DIFFERENT ASPECTS OF TAX PLANNING

Points of distinction Tax planning Tax Avoidance Tax Evasion Tax Management
Definition It is a way to reduce It is an exercise by It is the illegal way It is a procedure to
tax liability by taking which the assessee to reduce tax comply with the
full advantages legally takes liability by provisions of the
provided by the Act advantage of the deliberately law.
through various loopholes in the Act. suppressing income
exemptions, or sale or by
deductions, rebates increasing
& relief. expenses, etc.,
which results in
reduction of total
income of the
assessee.
Feature Tax planning is a Tax avoidance is a Tax evasion is illegal, It is implementation
practice to follow practice of bending both in script & or execution part of
the provisions of law the law without moral. taxation
within the moral breaking it. department of an
framework. organisation.
Object To reduce tax To reduce the tax To reduce tax To comply with the
liability by applying liability to the liability by applying provisions of laws
script & moral of minimum by unfair means.
law. applying script of
law only
Treatment of Law It uses benefits of It uses loopholes in It overrules the law. It implements the
the law. the law. law.
Practice It is tax saving. It is tax hedging. It is tax It is tax
concealment. administration.
Need It is desirable It is avoidable It is objectionable It is essential.

Morality It is moral in nature. It is immoral in It is illegal. It is duty.

nature

AREAS OF CORPORATE TAX PLANNING

Some of the important areas where planning can be attempted in an organised manner are as under:
AREAS OF CORPORATE TAX PLANNING
 Form of organisation / ownership pattern
 Locational aspects
 Nature of business
 Tax planning in respect of corporate restructuring
 Tax planning in respect of financial management
 Tax planning with respect of Non-Resident Companies
 Tax planning in respect of employees remuneration

FORM OF ORGANISATION : The selection of particular form of organisation depends not only on the magnitude of
financial requirements and owner’s liability, but also on the tax considerations. Normally, depending upon the level of
operation, expected profitability, need for external financing and expected requirements of technical expertise, a suitable
form can be chosen.
In view of the continuity of business, the benefits arising out of limited liability, organised accounting and the overall long-
term tax benefits flowing to the company form of organisation, the corporate enterprises may be regarded as an effective
instrument of tax planning. The company being a separate legal entity confers certain valuable benefits in the matter of
tax planning to its shareholders and the persons connected with the management of the company. As in this chapter we
are studying Corporate Tax Planning, therefore, we shall be discussing the benefits associated with corporate
form of organisation only.
Company Form of Organisation
The important tax privileges and advantages to a company over the other forms can be summarised as under:
(a) Deduction of Remuneration for managing persons: Remuneration is allowed for the persons who are managing
the affairs of the company and also owning its shares.
(b) Clubbing provisions do not apply: The provisions relating to clubbing of income u/s 64 of the Act do not apply even
if the business is carried on by family members through a company, which ultimately leads to reduction in liability
to tax on the part of the individual members.
(c) Dividend from Indian company is exempt: Dividend received by the shareholders from any Indian company as
referred to in Section 115-O is exempt under Section 10(34) of the Act, However if the amount of dividend
received exceeds Rs. 10,00,000 then such excess is taxable @ of 10% under Section 115BBDA in the hands of
shareholder.
(d) Deductions available to companies results in minimization of incidence of tax substantially:
Companies are subjected to flat rate of tax, regardless of quantum of their income. The tax rate on domestic
companies is 30% plus applicable surcharge and cess and @ 25% in case of a company having turnover less
than 250 crores in financial year 16-17 i.e. assessment year 2018-19. This, however, may not seen to be an
advantage in view of low slab rates applicable to sole proprietorships, but when we look at the total incidence of
tax after taking into account the various deductions allowed to companies and the scheme of perquisites, the real
owners of companies to stand to benefit.
(e) Certain benefits to company only: There are certain special tax concessions, allowances and deductions given
under the Act available only to the company form of business enterprises such as Section 32AC, Section 33AC,
Section 36(a)(ix) and 35D of the Act.

No limitations with regard to set off and carry forward of losses: Widely held companies do not find limitations and
restrictions in the matter of set off and carry forward of losses whereas closely held companies have certain
limitations or restrictions in this respect under Section 79 of the Act.
In the case of companies in which the public are not substantially interested, losses will not be carried forward
and set off unless the shares of the company carrying atleast 51% of the voting power were beneficially held by
the same person(s) both on the last day of the previous year in which loss occurred and on the last day of the
previous year in which brought forward loss is sought to be set off. However, if a change in voting power as
aforesaid takes place consequent upon the death of a shareholder or on account of transfer of shares by way of
gift to any relative of the shareholder making such gift, then the aforesaid disability does not get attracted.
This disability is also not attracted where change in the shareholding of an Indian company which is a subsidiary
of a foreign company, takes place as a result of amalgamation or demerger of a foreign company subject to the
condition that fifty one percent shareholders of the amalgamating or demerged foreign company continue to be
the shareholders of the amalgamated or the resulting foreign company.
Amendment made by Finance Act, 2018
Section 79 of the Act has been amended in order to provide that the provisions of Non Carry forward of loss will not be
applicable in case of a Company whose resolution plan has been approved under Insolvency and Bankruptcy
Code, 2016 (IBC, 2016).
For Example, If Loss relates to FY 2015-16 which is tested for set off in FY 2018-19, no testing is required to be made for
51% criteria in case of Companies under Insolvency.
(b) Provisions of deemed dividend u/s 2(22)(e) applicable to closely held company only: The provisions of deemed
dividend in respect of advances or loans to shareholders, or any payment on behalf of shareholders or any
payment for the individual benefit of a shareholder are applicable to a closely held companies under Section
2(22)(e) of the Act. However this benefit is not available from assessment year 2019-20 due to amendments
introduced by Finance Act-2018.
Now, Section 115-O and related sections have been amended in order to provide that dividends referred to in Section
2(22)(e) of the Act are also part of Section 115-O and chargeable to DDT @ 30% (instead of 20.5553%).
However, no change has been made in Section 115BBDA and Section 10(34) of the Act. Post Amendment, It can be
inferred that:
♦ Deemed Dividend u/s 2(22)(e) is chargeable to DDT @ 30% in hands of closely held co.
♦ Since Section 115BBDA of the Act do not cover above dividend, hence the same is wholly exempt from tax under
Section 10(34) of the Act even exceeds Rs. 10 lakhs.
♦ TDS under Section 194 of the Act is not required to be deducted since such dividend is now covered under Section 115-
O of the Act.
(c) Conversion from closely held company to widely held company would not result in transfer of ownership and
no tax liability: The conversion would not be treated as transfer of ownership of the business and hence, there
shall be no liability for capital gains tax or income tax in the hands of the closely held company or the new widely
held company, due to conversion.
Registration of Charitable institution as Company
Associations having charitable object viz., promotion of commerce, art, science, religion, charity or any other useful object
by nature, can be registered as companies under Section 25 of the Companies Act, 1956 (Now Section 8 of Companies
Act, 2013) and avail the benefits of a company form of organisation from the point of view of the Companies Act, as well
as various tax concessions available to widely held companies under the Act and also claim exemption from Income tax
under section 11 of the Act subject to the conditions specified in Section 13 thereof.
(B) Location of Business Aspect
Tax planning is relevant from location point of view. There are certain locations which are given special tax treatment.
Some of these are as under:
(a) Newly established undertaking in free trade zones etc.: Full exemption under Section 10A is available in the case
of a newly established Industrial undertaking in free trade zones, etc. (not allowed w.e.f. AY 2012-13).
(b) Newly established units in SEZ: Full exemption under Section 10AA for initial five years, 50% for subsequent five
years and further deduction of 50% for a further period of five years in case of a newly established units in SEZ on
or after 1.4.2005.
(c) Newly established 100% EOU: Full exemption under Section 10B for 10 years in the case of a newly established
100% export-oriented undertaking. (Not allowed w.e.f. AY 2012-13).
(d) Developer of SEZ: Deduction under Section 80-IAB in respect of profits and gains by an undertaking or an enterprise
engaged in the development of SEZ.
(e) Industrial undertaking in industrially backward state or district: Deduction under Section 80-IB is allowed in the
case of a newly set up industrial undertaking in an industrially backward State or district.
(f) Industrial undertaking in certain special category States: Deduction under Section 80-IC is available in case of
newly set up industrial undertaking or substantial expansion of an existing undertaking in certain special category
States.
(g) Hotels and convention centres in specified area: Deduction under Section 80-ID is allowed in respect of profits and
gains from business of hotels and convention centres in specified area or a hotel at world heritage sites.
(h) North-eastern States: Deduction under Section 80-IE is allowed in respect of certain undertakings in North-Eastern
States.
(i) Extra Depreciation in notified backward areas: With effect from AY 2016-17, any assessee setting up a new
manufacturing undertaking in the states of Andhra Pradesh, Telangana, Bihar or West Bengal will be eligible for
an extra depreciation of 15% of the cost of the new asset.

(C) Nature of Business

Tax planning is also relevant while deciding upon the nature of business. There are certain businesses which are granted
special tax treatment. Some of these are as follows:
(a) Newly established units in Free Trade Zones [Section 10A – Not available w.e.f. AY 2012-13], SEZ [Section 10AA] and
EOU [Section 10B- Not available w.e.f. AY 2012-13].
(b) Tea Development Account, Coffee Development Account and Rubber Development Account [Section 33AB];
(c) Site Restoration fund [Section 33ABA];
(d) Specified business eligible for deduction of Capital Expenditure [Section35AD];
(e) Amortisation of certain preliminary expenses [Section 35D];
(f) Expenditure on prospecting for certain minerals [Section 35E];
(g) Special reserve created by a financial corporation under Section 36(1)(viii);
(h) Special provisions for deduction in the case of business for prospecting for mineral oil [Section 42 and 44BB];
(i) Special provisions for computing profits and gains of business on presumptive basis [Section 44AD];
(j) Special provisions in the case of business of plying, hiring or leasing goods carriages [Section 44AE];
(k) Special provisions in the case of shipping business in the case of non-residents [Section 44B];
(l) Special provisions in the case of business of operation of aircraft [Section 44BBA];
(m) Special provisions in the case of certain turnkey power projects [Section 44BBB];
(n) Special provisions in the case of royalty income of foreign companies [Section 44D];
(o) Special provisions in case of royalty income of non-residents [Section 44DA];
(p) Certain income of offshore banking units and International financial service centre [Section 80-LA];
(q) Profits and gains of industrial undertakings or enterprises engaged in Infrastructure development etc. [Section 80-IA].
(r) Profits and gains of an undertaking or an enterprise engaged in development of SEZ [Section 80-IAB];
(s) Profits and gains from certain industrial undertaking other than infrastructure development [Section 80-IB];
(t) Special provisions in respect of certain undertakings or enterprises in certain category States [Section 80-IC];
(u) Deduction in respect of profits and gains from business of hotels and convention centres in specified area or a hotel at
world heritage site [Section 80-ID].
(v) Special provisions in respect of certain undertakings in North-Eastern States. [Section 80-IE];
(w) Profits and gains from the business of collecting and processing of bio-degradable waste [Section 80JJA];
(x) Employment of new workmen [Section 80JJAA];
(y) Special tax rates under Section 115A, 115AB, 115AC, 115AD, 115B, 115BB, 115BBD, 115BA and 115D.

Tax Planning in Respect of Employee’s Remuneration

As focus of this chapter is restricted to corporate tax planning, therefore, we shall discuss tax planning for employees
remuneration from the point of employer only. A company is allowed full deduction in respect of salary, allowances, bonus
or any other remuneration paid to the employee as per method of accounting followed by it.
An Employer corporate should take following points in consideration with respect to employees remuneration:
a) Residential accommodation to an employee:
Accommodation owned by employer- following expenses are allowed:
1. Current repairs, Insurance premium and rates and taxes of premises under section 30. However, deduction of rates
and taxes is subject to Section 43B.
2. Depreciation of such premises u/s 32.
Following expenses are allowed if accommodation is hired:
1. Current repairs, Rent, Insurance premium and rates and taxes. Rates and taxes deduction is subject to section 43B
If furniture is provided in accommodation then depreciation is allowed in case of owned furniture and actual hire
charges paid or payable are allowed in case of hired furniture.
b) Bonus or commission paid to employees is allowed as deduction under section 36(1)(ii), if it is not otherwise payable
as distribution of profits to employees. Also this deduction is subject to Section 43B.
c) Salary to research personnel (excluding perquisites) for 3 years prior to date of commencement of business is
allowed as deduction in year of commencement of business to the extent allowed by prescribed authority. In this
case research should be related with business of assessee.
d) Amount contributed by employer to RPF or Approved superannuation fund account or to National pension
scheme or Approved Gratuity fund account of an employee is allowed as deduction if contributed till due date.
(subject to Section 43B).
e) Amount deducted by employer from salary of employee for contributing it to employee benefit scheme such as
EPF etc. then such amount shall be added into the income of employer u/s 2(24)(x). However if employer
deposits this amount to employee’s benefit fund in due time then such amount is allowed as deduction u/s
36(1)(va).
f) Any payment made under the head salaries to an employee outside India or to a non resident shall not be allowed as
deduction u/s 40(a)(iv) if, neither tax is paid thereon nor deducted on it as TDS.
g) If employer pays tax on non monetary perquisite provided to employee (which is chargeable in hands of employee)
then such tax paid by employer is exempt in hands of employee u/s 10(10CCC), however, deduction shall be
disallowed to the employer u/s 40(a)(v) in respect of such tax paid by employer on behalf of employee.
TAX PLANNING MANAGEMENT CELL
Companies having effective tax planning cells (departments) can plan their transactions with a view to attract the least
incidence of tax. Organisation of such a cell can be justified on the following grounds:
(a) Complexity and volume of work: Where the volume of tax work to be handled is large and highly complex, then it is
required to appoint a special tax expert along with the required staff.
(b) Separate Documentation: Documentation is an indispensable ingredient of tax planning. An assessee has to keep
reliable, complete and updated documentation for all the relevant tax files so that the documentary evidence can
be made available at a short notice whenever it is required. In absence thereof, an assessee may lose a case for
want of proper documentary evidence.
(c) Data collection: The staff concerned with taxation has to collect and keep on collecting data relating to latest
circulars, case laws, rules and provisions, and other government notifications to keep abreast of the current
developments. This could also guide them in any particular area, when such guidance is needed.
(d) Integration: Tax planner should be consulted by all the departments of the company to know the impact of taxation on
their decisions. It would be necessary to integrate and properly link all the departments of the company with the
tax planning department. Any project or blue print may have a tax angle. This has to be identified early enough to
facilitate better tax compliance and availing of the several incentives.
(e) Constant Monitoring: In order to obtain the intended tax benefits, persons connected with tax management should
ensure compliance of all the pre-requisites, like procedures, rules etc. Besides, there should be constant
monitoring, so that all the tax obligations are discharged and penal consequences avoided.
(f) Developing tax effective alternatives: A managerial decision could be assumed to have been well taken only if all
the pros and cons are considered. A tax planner could guide important decisions, by considering varieties of
alternatives and choices.
(g) Take advantage of various allowances and deductions: A tax manager has to keep track of the provisions relating
to various allowances, deductions, exemptions, and rebates so as to initiate tax planning measures.

Tax Planning Relating to Corporate Restructuring : Corporate restructuring involves Merger, Demerger,
Reverse Merger etc of companies. This topic is covered in lesson Business Restructuring.
Tax Planning in Relation to Financial Management Decisions
Following points need to be considered while planning Financial management decisions:
(a) Expenses on issue of debentures/deposits should be after setting up of business: When a company raises long
term loans from financial institutions or by way of public issue of debentures or inviting deposits from the public, it should
plan that the expenses incurred on such issues of debentures or expenses towards stamp duty, registration fees and
lawyer’s fees should be incurred only after the date of the setting up of the business.
(b) Interest paid for acquisition of fixed assets to be capitalized: The interest paid before the commencement of
production but after setting up of the business on loans taken by the company for the acquisitions of its plant and
machinery and other assets, forms part of the actual cost of the asset and it should be capitalized in actual cost of the
asset. Thus, the company would be allowed to capitalise the expenditure and claim a higher depreciation and investment
allowance.
(c) Use of borrowing to finance purchase of fixed assets: The company should also plan the optimum use of the
share capital and the borrowed funds. Note that the borrowings should be utilised as far as possible for the acquisition
and installation of assets like buildings, plant and machinery so that interest can be capitalised for the period after setting
up of the acquired assets like buildings, plant and machinery but before the commencement of production. The interest
and higher amount of depreciation (due to capitalisation of expense) may be claimed as revenue expenditure pertaining to
the business of the company.
(d) Purchase of depreciable asset from borrowings or on hire: The company should also plan to purchase the
depreciable assets on credit terms and an agreed amount of interest can be paid on such credit purchases or the
company may purchase these company assets on the basis of the hire purchase agreement enabling the company to
claim the amount of interest paid as revenue business expenditure. The company would also be entitled to claim either
the depreciation for use of the asset or may treat the hire charges as the rent for the asset in the normal course of
business and claim deduction on revenue account.
Purchase vs. Lease
(i) In case of purchase, depreciation is allowed under Section 32, while depreciation will not be allowed u/s 32 in case of
Lease.
(ii) In case of Lease, revenue expenditure i.e., lease rent will be allowed as deduction u/s 37(1). Repairs are also
allowable under Section 31.
(iii) In case of Purchase, Insurance Premium, Current repairs are allowed as deduction u/s 31. Further, Interest on
borrowed funds is deductible under section 36.
(iii) Purchase of machinery would create a tangible asset which can also be mortgage in the hours of need. While it is not
so in case of Lease.
(e) Taking the source of finances i.e. Capital or borrowings:
(i) Cost of raising finance in case of capital is not deductible as revenue expenditure but amortised under Section
35D of the Act. If such expenditure is incurred after the commencement of the business, Section 35D is applicable
provided the expenditure is undertaken for expansion purposes in case of industrial undertaking.
(iii) Dividend is not deductible either for pre commencement period or in the post commencement period in India;
(iv) Cost of borrowing funds in case of pre commencement period is capitalised and in case of post
commencement period, it is deductible fully in the year.
(iv) Interest is capitalised for pre-commencement period, i.e. added to the cost of project (cost of fixed assets) and
its depreciation is calculated on capitalised value of assets. In post commencement period, interest is fully
deductible.

Que 1 : X Ltd. is a widely held company and is in need of funds to the tune of Rs 50 lacs. The following alternative are available:
Particulars Alt-1 Alt-2 Alt-3

Share capital 50,00,000 20,00,000 10,00,000

12% Debentures — 20,00,000 15,00,000
15% Loan from Bank — 10,00,000 25,00,000
Earning before Interest and Taxes is expected to be 30%. Rate of dividend of the company from last 5 years has not been less than
18% and date of dividend declaration is 30th June every year. Which alternative should the company opt with reference to tax
planning? Dividend tax is payable @ 17.65% . Tax rate applicable is 30% + cess 4%. (Ans : Alt-3 is better)

Que 2 A Ltd. wants to acquire a machine. It will cost Rs 1,50,000. It is expected to have a useful life of 3 years. Scrap
value will be Rs 40,000. If the machine is purchased through borrowed funds, rate of interest is 15% p.a. The loan is
repayable in three annual instalments of Rs. 50,000 If the machine is acquired through lease, lease rent would be Rs
60,000 p.a. Profit before depreciation and tax is expected to be Rs. 1,00,000 every year. Rate of depreciation is 15%.
Average rate of tax may be taken at 33.99%.
A Ltd. seeks your advice whether it should:
(i) Acquire the machine through own funds, or borrowed funds; or
(ii) Take it on lease.
Advice whether asset should be taken on lease or on purchase. Whether it should be acquired through own funds or
borrowed funds? Present value factor @ 10% for first, second and third year is 0.909, 0.826, 0.751 respectively.
Note: The Profit or loss on sale of the asset is to be ignored.
Solution
(I) PURCHASING MACHINE
(i) Through own Funds
Particulars Year (Amount in Rs.)
0 1 2 3
Cash Outflow (1,50,000) -- -- --
Less: Tax Relief on Dep.@ 33.99% (ROff) − 7,650 6,500 5,525
Less: Sale Proceeds of machine – – – 40,000
Total (1,50,000) 7,650 6,500 45,525
Present value Factor @10% 1 0.909 0.826 0.751
Present Value of Cash Outflows (1,50,000) 6,954 5,369 34,189
Net Present Value of Cash Inflows (–) Outflows (1,03,487)
(ii) Through Loan Funds
Particulars Year (Amount in Rs.)
0 1 2 3
Cash Outflows:
Loan repayment (50,000) (50,000) (50,000)
Interest Payment (22,500) (15,000) (7,500)
Cash Inflow
Less: Tax Relief on Depreciation/Loss 7,650 6,500 5,525@ 33.99%
Less: Tax Relief on Interest 7,650 5,100 2,550
Sale Proceeds of machinery - - 40,000
Total (57,200) (53,400) (9,425)
Discounting factor @ 10% 1 0.909 0.826 0.751
Present Value of Cash outflows Nil (51,995) (44,108) (7,078)
Net Present Value of Cash Outflows (1,03,181)
(II) ACQUIRING MACHINE ON LEASE
Particulars Year (Amount in Rs.)
0 1 2 3
Cash Outflow on Lease rent: – (60,000) (60,000) (60,000)
Less: Tax Relief on Lease Rent @ 33.99% – 20,390 20,390 20,390
Net Cash Outflow (39,610) (39,610) (39,610)
Discounting factor @ 10% 1 0.909 0.826 0.751
PV of Cash Outflows − (36,005) (32,718) (29,747)
Net Present Value of Cash Outflows (98,470)
Conclusion: Cash outflow is least if machine is acquired on lease. Hence, machine shall be acquired on lease.
Working Notes:
Calculation of Tax relief on Depreciation and Balancing Allowance
Year Opening Balance Depreciation@ 15% Tax Relief @33.99%
1 1,50,000 22,500 7,650
2 1,27,500 19,125 6,500
3 1,08,375 16,257 5,525
19,675