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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.

50 lacs is paid as compensation on 203-2008. Tax planning provides the perfect avenue to remain a responsible citizen while paying the least amount of tax. e. and this helps him optimize his decisions. and it is indeed a temptation to hide income earned and skip paying income tax.18 lac is compulsorily acquired by the government on 15-5-2007 for which a sum of Rs.2.14 lac for the purpose of setting up another industrial undertaking. The tax laws give attractive benefits to investors in these areas. but the process is tedious and puts an enormous burden on the legal system. d. R owns two buildings. c. the depreciated value of the block on 1-42007 being 22.Similarly in the case of individuals. Q. Reducing pressure on the legal infrastructure: The long arm of the law invariably catches up with economic offenders. 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. Reduction of tax liability by utilizing the benefits available in the tax laws. This can be successfully prevented by sensible tax planning. The company purchases a new building on 10-4-2009 for Rs. b. Informed and pragmatic financial decisions: A person adds the dimension of tax incidence in his decision-making on financial matters.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. and by taking up these investments one can contribute to nation-building and at the same time enjoy normal returns on one’s investment. Multi-dimensional investment decisions: In a democratic welfare state like India the government requires substantial investment in infrastructure. Discharging a citizen’s duty: No one likes to pay tax. Objectives of Tax Planning The prime objectives of tax planning are: a. income tax law allows a person to reduce from his taxable income certain specific investments. But these are unlawful methods of reducing tax liability and result in economic evils like black money. education and healthcare. Compute the amount of capital gains for the assessment year 2010-11. What would be the capital gains if the new building was purchased on 85-2008? .50 lacs of the said buildings which had been purchased on 30-4-1996 for Rs. or make purchases without bills and escape sales tax.

e. which deals with sales between States (or inter-state sales).50.000 Less: Cost of acquisition being the depreciated 22.000 ` 14 lakh) 13. before the date of acquisition by the Government.50.000 value of the block on 1-4-2007 Short-term capital gains 27. VAT on the contrary is a State subject i.50.000 Short term capital gain chargeable to tax for AY 13.00. VAT is applicable to all these purchases and sales.000 Nil 13. This is because VAT essentially covers sales within the State. the State and the Centre. while a trader will be buying trade goods.50. the capital gains shall be determined as follows: Sale consideration 50.3. At the Central level we have Central Sales Tax Act. Thus a manufacturer will be buying raw materials and capital goods. However.50.50.e.Hint: Short-term capital gain chargeable to tax for AY 2010-11 = 1350000 Answer: Sale consideration 50. Answer: Sales tax is a subject that is handled at two levels.00. What is value added tax? How does it operate? Write about the purchase eligibility for input tax credit.00. each Indian State and Union Territory makes and enforces rules relating to VAT.000 Less: Depreciated value of the block on 1-4-07 plus cost of asset acquired during the previous year 2007-08 (` 22.. How VAT operates: Goods are produced using the materials purchased and then sold by the manufacturer.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. .50.000 2010-11 If the new building is purchased on 8-5-08 i.000 + purchased during 2007-08 36.000 Exemption under Section 54D Short-term capital gain Q. Goods are bought and sold by a trader.

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. Any such purchase made locally i. 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. the cascading effect of tax on tax is prevented here also by using VAT input credit. Under this scheme. Answer: Income Tax implications of mergers and demergers: .as in the case of excise duty. Q. 50 lakh may opt for the Composition Scheme.4. and remit only the balance. within the State. collect and pay on his/her sales. 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. Discuss the tax planning for amalgamation/merger and demerger of companies. The rate of tax under the scheme is left to the discretion of the respective states. inter-state.e. But the seller can set-off the tax he/she has paid on his/her purchases against the tax he/she has to levy. • • • • • 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. attracts the levy of VAT. raw materials or consumable stores required for manufacturing taxable goods or for packing of such manufactured goods intended for intra-state.. VAT is payable as a small percentage of the gross turnover. He/She uses an account called Input Tax Adjustment account to account for input credit.

However. or if it is used for scientific research. if the undertaking was held by the assessee for not more than 36 months. The cost of acquisition of the asset and the cost of any improvement on it. 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. 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. furniture or intangible assets. machinery. The quantum of depreciation is calculated at the rates prescribed under Rule 5 and Part 1 of the Appendix of the Income Tax Rules. the cost of acquisition of a capital asset is determined in the following manner: Special provisions in the case of a slump sale (Sec. The assessee must be the owner of the assets The assets must be used for business or profession. No deduction is allowed if the asset is sold during the year. But. If it used for less than 180 days. plant. 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. or for exploitation of mineral oil. the gain is treated as short-term capital gain. Depreciation Deduction is allowed subject to the following conditions: • • The assets in respect of which depreciation is claimed are building. . depreciation is allowed to the extent of 50%. • • No depreciation is given on land.a. 50B): A slump sale occurs when the assessee disposes off an undertaking that is no longer worth his effort and time. Under different circumstances.

the fact must be disclosed. First Out (FIFO) or weighted average. If the cost formula to be used is First In. While the statutory audit usually covers all accounting standards applicable. 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. (2) and (3)] Demergers. corporate and non-corporate entities should know that some accounting standards are important in making the financial reports. 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. Accounting standard 2: Valuation of closing stock The following disclosures are required: • • If the measurement of inventory is at cost or net realizable value.ii) The net worth of the undertaking being sold is taken as cost. iii) The benefit of indexation will not be available. List and describe a few important accounting standards for tax audit. Q. Answer: Some Important Accounting Standards for Tax Audit: While offering books of accounts for tax audit. in Section 72A(6). minus the liabilities appearing in the books of accounts. The accountants of these entities should make sure these standards are complied with. it should be disclosed. in Section 72A(1). If the fundamental assumptions are not followed.5. If there is a change in policies with material impact. . For this purpose ’Net worth’ is the aggregate written-down book value of the total asset of the undertaking. in Section 72A(4) and (5) Reorganization of business.

6. To this extent the entity should state its accounting policy on revenue recognition clearly and ensure consistent compliance with the policy. If the tax audit report is not filed before the due date of filing of return. the fact should be indicated. 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. penalty would be levied u/s271B. exempt generally or subject to such conditions as may be specified. So. by notification in the Official Gazette. Where it is not ascertainable. However. 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). 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. Q. if the company uses straight line for statutory accounting. or individual special order. This is done to avoid the penal provisions of Section 271B. 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. the audit report may be filed first before the due date of filing even if the return of income is not filed. The rates of depreciation are also provided for different classes of assets. Accounting standard 9: Revenue recognition The focus of tax authorities will be on revenues that may escape assessment.6. The rebate may be disallowed if the proceeds of export sales are not received within the time specified by Reserve Bank of India. Accounting standard 22: Income tax This is described in detail in Section 13.Accounting standard 5: disclosure Any material effect should be disclosed. taxable service of any specified description from the whole or any part of the service tax. Discuss the exemptions and rebates from service tax. it may. Rebate (Section 93A) Where any goods or services are exported. the depreciation has to be re-calculated using WDV method. .