Professional Documents
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Tax Management Tax Management is essential, Tax planning is desirable and Tax evasion is objectionable. Elaborate. Tax Planning Tax Management Tax Evasion
Tax planning is to avail Tax management refers to Tax evasion refers to ways maximum deductions, rebates etc benefit and of the steps taken to ensure and means adopted by a with the tax payer to evade tax by falsifying concealing accounts or income, exemptions, compliance
inflating expenses etc. Its fully within the Its undertaken to fulfill the Its clearly violations of law includes deceit. in India It is obligatory to exercise This is clearly prohibited, tax management. as it is fully illegal. an element of
framework of law and it requirements contained in and unethical in nature. It makes use of the beneficial the provisions of the law. provisions in law. The judiciaries
It is a rewarding concept It aims at avoiding costs When proved, tax evasion for professionals/ experts arising as consequences of invites stringent penalties as it allows making use of non compliance of law. and beneficial thus liability. It is futuristic in approach Tax mgmt relates to the There is nothing like past, i.e. it aims at minimizing past the tax liability of the proceedings, future years. (assessment present or future approach appeal, in case of tax avoidance. provisions and Thus it helps the minimizing tax planning to be successful. prosecution against tax the person who is found engaged in it.
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Its benefits are substantial It aims at avoiding penalty, Tax particularly in the long run. interest, prosecution etc.
evasion
attracts
Tax Avoidance Is an arrangement if affairs so as to avoid payment of tax by the use of devices which are sham or make-believe. It defeats the basic intent of the legislature behind the statute. Objectives of Tax planning Reduction in tax liability Minimizing litigation Productive investment Healthy growth of economy Economic Stability Definition Company *sec 2(17) : Company means Indian company; or any body corporate incorporated by or under the laws of a country outside India; or any institution, association or body, declared by general or special order of the Board to be a company for specified assessment years. Indian company *sec2(26): Indian company means a company formed and registered under the companies act, 1956 and includes statutory corporation; and any institution, association or body declared by the board to be a company, if the registered/ principal office of the company, corporation, institution, association or body is in India. Company in which public are substantially interested [section 2(18)]: It means a I. A company owned by govt. / RBI or in which 40% or more of the shares are held by the Government or RBI or a corporation owned by the RBI; or
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Income received in India by him or on his Yes behalf( whether accrued in India or outside India)
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whether received in India or outside India) Income deemed to accrue or arise in India Yes (whether received in India or outside India) Income which accrues or arises outside Yes India(other than that covered in cases(1) to (4) above MINIMUM ALTERNATE TAX (MAT) Relevance IF the income- tax payable on total income of a company is less than 18% of its book profits, then such book profits shall be deemed to be the total income and income tax payable by such a company shall be equal to 18% of the book profits. Mode of computation of book profits [explanation to section 115 JB] Net Profit as per Profit and Loss A/c Add: ( If any of the following is debited to P&L a/c) Amount of Income tax paid/ payable or provision thereof; Amount carried to any reserves; Amount of provisions made for meeting unascertained liabilities; Amount by way of provision for losses of subsidiary companies; Amount of paid or proposed dividends; Expenditure relatable to any income exempt u/s 10 or 11 or 12, other than income exempt u/s 10(38); No Yes
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Carry forward of losses and allowances: The provisions of this section do not affectthedeterminationofamountsoflossesandallowancestobeC/F.
Corporate Restructuring Amalgamation, Mergers & Demergers,
Conversion & Slump sale BENEFITS Shareholders of the amalgamating company As per section 47(vII), transfer of shares held by a shareholder in amalgamating company is not regarded as transfer, if such transfer is in consideration of allotment to him of shares in the amalgamated company. When transfer is exempt, then for computing CG on shares: Period of holding: period, for which shares in amalgamating company were held by assessee, will be included in computing the period of holding of shares in amalgamated company.
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If all the assets and liabilities of the All the assets and liabilities of sole firm relating to their business proprietary business immediately succession before the succession become the and liabilities of the company immediately the company. before
All its partners become shareholders Sole Proprietorships shareholding of the company in in the their same in the company is 50% or more of capital the total voting power and proportion which
a/cts stood in the books of the firm continues to be as such for 5 years on the date of succession. from the date of succession; and proprietor only of receives in form in the of the
The partner rec. consideration only Sole company. The partners shareholding in the company in aggregate is 50% or more of its total voting power and continue to be as such for 5 yrs from the date of succession.
shares
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k.koteshwara and co., it has been k.koteshwara and co., it has been held that successor to a business is held that successor to a business is entitled to deduction in respect of entitled to deduction in respect of debts incurred by the predecessor, as debts incurred by the predecessor, the deduction is allowed to business as the deduction is allowed to and not to assessee personally. business and not to assessee of However, identity of business after personally. and it should not be dissolved. However, identity
succession should remain the same business after succession should remain the same and it should not be dissolved. C/F and set off of loses Such loss can be c/f for further 8 Such loss can be c/f for further 8 and unabsorbed years in the hands of the successor years in the hands of the successor company of depreciation in case of company reorganization business.
SLUMP SALE Slump sale [sec 2(42C)] : means transfer of one or more undertakings as a result of the sale for a lump sum consideration w/o values being assigned to the individual assets and liabilities in such sales. Charge and nature of CG: P&G arising from slump sale shall be taxable as CG in PY in which slump sale is effected. If the capital asset, being one or more undertakings, was owned and held by the assessee for not more than 36 months, the CG will be STCG. In any other case, it shall result into LTCG.
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Areas of Tax planning under Financial Management and role of Tax Planner The main objective of financial management is maximization of an
organizations wealth. Tax planning may be exercised n respect of following areas of decision making 1. Designing the capital structure (financing mix decision); 2. Capital budgeting (investment decisions and growth policy); 3. Distribution of profits (dividend policy decisions);
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or by a mutual fund/ administration /specified company for entitlement of dividend or bonus shares. Tax treatment of expenditure on issue of bonus shares: Companys point of view:
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is taxed in the hands of the sole proprietor. Such income enjoys the additional tax benefits of threshold exemption limit, tax rebates and reliefs. The income is taxed at the maximum rate of 30%. Thus, tax liability in case of sole proprietorship form of business tends to be the lowest. The disadvantages of this form are unlimited liability, non availability of certain deductions, which are admissible to companies; no deductions for interest on capital and remuneration to sole-proprietor; etc.
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On first Rs.3, 00,000 of book profits Rs. 150,000 or 90% of book profit or in case of a loss. On the balance whichever is higher 60% of the book profits
By virtue of section 28(v), interest or remuneration received by a partner from a firm is taxable as PGBP. Any payment of remuneration to partners, not allowed as deduction u/s 40(b), shall not be taxed in the hands of partners. However, the disallowance of remuneration / interest under sections 36(1)(III), 37(!) or section 40A(2) will be
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of imported raw material. Eligible articles or things mean all hand- made articles or things which are of artistic value and which require the use of wood as main RM. b) The export- sales of eligible articles isnt less than 90% of total sales during that PY. c) The sale proceeds of export are received in, or bought into, India in convertible foreign exchange within six months from the end of PY or within such extended period as may be allowed by the RBI or any other competent authority. d) It employs 20 or more workers in its manufacture or production during the PY. Quantum of deduction 2010- 2011. Note: export shall not include any transactions by way of sale or otherwise, in a shop, emporium, etc. not involving customs clearance. Deduction in relation to expenditure on obtaining license to operate telecommunication services [section 35ABB]: tax treatment a) If whole or part of the license is transferred and sale proceeds ( only capital sum) exceeds the expenditure remaining unallowed: deduction is NIL. The following deemed profits will be taxable in year of transfer even if business doesnt exist a) sale proceeds less expenditure remaining unallowed; or b) expenditure incurred less expenditure remaining unallowed, w.el. deduction is allowed to the extent of 100% of profits or
gains from the export of eligible articles. No deduction will be allowed w.e.f AY
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Before commencement of business For setting up of any undertaking or business After commencement of business Extension of the existing
industrial undertaking or setting up new industrial undertaking Benefit of sec 35D not available to a non industrial undertaking incurring expenditure in connection with extension of its business after its commencement.
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1)Preparation of feasibility report, Preparation of feasibility report, project report or for project report or for conducting conducting market survey or any other survey or market survey or any other survey engineering services relating to the business of the or engineering services relating to assessee. the business of the assessee. Legal charges for drafting any agreement for setting
2) Legal charges for drafting any up or for conduct of any business. agreement for setting up or for conduct of any business. 3) expenses incurred for a) legal charges for drafting and printing
memorandum and articles of association; b) fees for registering the company under companies act; c) Issue of shares or debentures of the company, underwriting commission, brokerage and charges for drafting, prospectus. typing, printing and advertisement
Issued share capital + debentures + long term borrowings. means actual cost of fixed assets as shown in the books
of the assessee on the last day of the PY in which the assessee commences
Audit report non corporate assesses, the assessee is required to furnish the audit report in form 3AE along with the return of income for the first year. Case law Brooke bond India ltd share issue expenses cannot be claimed
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biodegradable waste [section 80JJA]: Applicability: all assesses. Amount of deduction: amount of profits and gains derived from certain business for 5 consecutive years beginning from the AYs in which such business commences. Business should consist of collecting, processing /treating bio degradable waste for a) Generation of power; b) producing bio gas c) Making pellets/briquettes for fuel or organic manure. Deduction available for assesses providing additional employment sec 80 JJAA : Applicability Indian company Condition company derives profit from any industrial undertaking engaged in the manufacture or production of article or thing not formed by splitting up, reconstruction or amalgamation. Period of deduction deduction u/s 80 JJAA is applicable for 3 AYs only, including the AY relevant to the PY in which employment is provided. Audit report to be furnished in form 10DA.
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Section doesnt apply to undertaking, which begun or begins to manufacture or produce articles or things or computer SW on or after 1-4-2005 in any SEZ. New established undertaking in special economic zones (section 10AA): Conditions a) its not formed by splitting up or reconstruction of existing business. b) Its not formed by transfer of plant or machinery previously used for nay purpose. Exceptions: condition isnt violated when a) the value of second hand plant and machinery doesnt exceed 20% of total value of plant or machinery used in that business; or B)P&M used outside Indian by any person other than assessee is imported and no depreciation has been allowed on it under this act. Note: Above two conditions are common for section 10A, 10B and 80 I-A to 80IE. Quantum of deduction : First 5 consecutive years 100% of profits and gains from export business (starting from AY relevant to year of start of production/ manufacture) Next years Further next 5 consecutive AYs 5 consecutive assessment 50% of profits and gains from export business Lower of a) 50% of profits from export business or b) amount transferred from
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Tax deduction for last AYs is allowed if Amount transferred to SEZ reinvestment reserve a/c is used for acquiring new plant and machinery, which is first put to sue within 3 yrs from the yr of creation of reserve. Until acquisition of P&M, its used for business purposes other than for distribution by way of dividend or profits or remittance outside India for creation of any asset therein. Particulars of P&M are furnished along with return of income for the PY in which such plant or machinery is first put to use. Consequences of misutilisation / non- utilization of reserve : If the amount is credited to the Taxability reserve is Used for purposes other than Amount so misutilised shall be taxable in the year of misutilisation three years Amount not so utilized shall be taxable in the year immediately following the period of 3 years. Newly established 100% Export oriented undertaking (EOU) (section 10B): 100% deduction is allowed in respect of P&G derived by 100% EOU. Deduction is allowed for 10 consecutive AY beginning with AY relevant to PY in which undertaking begins production/ manufacture. However no deduction will be allowed w.e.f AY 2010-11. Section 80 I-A deductions available to industries engaged in
aforesaid
infrastructure development
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Section 80 I-A deductions available to industries engaged in infrastructure development Nature of undertaking Commences During Quantum deduction From Infrastructure facilities 1-4-95 To Open ended Company 100% others 100% For 10 years 4(I) out of first 15 years Telecommunication services: 1-4-95 31-3-05 100% 30% X For initial 5 4(II) years Balance period yrs 1-4-95 31-3-05 100% 30% 100% 25% For initial 5 4(II) years Balance period years Industrial park 1-4-97 31-3-09 100% 100% For 10 years 4(III) out years of 15 of 5 of 5 Of Period AY Ref (see note 2)
a) domestic satellite services b) other services viz., radio, paging, service basic or cellular networking of turnking & EDI
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out of 15 yrs
reconstruction/
Common conditions: Condition : w.e.f 1-4-06, deduction u/s 80 I-A will be allowed only if the assessee furnishes the return of income u/s 139 (a) Period of deduction Ays :
For any 10 consecutive Ays out of 15 yrs beginning from the year in which the undertaking or the enterprise Develops and begins to operate any infrastructure facility; or Starts providing telecommunication services; or Develops an industrial park; or Generates power or commences transmission or distribution of power. For operation and maintenance of the infrastructure facilities referred in Para 1(c) above subject to fulfillment of conditions, the period of 15 years is substituted by 20 years.
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certain special category states. The eligible businesses are a) in case of undertaking/ enterprise located in
notified areas under specified states: it has begun manufacture during specified period, or takes substantial expansion during that period. b) In case of undertaking/ enterprise located in any area under specified states: it has begun manufacture during specified period, or takes substantial expansion (50% or more increase in book value of P&M) during that period. Specified period and deduction:
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Income from the offshore banking unit in a SEZ; Income from business referred in section 6(1) of banking regulation act, with an undertaking
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Amount of deduction
Period Quantum of deduction
For the first 5 AYs relevant to the 100% of such income PY in which permission under banking regulation act or SEBI or under obtained Next 5 years 50% of such income any other laws was
Non resident 1) Non resident individual: An individual is regarded as non resident if he is not resident in India during that PY. An individual is regarded as resident in India if He is India for a period of 182 days*** or more during the PY; OR He is in India for a period of 60 days or more during the PY and 365 days or more during the 4 years preceding the PY. ** Under the following circumstances, the period of 60 days are extended to 182 days a) An Indian citizen who leaves India during PY for the purpose of employment outside India. b) An Indian citizen who leaves India during PY as a member of crew of an Indian ship.
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resident is covered Concluding agent who concludes contracts on behalf of the non resident. However, agents who only purchase goods/ merchandise for the non resident arent covered, or Stocking agent who maintains stock of goods in India from which he regularly delivers goods on behalf of the non resident.
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b) In cases falling under the above three, only the income attributable to the operations carried out in India shall be deemed to accrue or arise in India. Income not to be treated as arising from or through business connection A. In case all the operations of a business arent carried out in India, only the income reasonably attributable to the operations carried out in India will be deemed to accrue or arise in India. B. In case of a non resident, income in respect of operations confined to purchase of goods in India for the purpose of export shall not be deemed to accrue or arise in India. C. In case of non resident, engaged in business of running a news agency/ publishing newspapers, magazines, journals, income arising through and from activities confined to collection of news and views in India for transmission out of India shall not be deemed to accrue or arise in India. D. In case of a non resident being a. An individual who isnt a citizen of India ; b. A firm not having a partner who is either a citizen of India or resident in India; and c. A company not having any shareholder who is either citizen of India or resident in India,
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income under any provision of Act. -->such agreement must be approved by the central or Government
must relate to a matter covered by the of India. b) Royalty and fees for technical services received under agreement entered Between 1-4-1976 to 31-5-1997 Between 1-6-1997 to 31-5-2005 On or after 1-6-2005 115AB Overseas fund) financial LTCG from 10% of Indexation will not available computing LTCG benefit be in industrial policy of the Govt.
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Assessee**
notified foreign
such and no
computing
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institutional investor
income under any provision of the act and no indexation benefit computing LTCG in
Capital gains on transfer of the securitiesSTCG under section 111A Other STCG LTCG 115BBA Non sportsman foreign citizen** resident Income from being -participation in India ; advertisement ; - Contribution of articles relating to any game or sport in India in newspapers, a game/sport in 10% No allowable computing deduction in such
incomes under any provision of act Winnings lottery, puzzles taxable section they do etc 115BB not from crossword are under @ fall
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guaranteed payable
game/
sport played in
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has been increase in the cross border transactions. The existence of different tax rates in different countries offers a potential incentive to multinational enterprises to manipulate their transfer prices to recognize lower profit in countries with higher taxes and vice versa. In order to monitor transfer prices for goods, facilities and services, transfer pricing regulations were introduces in the form of sections 92 and 92A to 92F. The basic intention underlying the transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the countrys tax base. Provisions relating to computation of income from international
transactions sec 92 1) Income to be computed as per arms length price 2) Section not to apply when arms length prices decreases income or increases loss. Section 92A associated enterprises and deemed associated enterprises.
Associated enterprise means an enterprise which participates, directly or indirectly, in management or control or capital of other enterprise. Further, if one or more persons participate, directly or indirectly in the management or control or capital of two enterprises those two enterprises are associated enterprises. Deemed associated enterprises: two enterprises are deemed to be associated enterprises. If, at any time during the PY, -
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agreement with any specified association in the specified territory outside India. Through notification in the official gazette, the central Government may make such provisions necessary for adopting and implementing such agreement. Purpose of adoption a) Granting of relief in respect of Income which have suffered tax under both Indian tax laws and those of specified territory outside India, or; Income tax chargeable under this act and under the corresponding law in force in that specified territory outside India to promote mutual economic relations, trade and investment, or b) Avoidance of double taxation of income under Indian law and those governing the specified territory; or c) Exchange of information for the prevention of evasion or avoidance of income tax chargeable in both in India and specified territory , or investigation of cases of such evasion or avoidance, or d) Recovery of income tax tax under laws of both the countries/ territories. Section 91 Conditions a) The assessee must have been resident in India in the relevant PY. b) The income must have accrued or arisen outside India during that PY. c) The assessee must have paid the tax either by deduction or otherwise in respect of such income as per the law of the foreign country. unilateral relief
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