Master of Business Administration- MBA Semester 3 MF0012 –Taxation Management- 4 Credits (Book ID: B1760) Assignment (60 Marks


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511221484 ZITE 01904

Q.1. Explain the concept of tax planning. What are the objectives of tax planning? Answer: The Concept of Tax Planning: Under the different direct and indirect tax laws, a taxpayer is entitled to plan his taxes in such a manner that the tax incidence in relation to his income is minimal i.e., his net income after tax is the maximum. Tax planning involves a study of the exemptions, rebates, deductions and reliefs given under the direct and indirect tax laws for specific business decisions in the case of business persons, and personal financial decisions in the case of individuals in such a way that the tax amount as percentage of his income is the least. This does not mean that every rebate or relief should be made use of, because it will certainly have other ramifications. Tax planning is the art and science of evaluating the alternatives and picking the one that maximizes the income, but not necessarily by minimizing the tax. For instance a company has the option of setting up its business in a backward area, which entitles it to enjoy certain direct and indirect tax benefits. But the downside of going to the backward area could be the higher cost of doing business. It is therefore important for the company to assess whether the tax benefit is greater than the additional cost or vice versa. This is the essence of tax planning.

Q. or make purchases without bills and escape sales tax. Informed and pragmatic financial decisions: A person adds the dimension of tax incidence in his decision-making on financial matters. Tax planning provides the perfect avenue to remain a responsible citizen while paying the least amount of tax. the depreciated value of the block on 1-42007 being 22. but the process is tedious and puts an enormous burden on the legal system. Reduction of tax liability by utilizing the benefits available in the tax laws. d.50 lacs of the said buildings which had been purchased on 30-4-1996 for Rs. and this helps him optimize his decisions.14 lac for the purpose of setting up another industrial undertaking.The said building was being used by the company as a tenant for about 4 years prior to the date of acquisition of the same by the company. education and healthcare. and by taking up these investments one can contribute to nation-building and at the same time enjoy normal returns on one’s investment. What would be the capital gains if the new building was purchased on 85-2008? . Multi-dimensional investment decisions: In a democratic welfare state like India the government requires substantial investment in infrastructure. The decision to do so will depend upon whether the net income earned from the specified investment is higher than the income from another investment after deducting tax. c. 50 lacs is paid as compensation on 203-2008. and it is indeed a temptation to hide income earned and skip paying income tax. R owns two buildings.Similarly in the case of individuals. The company purchases a new building on 10-4-2009 for Rs. Objectives of Tax Planning The prime objectives of tax planning are: a.18 lac is compulsorily acquired by the government on 15-5-2007 for which a sum of Rs. But these are unlawful methods of reducing tax liability and result in economic evils like black money. The tax laws give attractive benefits to investors in these areas. b. This can be successfully prevented by sensible tax planning. Reducing pressure on the legal infrastructure: The long arm of the law invariably catches up with economic offenders. Discharging a citizen’s duty: No one likes to pay tax. e.2. Compute the amount of capital gains for the assessment year 2010-11. income tax law allows a person to reduce from his taxable income certain specific investments.

Hint: Short-term capital gain chargeable to tax for AY 2010-11 = 1350000 Answer: Sale consideration 50. while a trader will be buying trade goods.00.000 Nil 13. VAT on the contrary is a State subject i.000 Less: Cost of acquisition being the depreciated before the date of acquisition by the Government.e.000 Exemption under Section 54D Short-term capital gain Q.50. What is value added tax? How does it operate? Write about the purchase eligibility for input tax credit. the State and the Centre.00.000 + purchased during 2007-08 36. the capital gains shall be determined as follows: Sale consideration 50. How VAT operates: Goods are produced using the materials purchased and then sold by the manufacturer.50. each Indian State and Union Territory makes and enforces rules relating to VAT. However. Thus a manufacturer will be buying raw materials and capital goods.50.000 Less: Depreciated value of the block on 1-4-07 plus cost of asset acquired during the previous year 2007-08 (` 22.. which deals with sales between States (or inter-state sales). . Answer: Sales tax is a subject that is handled at two levels.e.000 value of the block on 1-4-2007 Short-term capital gains 27.000 Less: Exemption under Section 54D As the taxpayer has purchased a new building for setting up another industrial undertaking within 2 years from 20-3-08 exemption u/s 54D = ` 14 lakh 14.000 2010-11 If the new building is purchased on 8-5-08 i.000 ` 14 lakh) 13. Goods are bought and sold by a trader.000 Short term capital gain chargeable to tax for AY 13.50. VAT is applicable to all these purchases and sales.50. This is because VAT essentially covers sales within the State.50. At the Central level we have Central Sales Tax Act.

Under this scheme. inter-state. Q. attracts the levy of VAT.e. Discuss the tax planning for amalgamation/merger and demerger of companies.4. the cascading effect of tax on tax is prevented here also by using VAT input credit. The rate of tax under the scheme is left to the discretion of the respective states. and remit only the balance. raw materials or consumable stores required for manufacturing taxable goods or for packing of such manufactured goods intended for intra-state. collect and pay on his/her sales. VAT is payable as a small percentage of the gross turnover. Purchases eligible for input tax credit: Input credit can be claimed only if the purchases are for any of the following purposes: • • For sale/resale – both intra-state and inter-state Use as containers/packing materials. Answer: Income Tax implications of mergers and demergers: . 50 lakh may opt for the Composition Scheme. • • • • • Purchase from unregistered dealers Purchase from registered dealers who opt for composition scheme Goods purchased for personal use/consumption or provided free of charge as gift Goods imported from other states (remember. within the State. Any such purchase made locally in the case of excise duty. and export sales Use as capital goods required for the manufacture or resale of taxable goods Use in making zero-rated sales Ineligible purchases • • • The following includes a list of purchased which are not eligible.. But the seller can set-off the tax he/she has paid on his/her purchases against the tax he/she has to levy. He/She uses an account called Input Tax Adjustment account to account for input credit. this is a State legislation) Purchase of goods for which invoice is not available Composition scheme: Small dealers who are liable to pay VAT but whose gross turnover does not exceed Rs.

furniture or intangible assets. No deduction is allowed if the asset is sold during the year. if the undertaking was held by the assessee for not more than 36 months. Under different circumstances. The cost of acquisition of the asset and the cost of any improvement on it. However. The following are the tax aspects of such a sale: i) Profits from a slump sale are chargeable as long-term capital gains in the year in which the transfer takes place. or accrued as a result of the transfer of the capital asset: • • The expenditure incurred wholly and exclusively in connection with such transfer. If it used for less than 180 days. the cost of acquisition of a capital asset is determined in the following manner: Special provisions in the case of a slump sale (Sec. or for exploitation of mineral oil. The assessee must be the owner of the assets The assets must be used for business or profession. But. plant.a. . the gain is treated as short-term capital gain. 50B): A slump sale occurs when the assessee disposes off an undertaking that is no longer worth his effort and time. The quantum of depreciation is calculated at the rates prescribed under Rule 5 and Part 1 of the Appendix of the Income Tax Rules. Depreciation Deduction is allowed subject to the following conditions: • • The assets in respect of which depreciation is claimed are building. machinery. or if it is used for scientific research. Provision 1 to Section 48 gives special concession to non-residents and Provision 2 gives special concession to residents with regard to long-term capital gains. • • No depreciation is given on land. depreciation is allowed to the extent of 50%. Tax Implications of transfer of capital assets in a merger or demerger Computation of capital gains (Sections 48 to 51) Capital gains are computed by deducting the following from the full value of the consideration received.

iv) The computation of net worth of the undertaking in the case of slump sale will be supported by a report of a chartered accountant in form 3CEA verifying the calculation Carry forward and set off of losses and unabsorbed depreciation in amalgamations and demergers Provisions for carry forward and set off of accumulated loss and unabsorbed depreciation can be seen with regard to the following: • • • Amalgamations. For this purpose ’Net worth’ is the aggregate written-down book value of the total asset of the undertaking. If the fundamental assumptions are not followed. If there is a change in policies with material impact. While the statutory audit usually covers all accounting standards applicable. List and describe a few important accounting standards for tax audit. . (2) and (3)] Demergers.ii) The net worth of the undertaking being sold is taken as cost. corporate and non-corporate entities should know that some accounting standards are important in making the financial reports. First Out (FIFO) or weighted average. in Section 72A(1). it should be disclosed. The accountants of these entities should make sure these standards are complied with. the fact must be disclosed. Q. If the cost formula to be used is First In. in Section 72A(4) and (5) Reorganization of business. iii) The benefit of indexation will not be available. the following lists are standards of special importance for tax accounts: Accounting standard 1: Disclosure of accounting policies The following disclosures are required: All significant accounting policies should form part of financial statements.5. Answer: Some Important Accounting Standards for Tax Audit: While offering books of accounts for tax audit. in Section 72A(6). Accounting standard 2: Valuation of closing stock The following disclosures are required: • • If the measurement of inventory is at cost or net realizable value. minus the liabilities appearing in the books of accounts.

by notification in the Official Gazette. the Central Government may grant rebate of service tax paid on taxable services which are used as input services for the manufacturing or processing of such goods or for providing any taxable services. This is done to avoid the penal provisions of Section 271B.6. if the company uses straight line for statutory accounting. If the tax audit report is not filed before the due date of filing of return. The rebate may be disallowed if the proceeds of export sales are not received within the time specified by Reserve Bank of India. However. Q. Discuss the exemptions and rebates from service tax. the audit report may be filed first before the due date of filing even if the return of income is not filed. or individual special order. So. . To this extent the entity should state its accounting policy on revenue recognition clearly and ensure consistent compliance with the policy. exempt generally or subject to such conditions as may be specified. The rates of depreciation are also provided for different classes of assets. Filing of tax audit report and penalty The tax audit report u/s 44AB has to be filed along with the return of income of the assessee. penalty would be levied u/s271B. Accounting standard 22: Income tax This is described in detail in Section 13.Accounting standard 5: disclosure Any material effect should be disclosed. the depreciation has to be re-calculated using WDV method. Accounting standard 9: Revenue recognition The focus of tax authorities will be on revenues that may escape assessment. taxable service of any specified description from the whole or any part of the service tax. the fact should be indicated. Accounting standards 10 & 6: Fixed assets and depreciation respectively The only method of depreciation permitted for tax accounts is the written down value method (WDV). Rebate (Section 93A) Where any goods or services are exported.6. Where it is not ascertainable. it may. Answer: Exemptions and Rebates in Service Tax Law: Exemptions (Section 93) If the Central Government is satisfied that it is necessary in the public interest so to do.

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