Risk may be factored for two considerations: (a) the capital structure
must be consistent with the business risk, and (b) the capital structure results in certain level of
financial risk. Business risk may be defined as the relationship between the firm's sales and its earnings
before interest and taxes (EBIT). In general, the greater the firm's operating leverage – the use of fixed
operating cost – the higher its business risk. Although operating leverage is an important factor affecting
business risk, two other factors also affect it – revenue stability and cost stability. Revenue stability refers
to the relative variability of the firm's sales revenue. Firms with highly volatile product demand and price
have unstable revenues that result in high levels of business risk. Cost stability is concerned with the
relative predictability of input price. The more predictable and stable these inputs prices are, the lower is
the business risk, and vice-versa. The firm's capital structure directly affects its financial risk, which may
be described as the risk resulting from the use of financial leverage. Financial leverage is concerned with
the relationship between earnings before interest and taxes (EBIT) and earnings per share (EPS). The more
fixed-cost financing i.e., debt (including financial leases) and preferred stock, a firm has in capital
structure, the greater its financial risk.
5. Control: The determination of capital structure is also governed by the management desire to retain
controlling hands in the company. The issue of equity share involve the risk of losing control. Thus in case
the company is interested in – retaining control, it should prefer the use of debt and preference share capital
to equity share capital. However, excessive use of debt and preference capital may lead to loss of control
and other bad consequences.
6. Flexibility: The term flexibility refers to the firm’s ability to adjust its capital structure to the requirements
of changing conditions. A firm having flexible capital structure would face no difficulty in changing its
capitalization or source of fund. The degree of flexibility in capitals structure depends mainly on (i)
firm’s unused debt capacity, (ii) terms of redemption (iii) flexibility in fixed charges, and (iv) restrictive
stipulation in loan agreements.
If a company has some unused debt capacity, it can raise funds to meet the sudden requirements of finances.
Moreover, when the firm has a right to redeem debt and preference capital at its discretion it will able to
substitute the source of finance for another, whenever justified. In essence, a balanced mix of debt and equity
needs to be obtained, keeping in view the consideration of burden of fixed charges as well as the benefits of
leverages simultaneously.
7. Profitability: A capital structure should be the most profitable from the point of view of equity
shareholders. Therefore, within the given constraints, maximum debt financing (which is generally
cheaper) should be opted to increase the returns available to the equity shareholder.
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8. Cash Flow Ability: The EBIT – EPS analysis, growth of earnings and coverage ratio are very useful
indicator of a firm’s ability to meet its fixed obligations at various levels of EBIT. Therefore, an important
feature of a sound capital structure is the firm’s ability to generate cash flow to service fixed charges.
At the time of planning the capital structure, the ratio of net cash inflows to fixed charges should be
examined. The ratio depicts the number of times the fixed charges commitments are covered by net cash
inflows. Greater is this coverage, greater is this capacity of a firm to use debts an other sources of funds
carrying fixed rate of interest and dividend.
9. Characteristics of the company: The peculiar characteristics of a company in regards to its size, nature,
credit standing etc. play a pivotal role in ascertaining its capital structure. A small size company will not be
able to raise long-term debts at reasonable rate of interest on convenient terms. Therefore, such companies
rely to a significant extent on the equity share capital and reserves and surplus for their long-term financial
requirements.
In case of large companies the funds can be obtained on easy terms and reasonable cost by selling equity
shares and debentures as well. Moreover the risk of loss of control is also less in case of large companies,
because their shares can be distributed in a wider range. When company is widely held, the dissident
shareholders will not be able to organize themselves against the existing management, hence, no risk of loss of
loss of control. Thus, size of a company has a vital role to play in determining the capital structure.
The various elements concerning variation in sales, competition with other firms and life cycle of industry
also affect the form and size of capitals structure. If company’s sales are subject to wide fluctuations, it should
rely less on debt capital and opt for conservative capitals structure. A company facing keen competition with
other companies will run the excessive risk of not being able to meet payments on borrowed funds. Such
companies should place much emphasis on the use of equity than debt, similarly, if a company is in infancy
stage of its life cycle, it will run a high risk of mortality. Therefore, companies in their infancy should rely more
on equity than debt. As a company grows mature, it can make use of senior securities (bonds and debentures).
Capital Structure of a New Firm : The capital structure a new firm is designed in the initial stages of the
firm and the financial manager has to take care of many considerations. He is required to assess and evaluate
not only the present requirement of capital funds but also the future requirements. The present capital structure
should be designed in the light of a future target capital structure. Future expansion plans, growth and
diversifications strategies should be considered and factored in the analysis.
Capital Structure of an Existing Firm: An existing firm may require additional capital funds for meeting
the requirements of growth, expansion, diversification or even sometimes for working capital requirements.
Every time the additional funds are required, the firm has to evaluate various available sources of funds vis-à-
vis the existing capital structure. The decision for a particular source of funds is to be taken in the totality of
capital structure i.e., in the light of the resultant capital structure after the proposed issue of capital or debt.
Evaluation of Proposed Capital Structure : A financial manager has to critically evaluate various costs and
benefits, implications and the after-effects of a capital structure before deciding the capital mix. Moreover, the
prevailing market conditions are also to be analyzed. For example, the present capital structure may provide a
scope for debt financing but either the capital market conditions may not be conducive or the investors may not
be willing to take up the debt-instrument. Thus, a capital structure before being finally decided must be
considered in the light of the firm’s internal factors as well as the investor's perceptions.
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#Meaning of Dividend Policy:
The term dividend refers to that part of profits of a company which is distributed by the company among its
shareholders. It is the reward of the shareholders for investments made by them in the shares of the company.
The investors are interested in earning the maximum return on their investments and to maximise their wealth.
A company, on the other hand, needs to provide funds to finance its long-term growth.
If a company pays out as dividend most of what it earns, then for business requirements and further expansion it
will have to depend upon outside resources such as issue of debt or new shares. Dividend policy of a firm, thus
affects both the long-term financing and the wealth of shareholders.
Types of Dividend Policy:

The various types of dividend policies are discussed as follows:
(a) Regular Dividend Policy:
Payment of dividend at the usual rate is termed as regular dividend. The investors such as retired persons,
widows and other economically weaker persons prefer to get regular dividends.
(b) Stable Dividend Policy:

The term ‘stability of dividends’ means consistency or lack of variability in the stream of dividend payments. In
more precise terms, it means payment of certain minimum amount of dividend regularly.
A stable dividend policy may be established in any of the following three forms:
(i) Constant dividend per share:
Some companies follow a policy of paying fixed dividend per share irrespective of the level of earnings year
after year. Such firms, usually, create a ‘Reserve for Dividend Equalisation’ to enable them pay the fixed
dividend even in the year when the earnings are not sufficient or when there are losses.
A policy of constant dividend per share is most suitable to concerns whose earnings are expected to remain
stable over a number of years.
(ii) Constant payout ratio:

Constant pay-out ratio means payment of a fixed percentage of net earnings as dividends every year. The
amount of dividend in such a policy fluctuates in direct proportion to the earnings of the company. The policy
of constant pay-out is preferred by the firms because it is related to their ability to pay dividends. Figure given
below shows the behaviour of dividends when such a policy is followed.
(iii) Stable rupee dividend plus extra dividend:

Some companies follow a policy of paying constant low dividend per share plus an extra dividend in the years
of high profits. Such a policy is most suitable to the firm having fluctuating earnings from year to year.
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Meaning of Bonus Shares:
Sometimes a company cannot pay dividend in cash due to shortage of liquid funds—viz. cash—in spite of
earning a large amount of profit for a particular period. Under the circumstances, the company issues new
shares to the existing shareholders in lieu of paying dividend in cash.
Generally, the company issues bonus shares out of profits and/or reserve to the existing shareholders. Since the
profit/reserve is being capitalized, it is also called capitalisation of profit/reserve. As the company cannot
receive cash from the shareholders for the purpose of issuing bonus shares, a sum equal to the total value of
bonus issue is to be adjusted against profit/reserve and transferred to Equity Share Capital Account.
These shares are known as ‘Bonus Shares’. Such bonus shares are to be offered to the existing shareholders in
proportion to the shareholdings and dividend rights.
Effect of Bonus Issue:

(a) Issue of bonus share does not invite liquidity crisis like payment of cash dividends. As no cash payment is
made, liquidity position remains unaffected.
(b) Since total numbers of shares are increased as a result of bonus issue, dividend per share may be less.
(c) Issue of bonus shares earns confidence of the public.
Conditions for the Issue of Bonus Shares:

The following conditions must be fulfilled before issuing bonus shares:
(i) The issue must be authorised by the Articles of the company;
(ii) The same must be recommended by a resolution of the Board of Directors and this approved by the
shareholders in the general meeting; and
(iii) The same also must be permitted by the Controller of Capital Issues (regardless of the amount involved).
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UNIT - 4
TAX PLANNING REGARDING OWN OR LEASE DECISION:
TAX PLANNING REGARDING OWN OR LEASE DECISION BY: MS.MANI NAGPAL (SHAH SATNAM
JI GIRLS COLLEGE,SIRSA(HARYANA )
INTRODUCTION :
INTRODUCTION If business wants to acquire an asset(plant,machinery,land,building and furniture etc.)it has
the following two options: OWN LEASE
Owing /purchase of asset :
Owing /purchase of asset
Meaning of lease:
Meaning of lease Lease is agreement that provides a person to use and control over asset, for price payable
periodically, without having title of asset. The owner is called lesser and the user is called lessee . Sources of
lease financing: share capital Debentures Public deposits Term loans from bank or financial institutions
Factors affecting lease or buy desicion:
Factors affecting lease or buy desicion
Process to calculate p.v. Of cash outflow :
Process to calculate p.v. Of cash outflow
conclusion:
conclusion As far a company various kind of assets for its opreating,the p.v. cash outflow lower option should
be preferred and purchasing is better idea to choose than buying as it involves less cost than taken on lease.
#Tax Management with reference to – ‘Sale of Scientific Research Asset'
Sale of Scientific Research Asset

SCIENTIFIC RESEARCH ASSET SOLD AFTER HAVING BEEN USED FOR THE PURPOSE OF
BUSINESS.
As per explanation 1 to section 43(1) where an asset is used in the business after is ceases to be used for
scientific research related to that business the actual cost of the asset to be included in the relevant block of asset
shall be taken as nil as 100% deduction has already been allowed. If such asset is sold then the value of block
shall be reduce by the sale value of the asset.
SECTION 41(3). SCIENTIFIC RESEARCH ASSET SOLD WITHOUT HAVING BEEN USED FOR
THE PURPOSE OF BUSINESS
(1) Where an asset representing expenditure of a capital nature on scientific research, is sold, (2) without having
been used for other purposes, and (3) the proceeds of the sale together with the actual amount of the educations
made, the amount of the deduction exceed the amount of the capital expenditure (4) the excess or the amount of
the deductions so made, whichever is the less, (5) shall be chargeable to income-tax as income of the business
or profession of the previous year in which the sale took place.
The Clause is applicable even if the business is not in existence during PY.
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ANALYSIS :
1. Profit from Business = Sale price or cost whichever is lower.
2. Capital Gain = Sale consideration minus cost of acquisition . If LTCA minus indexed cost of
acquisition. There can be no loss under the head Capital G
TAX PLANNING VIEW :

Tax planning question can be whether the scientific research asset should be sold by using for the purpose of
business or without being used for the purpose of business.
 Scientific research asset can either be sold without being used for the purpose of
business as such. Sale of scientific research asset as such shall give rise to capital gain
which can be either short-tem capital gain or long-term capital gain.
 Sale of Scientific Research Asset after it is put to use for the purpose of business shall
reduce the depreciation for subsequent years. Capital gain shall arise depending upon the
block of asset. As per section 50 Capital Gain can arise only if on the last day of the PY.
 Block of Assets do not exist ; or
 WDV is Zero.
#Tax Management with reference to –Repair, Replace, Renewal Or Renovation:
REPAIR, REPLACE, RENEWAL OR RENOVATION
The main tax consideration which one has to keep in mind is whether expenditure on repair, replacement or
renewal is deductible as revenue expenditure u/s 30,31, or 37(1). It the expenditure is deductible as revenue
expenditure under these sections, then cost of financing such expenditure is reduced to the extent of tax save.
On the other hand if such expenditure is not allowed as deduction u/s 30,31 or 37(1) then it may be capitalized
and on the amount so capitalized depreciation is available if certain conditions are satisfied.
DIFFERENCE BETWEEN REVENUE AND CAPITAL EXPENDITURE
Revenue Expenditure
Capital Expenditure
Cost of acquisition and installment charges of a Purchase price of a current asset for resale or manufacture is
fixed asset is a capital expenditure. a revenue expenditure.
Expenditure incurred to free oneself from a Expenditure incurred to free oneself from a revenue liability
capital liability is a capital expenditure. is a revenue expenditure.
Expenditure incurred towards acquisition of a Expenditure incurred towards an income is a revenue
source of income is a capital expenditure. expenditure.
Expenditure incurred to increase the operating Expenditure incurred to maintain the fixed assets is a
capacity of fixed assets is capital expenditure. revenue expenditure
Expenditure incurred for obtaining capital by Expenditure incurred towards raising loans or issue of
issue of shares is a capital expenditure debentures is a revenue expenditure.
“Repair” implies the existence of a thing has malfunctioned and can be set right by effecting repairs which may
involve replacement of some parts, thereby making the thing as efficient as it was before or close to it as
possible. After repair the thing to which the repair was carried out continues to be available for use.
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Replacement is different from repair.
“Replacement” implies the removal or discarding of the things that was in use, by a different or new thing
capable of performing the same function with the same or greater efficiency. The replacement of a section in a
series of machines which are interconnected , in a segment of the production process which together form an
integrated whole may in some circumstances , be regarded as amounting to repair when without such
replacement that unit in that segment will not function. That logic cannot be extended to the entire
manufacturing facility from the stage of Raw Material to the delivery of the final finished product.
“Current Repair” implies the expenditure must have been incurred to ‘preserve and maintain’ an already
existing asset and the object of the expenditure must not be to bring a new asset into existence of for obtaining a
new advantage.
Shifting of Administrative Office :
Expenditure incurred for shifting the administrative office from one city to another city as a result of
amalgamation of three companies having a number of activities in various centers is allowable as Revenue
Expenditure.
Shifting of Head Office from one place to another is Capital Expenditure :
Where the assessee-company shifted its head office from one place to another place after it Board of Directors
resolved that it would be commercially prudent to centralized the Registered Office of the company in one
place, in connection with the shifting , it incurred huge expenses including a certain payment made to the
lawyers, the expenses incurred on this account could not be on revenue account.
Expenditure of shifting of employees is Revenue Expenditure :
Expenditure incurred by assessee on shifting of employees to another place consequent on shifting of factory to
another site due to labour unrest was allowable as Revenue Expenditure.
Decoration of reception / dining halls in Hotels is revenue expenditure :
Expenses incurred in putting up decorative mirrors in the wall, plaster molded roof, plywood panels, etc. in
reception-cum dinning halls of a Hotel, in order to deep the place fir and attract customers, is deductible as
revenue expenditure.
Expenditure on renovation an modernization of Hotel Premises is Revenue Expenditure :
Expenditure incurred solely for repairs and modernizing the Hotel and replacing the existing components of
thebuilding, furniture, and fittings, with a view to create a conductive and beautiful atmosphere for the purpose
of running of a business of a Hotel , will fall under the category of Revenue Expenditure only, and is hence
deductible.
Expenditure on Wall to Wall Carpet for office is capital expenditure :
Expenditure on purchase of wall-to-wall carpet, for being used in the office, has nothing to do with the
augmenting, preserving or protecting the turnover or profits of the business and hence it is in the nature of
capital expenditure.
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Repairs to building can be capital or revenue, depending on nature of change brought about :
So long as the repair does not bring into existence an additional advantages or benefit of an enduring nature or
change the nature, character or the identity of the building itself, the expenditure must be regarded as a revenue
expenditure. On the other hand, if it does, it will be in the nature of a Capital Expenditure.
Replacement of Assets as a whole is not ‘Repair’ :
Where substantial repairs are carried out in order to put to use an existing asset, the same could be termed as
Revenue Expenditure. But where there is replacement ‘As a Whole’ , it amounts to reconstruction and not
repairs. It is pertinent that the asset in its old form must continue to exist to say that the expenditure involved in
improving the assets is Revenue Expenditure. Where effacement takes place and a new asset comes into being,
then expenditure involved would become a Capital Expenditure.
Repairs for converting Godown into Administrative Office :
Where the assessee incurred expenditure on repairs to a godown used for business purpose so as to convert it
into an Administrative Office, the expenditure was allowable as revenue expenditure, since the business asset
has retained its character and only its use had changed, and the use at both points of time, i.e. before and after
the expenditure was incurred, related to the business of the assessee without there being any addition to or
expansion of the profit-making apparatus of the assessee.
Remodeling of furniture in retail outlet is revenue expenditure :
The expenditure incurred by the assessee company towards the remodeling of furniture in its various retails
depots which was necessitated by changes in design, was deductible as revenue expenditure.
Repair and replacement of false ceiling in cinema building is revenue expenditure :
Expenditure on repair and replacement of false ceiling in cinema building owned by the assessee was allowable
as revenue expenditure, since it was incurred for keeping the business running.
Replacement of electric wiring in cinema building is revenue expenditure, since it was incurred for keeping the
business running.
Expenditure in repairs to car damaged during riots are deductible :
Expenditure to repair damage to car in which director of assessee-company was traveling to the business
premises, was allowable as business expenditure.
Concept Of Drop Or Continue Decision

The management of the company may face a problem of dropping/shutdown or continuing the manufacturing
and marketing facilities. It is always in the interest of company to continue to operate facilities as long as
products or services sold to recover variable cost and make a contribution toward recovery of fixed cost.
But the problem of drop or continue arise when the income statement regarding the product shows a loss. Then
management of the company attempts to find out the reasons for loss and makes decision regarding drop or
continue the manufacturing and marketing facilities.
In deciding whether to continue or drop, expected future revenue should be compared with the relevant cost.
For this, the relevant cost must be separated into variable/avoidable and fixed/unavoidable cost. Certain cost-
fixed cost- does not eliminate by dropping facilities, like depreciation, interest, property tax and insurance.
These costs continue during complete inactivity also.
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If operations are continued, certain expenditure connected with shutting down will be saved. Such expenditure
includes reopening cost.expenses, cost for recruiting and training to new workers etc.
For taking decision to drop or continue the facilities, income statement should be prepared under contribution
margin format. Income statements for drop or continue facilities will show:
- Contribution margin
- Net profit and,
- Percentage of net income to net sales
Alternative which has higher contribution margin should be chosen as it will absorb the fixed cost and gives
higher profit. Facilities with high amount of fixed cost cannot be dropped as the fixed cost is irrelevant cost and
fixed cost will not decrease by dropping the particular facilities.
Fixed cost imposed by dropping the facilities will have to be paid cumulatively in total resulting extra burden of
fixed cost to continuing facilities and thereby reduced overall profit of the company.
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UNIT - 5
(SPECIAL TAX PROVISIONS)
Special tax provision relating to free trade zone:

10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an
undertaking from the export of articles or things or computer software for a period of ten consecutive
assessment years beginning with the assessment year relevant to the previous year in which the undertaking
begins to manufacture or produce such articles or things or computer software, as the case may be, shall be
allowed from the total income of the assessee: Provided that where in computing the total income of the
undertaking for any assessment year, its profits and gains had not been included by application of the provisions
of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be
entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten
consecutive assessment years: Provided further that where an undertaking initially located in any free trade zone
or export processing zone is subsequently located in a special economic zone by reason of conversion of such
free trade zone or export processing zone into a special economic zone, the period of ten consecutive
assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the
previous year in which the undertaking began to manufacture or produce such articles or things or computer
software in such free trade zone or export processing zone : Provided also that for the assessment year
beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the
profits and gains derived by an undertaking from the export of such articles or things or computer software:
Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year
beginning on the 1st day of April, 2012 and subsequent years. (1A) Notwithstanding anything contained in sub-
section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or
produce articles or things or computer software during the previous year relevant to any assessment year
commencing on or after the 1st day of April, 2003, in any special economic zone, shall be,— (i) hundred per
cent of profits and gains derived from the export of such articles or things or computer software for a period of
five consecutive assessment years beginning with the assessment year relevant to the previous year in which the
undertaking begins to manufacture or produce such articles or things or computer software, as the case may be,
and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and
thereafter; (ii) for the next three consecutive assessment years, so much of the amount not exceeding fifty per
cent of the profit as is debited to the profit and loss account of the previous year in respect of which the
deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-
investment Allowance Reserve Account”) to be created and utilised for the purposes of the business of the
assessee in the manner laid down in sub-section (1B) : Provided that no deduction under this section shall be
allowed to an assessee who does not furnish a return of his income on or before the due date specified under
sub-section (1) of section 139. (1B) The deduction under clause (ii) of sub-section (1A) shall be allowed only if
the following conditions are fulfilled, namely:— (a) the amount credited to the Special Economic Zone Re-
investment Allowance Reserve Account is to be utilised— (i) for the purposes of acquiring new machinery or
plant which is first put to use before the expiry of a period of three years next following the previous year in
which the reserve was created; and (ii) until the acquisition of new machinery or plant as aforesaid, for the
purposes of the business of the undertaking other than for distribution by way of dividends or profits or for
remittance outside India as profits or for the creation of any asset outside India; (b) the particulars, as may be
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prescribed in this behalf, have been furnished by the assessee in respect of new machinery or plant along with
the return of income for the assessment year relevant to the previous year in which such plant or machinery was
first put to use. (1C) Where any amount credited to the Special Economic Zone Re-investment Allowance
Reserve Account under clause (ii) of sub-section (1A),— (a) has been utilised for any purpose other than those
referred to in sub-section (1B), the amount so utilised; or (b) has not been utilised before the expiry of the
period specified in sub-clause (i) of clause (a) of sub-section (1B), the amount not so utilised, shall be deemed
to be the profits,— (i) in a case referred to in clause (a), in the year in which the amount was so utilised; or (ii)
in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-
clause (i) of clause (a) of sub-section (1B), and shall be charged to tax accordingly. (2) This section applies to
any undertaking which fulfils all the following conditions, namely :— (i) it has begun or begins to manufacture
or produce articles or things or computer software during the previous year relevant to the assessment year—
(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the
1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology
park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone; (ii) it is not formed
by the splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall
not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or
revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the
circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new
business of machinery or plant previously used for any purpose. Explanation.—The provisions of Explanation 1
and Explanation 2 to subsection (2) of section 80-I shall apply for the purposes of clause (iii) of this subsection
as they apply for the purposes of clause (ii) of that sub-section. (3) This section applies to the undertaking, if the
sale proceeds of articles or things or computer software exported out of India are received in, or brought into,
India by the assessee in convertible foreign exchange, within a period of six months from the end of the
previous year or, within such further period as the competent authority may allow in this behalf. Explanation
1.—For the purposes of this sub-section, the expression “competent authority” means the Reserve Bank of India
or such other authority as is authorised under any law for the time being in force for regulating payments and
dealings in foreign exchange. Explanation 2.—The sale proceeds referred to in this sub-section shall be deemed
to have been received in India where such sale proceeds are credited to a separate account maintained for the
purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. (4) For the
purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software
shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the
export turnover in respect of such articles or things or computer software bears to the total turnover of the
business carried on by the undertaking. (5) The deduction under this section shall not be admissible for any
assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed
form, alongwith the return of income, the report of an accountant, as defined in the Explanation below sub-
section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the
provisions of this section. (6) Notwithstanding anything contained in any other provision of this Act, in
computing the total income of the assessee of the previous year relevant to the assessment year immediately
succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent
assessment year,— (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of
section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any
of the relevant assessment years ending before the 1st day of April, 2001, in relation to any building, machinery,
plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such
assessment year or any expenditure incurred for the purposes of such business in such previous year had been
given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of
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sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the
second proviso to clause (ix) of subsection (1) of section 36, as the case may be, shall not apply in relation to
any such allowance or deduction; (ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or
sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried
forward or set off where such loss relates to any of the relevant assessment years ending before the 1st day of
April, 2001; (iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section
80-IA or section 80-IB in relation to the profits and gains of the undertaking; and (iv) in computing the
depreciation allowance under section 32, the written down value of any asset used for the purposes of the
business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the
deduction in respect of depreciation for each of the relevant assessment year. (7) The provisions of sub-section
(8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to
in this section as they apply for the purposes of the undertaking referred to in section 80-IA. (7A) Where any
undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the
expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or
demerger,— (a) no deduction shall be admissible under this section to the amalgamating or the demerged
company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of
this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have
applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.
(7B) The provisions of this section shall not apply to any undertaking, being a Unit referred to in clause (zc) of
section 2 of the Special Economic Zones Act, 2005, which has begun or begins to manufacture or produce
articles or things or computer software during the previous year relevant to the assessment year commencing on
or after the 1st day of April, 2006 in any Special Economic Zone. (8) Notwithstanding anything contained in the
foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income
under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the
provisions of this section may not be made applicable to him, the provisions of this section shall not apply to
him for any of the relevant assessment years. (9) Omitted by the Finance Act, 2003, w.e.f. 1-4-2004. (9A)
Omitted by the Finance Act, 2003, w.e.f. 1-4-2004. Explanation 1.— Omitted by the Finance Act, 2003, w.e.f.
1-4-2004. Explanation 2.—For the purposes of this section,— (i) “computer software” means— (a) any
computer programme recorded on any disc, tape, perforated media or other information storage device; or (b)
any customized electronic data or any product or service of similar nature, as may be notified by the Board,
which is transmitted or exported from India to any place outside India by any means; (ii) “convertible foreign
exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as
convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and
any rules made thereunder or any other corresponding law for the time being in force; (iii) “electronic hardware
technology park” means any park set up in accordance with the Electronic Hardware Technology Park (EHTP)
Scheme notified by the Government of India in the Ministry of Commerce and Industry; (iv) “export turnover”
means the consideration in respect of export by the undertaking of articles or things or computer software
received in, or brought into, India by the assessee in convertible foreign exchange in accordance with subsection
(3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the
articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in
providing the technical services outside India; (v) “free trade zone” means the Kandla Free Trade Zone and the
Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central
Government may, by notification in the Official Gazette, specify for the purposes of this section; (vi) “relevant
assessment year” means any assessment year falling within a period of ten consecutive assessment years
referred to in this section; (vii) “software technology park” means any park set up in accordance with the
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Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and
Industry; (viii) “special economic zone” means a zone which the Central Government may, by notification in
the Official Gazette, specify as a special economic zone for the purposes of this section. Explanation 3.—For
the removal of doubts, it is hereby declared that the profits and gains derived from on site development of
computer software (including services for development of software) outside India shall be deemed to be the
profitsand gains derived from the export of computer software outside India. Explanation 4.—For the purposes
of this section, “manufacture or produce” shall include the cutting and polishing of precious and semi-precious
stones.
#Tax incentives for exporters:

India’s economy is one of the fastest growing economies in the world. As a part of economic reforms, the
government has formulated many economic policies which have led to the country’s gradual economic
development. Under the changes, there has been an initiative to improve the condition of exports to other
countries. With this regard, the government has taken up a few actions to benefit businesses in the export trade.
The primary objective of these benefits is to simplify the whole export process and make it more flexible. On a
broader scale, these reforms have been a blend of both social democratic and liberalization policies.
Since the initiation of the liberalization plan in the 1990s, the economic reforms have emphasized the open
market economic policies. Foreign investments have come in various sectors, and there has been good growth in
the standard of living, per capita income and Gross Domestic Product. Moreover, there has been a greater
emphasis on flexible business and doing away with excessive red-tapism and government regulations.
Some of the different types of export incentive schemes and benefits that the government has initiated are:
Advance Authorization Scheme

As part of this scheme, businesses are allowed to import input in the country without having to pay duty
payment, if this input is for the production of an export item. Moreover, the licensing authority has fixed the
value of the additional export products to not below than 15%. The scheme has the validity period of 12 months
for imports and 18 months for carrying out the Export Obligation (EO) from the date of issue typically.
Advance Authorization for Annual Requirement

Exporters who have a previous export performance for at least two financial years can avail the Advance
Authorization for Annual requirement scheme or more benefits.
Export Duty Drawback for Customs, Central Excise, and Service Tax
Under these schemes, the duty or tax paid for inputs against the exported products is refunded to the exporters.
This refund is carried out in the form of Duty Drawback. In case the duty drawback scheme is not mentioned in
the export schedule, exporters can approach the tax authorities for getting a brand rate under the duty drawback
scheme.
Service Tax Rebate

In the case of specified output services for export goods, the government provides rebates on service tax to
exporters.
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Duty-Free Import Authorization
This is another benefit the government has introduced by combining the DEEC (Advance License) and DFRC
to help exporters get free imports on certain products.
Zero duty EPCG (Export Promotion Capital Goods) Scheme
In this scheme, which applies to exporters of electronic products, import of capital goods for production, pre-
production, and post-production is allowed at zero percent customs duty if the export value is at least six times
the duty saved on capital goods imported. The exporter needs to verify this value(Export Obligation) within six
years of issuing date.
Post Export EPCG Duty Credit Scrip Scheme

Under this export scheme, exporters who aren’t sure about paying the export obligation can obtain an EPCG
license and pay the duties to the customs officials. Once they fulfill the export obligation, they can claim a
refund of the taxes paid.
Towns of Export Excellence (TEE)

Towns that produce and export goods above a particular value in the identified sectors would be known as
towns of export status. Towns will be given this status based on their performance and potential in exports to
help them reach new markets.
Market Access Initiative (MAI) Scheme
An effort to provide financial guidance to eligible agencies for undertaking direct and indirect marketing
activities like market research, capacity building, branding, and compliances in importing markets.
Marketing Development Assistance (MDA) Scheme
This scheme aims to promote export activities abroad, assist export promotion councils to develop their
products and other initiatives to carry out marketing activities abroad.
Merchandise Exports from India Scheme (MEIS)

This scheme applies to the export of certain goods to specific markets. Rewards for exports under MEIS will be
payable as a percentage of realized FOB value.
Thanks to all these schemes, exports have increased by a right margin, and there is a favorable atmosphere
among the business community. The government is also upcoming with many other benefits to strengthen the
export sector of the country further.
#Tax planning with respect to amalgamation of companies:

1 INVESTMENT ALLOWANCE:
Investment allowance in the Act has been inserted in place of Development Rebate. The purpose of this
allowance is to provide for deduction on any purchases made in the form of ship, aircraft, machinery, plant. The
rate of investment allowance is 25% of the actual cost of the ship, aircraft, machinery or plant. Therefore it
could be termed as a deduction on the investment made by the person which is allowed to him at the time of
calculation of his taxable income. The section provides for exemption from application of the provision in
certain cases mentioned in the Section itself. Sub section (2) of the section assumes importance in light of the
fact that it provides for the meaning to be given to the words ship, aircraft and plant and machinery by stating
their purposes or the object with which it is to be used. For example, clause (b) of sub section (2) provides for
the purposes of installation of plant or machinery which may be generation of electricity or distribution of the
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same, in a small scale industrial undertaking for the manufacture of any article, for the purposes of business of
construction, manufacture or production of any article. Sub section (5) of the section provides for disallowance
of the investment allowance in certain circumstances. [7] The purpose of creation of an investment allowance is
the creation of a reserve called the Investment Allowance Reserved Account for the purposes of acquiring new
ship or aircraft or machinery and plant, and for other purposes of business of the undertaking except for
distribution of dividends, profits or remittances outside India as profits. Sub section (6) stipulates conditions to
be followed in case of an amalgamation and the amalgamated company is supposed to take over the mantle of
the maintenance and creation of the reserve for the aforesaid utilization in the business.
CURRENT STATUS OF THE BENEFIT: Notification dated 19 March 1990 was issued to discontinue
investment allowance from the assessment year 1991-92.
1.2.2. DEVELOPMENT REBATE:

This rebate is granted at varying rates, in respect of ships, machinery and plant provided:
the machinery or plant is not an office appliance, or a road transport vehicle.
it is not installed in any office premises.
the asset is new.
it is owned by the assessee.
it is wholly used for the purposes of the assessee’s business.
the particulars prescribed for the purpose of depreciation allowance have been furnished.
a development rebate reserve is created and the asset is not transferred for eight years as provided in S.34(3).
Sub section (3) provides for cases in which amalgamation of companies occurs and it says that the amalgamated
company shall continue to fulfill the conditions mentioned in sub section (3) of section 34 in respect of the
reserve created by the amalgamating company and in respect of the period within which the ship, machinery or
plant shall not be sold or otherwise transferred and accordingly provides for any default. The same sub section
provides for the balance amount of the development rebate to be allowed to the amalgamated company or the
new entity.
The section further provides for the fulfillment of certain conditions for the allowance of development rebate
which says that development rebate shall be allowed in respect of a ship, machinery or plant installed on or after
1 Jan 1958, S.34(3) enacts that development rebate should be allowed only if the following conditions are
fulfilled which are as follows:
An amount equal to 75% of the development rebate to be actually allowed should be debited to the P&L A/c
and should be credited to a reserve account. The reserve so created is utilized for a period of eight years.
For distribution by way of dividends or profits.
For remittance outside India as profits.
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For any other purpose which is not a purpose of the business of the undertaking.
The clause requires maintaining a reserve of the value of 75% of the development rebate actually allowed.
CASE OF AMALGAMATION: The right to development rebate would be lost even if a transfer of the asset is
affected within eight years merely as a step in business reorganization or expansion. Only in two cases of
business reorganization is the bar against transfer of assets removed ie: when the two companies amalgamate
and when a firm is succeeded by a company. But this benefit is available only when the amalgamation takes
place as per the conditions laid down in s 2(1B) of the Income Tax Act, 1961.
CURRENT STATUS OF DEVELOPMENT REBATE: The development rebate has been discontinued from 31
May 1977 and at present stands discontinued.
· 1.2.3.DEVELOPMENT ALLOWANCE:
Under section 33 A, an assessee who is carrying on the business of growing and manufacturing tea in India is
entitled to a deduction while computing his profits by way of development allowance with reference to the
actual cost of planting tea bushes. Here the actual cost planting comprises the cost of planting and replanting
and the cost of upkeep thereof, for the previous year in which the land has been prepared for planting and the
three succeeding years. [8] This benefit of deduction is available under the current legal provision to companies
carrying on similar kind of business and going in for amalgamation. The section is applicable to an assessee
carrying on the business of growing and manufacturing tea in India. The allowance is available only if the
assessee grows and manufactures tea in the country. Allowance is granted under this section at the following
rates:
50% of the actual cost of planting tea bushes, where such tea bushes are planted on a land and not planted with
any other tea bushes planted earlier (such cost being incurred between 1 Apr 1965 and 31 Mar 1990).
30% of the actual cost of planting tea bushes where tea bushes are planted in replacement of tea bushes that
have died or have become permanently useless on any land already planted (such cost being incurred between 1
Apr 1965 and 31 Mar 1970).
Sub section (5) provides that all the conditions relating to creation and maintenance of reserve and sale and
otherwise transfer of the land should be fulfilled by the amalgamated company just as they would have been
fulfilled by the amalgamating company.
·
1.2.4. EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH:
According to section 35(5), where, in a scheme of amalgamation, the amalgamating company sells or otherwise
transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a
capital nature on scientific research [9] –
the amalgamating company shall not be allowed the deduction under clause (ii) or clause (iii) of sub-section
(2); and
the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have
applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset
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The Madras High Court held in Tamil Nadu Civil Supplies Corporation Ltd v CIT [10] that, after the Research
Centre was taken over by the assessee, entire actual expenditure incurred by assessee was allowable, therefore,
the Tribunal was not justified in allowing proportionate expenditure. The research, for the purposes of the
present section, need not necessarily be related to present manufacturing activity. It was held in CIT v National
Rayon Corporation Ltd. [11] that, ‘the expression “related to business” does not mean related to present
manufacturing activities of the assessee. In this case assess was all along using imported wood pulp for the
manufacture of rayon incurred expenditure on research for making pulp out of bamboo since it proposed to set
up a plant for making bamboo pulp. The expenditure on such research could not be disallowed because it did
not relate to the present manufacturing activity of the assessee.
1.2.5. EXPENDITURE ON ACQUISITION OF PATENT RIGHTS OR COPYRIGHTS:

Section 35 A of the Income Tax Act deals with expenditure on acquisition of patent rights or copyrights.
According to its sub-section (1), in respect of any expenditure of a capital nature incurred after the 28th day of
February, 1966 but before the 1st day of April, 1998, on the acquisition of patent rights or copyrights, used for
the purposes of the business, there shall, be allowed for each of the relevant previous year, a deduction equal to
the appropriate fraction of the amount of such expenditure. Sub-section (6) of this section provides that, where,
in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the rights to the
amalgamated company (being an Indian company),
the provisions of sub-sections (3) and (4) shall not apply in the case of the amalgamating company ; and
the provisions of this section shall, as for as may be, apply to the amalgamated company as they would have
applied to the amalgamating company if the latter had not so sold or otherwise transferred the rights.
Sub-section (6) was inserted in section 35(A) by the Finance (No.2) Act, 1967, to provide deduction to
amalgamated companies. The scope of its insertion is elaborated in the following extract of the circular No 5-P,
dated 9.10.1997, which read as under:
“Where the amalgamating company sell or otherwise transfers to the amalgamated company (being an Indian
Company) any capital assets used by it for scientific research related to its business or any capital asset of the
nature of patent right or copyrights or any capital assets used for promoting family planning amount its
employee, the amalgamated company will be entitled to amortize the capital cost of such assets against its
profits under the relevant provision of the Income Tax Act, viz., sections 35, 35A and 36 (1) (ix), in the same
manner and to the same extent as the amalgamating company would have been, if it had not sold or transferred
the asset to the amalgamating company will not be entitled to any of the terminal benefits under the provisions
of section 35, 35 A and 36 9i) (ix).” [12]
Where an assessee has purchased patent rights or copyrights, he is entitled to a deduction under section 35 A for
a period of 14 years in equal installments. If during such period the assessee merges with another company, the
amalgamated company would then have the right to claim the unexpired installment as a deduction from its
total income. However, where the whole or any part of the right are sold by the amalgamated company after
amalgamation and the sale proceeds exceeds the amount of the cost of acquisition of the asset which remains
unallowed as deduction, the excess amount would be chargeable to income-tax in the hands of the
amalgamated company. If the sale price even exceeds the cost of acquisition, the difference between such price
and the cost would be the capital gains which would be taxed in the hands of the amalgamated company.
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1.2.6. AMORTISATION OF CERTAIN PRELIMINARY EXPENSES:
Section 35D of the Income Tax Act deals with amortization of certain preliminary expenses. According to its
sub-section (1), where an assessee being an Indian Company or a person (other than a company) who is resident
in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2)
before the commencement of his business, or
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, in accordance with and subject to the provisions of this section, be allowed a deduction of an
amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the
previous year in which the business commences or, as the case may be, the previous year in which the extension
of the industrial undertaking is completed or the new industrial unit commences production or operation. The
section grants deduction in respect of expenditure which may otherwise be disallowed as an expenditure of a
capital nature. This implies that expenses of a capital nature which are generally disallowable as deductions at
the time of calculation of taxable income, may be allowed by virtue of this section of the Act. The expenditure
may be incurred in respect of any of the following:
preparation of feasibility report.
preparation of project report.
conducting market survey or any other survey necessary for the business of the assesse.
engineering services relating to the business of the assessee.
legal charges for drafting any agreement between the assessee and any other person for any purpose relating to
the setting up or conduct of the business of the assessee.
where the assessee is a company, also expenditure, by way of legal charges for drafting the Memorandum and
Articles of Association of the company.
On printing of the Memorandum and Articles of Association.
By way of fees for registering the company under the provisions of the Companies Act, 1956.
In connection with the issue, for public subscription, of shares in or debentures of the company, being
underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the
prospectus.
Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other
provision of this Act) as may be prescribed.
Section 35D is an enabling provision which enables an assessee to amortize w.e.f. assessment year 1999-2000
its preliminary expenses incurred after 31.3.1998 by an Indian Company or a person resident in India. The
expenses can be amortized in five equal installments for five successive previous years i.e one fifth of the
expenditure shall be allowed as deduction, for a period of five successive previous years. And the aggregate
30 | P a g e

amount of the preliminary expense incurred after 31.3.98 should not exceed 5% of the cost of project and in
case of a company as its option, 5% of the capital employed. However, if it exceeds 5% then the expenditure
shall be limited to 5% of the cost of project. This certainly depends on a case to case basis. [13]
1.2.7. AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER:

Section 35DD has been inserted in the Income Tax Act w.e.f 1 April, 2000 by the Finance Act, 1999 to provide
for amortization of expenditure in case of amalgamation and demerger. It provides that, where an assessee,
being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively
for the purposes of amalgamation or demerger of an undertaking , the assessee shall be allowed a deduction of
an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with
the previous year in which the amalgamation or demerger takes place. However, no deduction shall be allowed
in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act. According to
sub-section (1) of section 35DD, any expenditure incurred in connection with amalgamation or demerger of any
undertaking is allowable in five equal installments over a period of five years beginning with the year of
amalgamation or demerger. However, following conditions need to be fulfilled:
The entity making the expenditure shall be an Indian company
The expenditure shall be incurred on or after 1-4-1999.
Further, no deduction shall be allowed under any other provisions of the Act, as per sub-section (2) of section
35DD.
The separation of two or more existing business undertakings operated by a single corporate entity can be
effected in a tax-neutral manner. The tax-neutral separation of a business undertaking is termed a de-merger.
Tax deduction and collections and at source:

TAX DEDUCTED AT SOURCE (TDS)
The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a
person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax
at source and remit the same into the account of the Central Government. The deductee from whose income tax
has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS
or TDS certificate issued by the deductor.
Rates for deduct of tax at source
Taxes shall be deducted at the rates specified in the relevant provisions of the Act or the First Schedule to the
Finance Act. However, in case of payment to non-resident persons, the withholding tax rates specified under the
Double Taxation Avoidance Agreements shall also be considered.
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Tax collection at source:
TCS is the Tax Collected at Source by the seller (collector) from the buyer/ lessee (collectee/ payee). The
goods are as specified under section 206C of the Income Tax Act, 1961.
If the purchase value of goods is X, the amount payable by the buyer is X+Y, where Y is the value of tax at
source. The seller deposits Y (tax collected at source) at any designated branch of banks authorised to receive
the payment.
The seller, lessor or licensor, is responsible for the collection of tax from the buyer, lessee or licensee. The tax is
collected for sale of goods, on transactions, receipt of amount from the buyer in cash or issue of cheque, draft or
any other mode, whichever is earlier.
11.2. Classification of Seller for TCS

Under TCS, a seller is defined as any of the following:
o Central Government
o State Government
o Any Local Authority
o Any Statutory Corporation or Authority
o Any Company
o Any Partnership Firm
o Any Co-operative Society
o Any individual/HUF whose total sales or gross receipts exceed the prescribed monetary limits as
specified under section 44AB during the previous year
#ADVANCE PAYMENT OF TAX:

According to Section 208 of Income tax Act, 1961, every person whose estimated tax liability for the FY
exceeds Rs.10,000 has to pay tax in advance.
Section 208 of Income Tax Act

According to Section 208 of the Income Tax Act:
1. Every assessee shall be liable to pay advance income-tax during any financial year in respect of his total
income of the financial year, if the amount of advance income-tax payable exceeds ten thousand rupees.
2. The amount of advance income-tax payable by an assessee in the financial year shall be computed in the
following manner, namely :
1. the assessee shall first estimate his total income and calculate income-tax thereon at the rates in force in
the financial year
2. the income-tax so calculated shall be reduced by;
1. the amount of income-tax which would be deductible or collectible at source during the financial year
from any income which is taken into account in estimating the total income.
2. the amount of credit under section 207, allowed to be set-off in the financial year AND
3. the balance amount of income-tax shall be the advance income-tax payable.
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3. The advance income-tax, in case of any person other than a company, shall be payable in three
instalments during the financial year on or before the dates as specified.
Who should pay advance tax?

Salaried persons are not required to pay advance tax, as the employer usually deducts tax at source (TDS).
However, if an employee has any other income other than salary income for which tax has not been deducted at
source and the tax liability exceeds more than Rs.10000, then advance tax must be paid.
Professionals (self-employed), businessmen and corporates will have to pay taxes in advance as they typically
have taxable income that exceeds the advance tax payment threshold.
When to pay advance tax?

The advance tax is to be paid in the following three instalments on the following dates:
For Non-Corporate Assessee:
 On or before 15 September – not less than 30% of tax payable for the year.
 On or before 15 December – not less than 60% of tax payable for the year.
 On or before 15 March – not less than 100% of tax payable for the year.
For Corporate Assessee:
On or before 15 June – not less than 15% of tax payable for the year.
On or before 15 September – not less than 45% of tax payable for the year.
On or before 15 December – not less than 75% of tax payable for the year.
On or before 15 March – not less than 100% of tax payable for the year.
How to pay advance tax?

You can pay advance tax using the tax payment challan at the bank branches empanelled with
the Income Tax (I-T) department. Advance tax can be deposited with State Bank of India, ICICI Bank, HDFC
Bank, Indian Overseas Bank, Indian Bank, and other authorised banks. There are over 926 branches in India
that can accept advance tax payments. Now, advance tax can also be paid through the NDSL website.
Advance tax exemption

According to Section 207 of the Act, a resident senior citizen (an individual of age 60 years or more) who does
not have any income from business or profession is not liable to pay advance tax. For instance, a senior citizen
may have various sources of income such as rental income, pension, interest from bank deposits, or dividends.
Senior citizens do not have to pay advance tax, as these sources of income do not fall under the income tax head
of “income from business or profession”. Also, this exemption is provided irrespective of the amount of
income that a senior citizen earns from a source other than business or profession.
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05 Corporate Tax Planning and Management

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[Type the document subtitle] | Mohit Kumar

SUNIL KUMAR YADAV MFC 4Th Sem.

CONCEPT OF TAX PLANNING:

Objectives of Tax Planning

SUNIL KUMAR YADAV MFC 4Th Sem.

Corporate Tax in India

What is meant as Income of a company?

SUNIL KUMAR YADAV MFC 4Th Sem.

Tax rates applicable

Particulars Tax Rate

Gross Turnover upto Rs. 250 Crore in FY 2016-17 25%

Gross Turnover exceeding Rs. 250 Crore 30%

Nature of Income Tax

Any other income 40%

In addition to above rates :

Particulars Tax Rate

SUNIL KUMAR YADAV MFC 4Th Sem.

Health & education Cess :

Everything about filing income tax return

Due date for filing Income tax return

SUNIL KUMAR YADAV MFC 4Th Sem.

 Dividends from a domestic company.

Dividend Received from a Domestic Company

SUNIL KUMAR YADAV MFC 4Th Sem.

Foreign Company Dividends Received by an Indian Company

Dividends Double Taxation Avoidance

CRPORATE DIVIDEND TAX:

SUNIL KUMAR YADAV MFC 4Th Sem.

(TAX PLANNING FOR NEW BUSINESS)

TAX PLANNING WITH REFERENCE TO LOCATION:

THE DIFFERENCE BETWEEN ‘TAX PLANNING’ AND ‘TAX MANAGEMENT’ .

Tax Planning Tax Management

Tax planning and business structure

SUNIL KUMAR YADAV MFC 4Th Sem.

SUNIL KUMAR YADAV MFC 4Th Sem.

#Capital Structure Management or Planning The Capital Structure:

Essential Features of a Sound Capital Mix

(i) Maximum possible use of leverage.

(ii) The capital structure should be flexible.

(iii) To avoid undue financial/business risk with the increase of debt.

(v) It should involve minimum possible risk of loss of control.

(vi) It must avoid undue restrictions in agreement of debt.

SUNIL KUMAR YADAV MFC 4Th Sem.

SUNIL KUMAR YADAV MFC 4Th Sem.

SUNIL KUMAR YADAV MFC 4Th Sem.

SUNIL KUMAR YADAV MFC 4Th Sem.

Types of Dividend Policy:

(b) Stable Dividend Policy:

(ii) Constant payout ratio:

(iii) Stable rupee dividend plus extra dividend:

SUNIL KUMAR YADAV MFC 4Th Sem.

Effect of Bonus Issue:

(c) Issue of bonus shares earns confidence of the public.

Conditions for the Issue of Bonus Shares:

SUNIL KUMAR YADAV MFC 4Th Sem.

TAX PLANNING REGARDING OWN OR LEASE DECISION:

Sale of Scientific Research Asset