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Tax planning And Mergers and acquisitions

FROM PRIYANKA JOHAR

INTRODUCTION

Tax Planning in India is an application to reduce tax liability through the finest use of all accessible allowances, exclusions, deductions, exemptions, etc, to trim down income or capital profits It is arrangement of one’s financial affairs so that legal provisions won’t violate. It carried out the full enjoyment of Tax Rebates, Tax Exemptions, and Tax Deductions. It is within the four corners of LAW and regarded as fully legitimate. A charge or a sum of money levied on person or property for the benefit of state. It is a payment to Government. It is a kind or charge imposed by the state upon the citizens. Profit = Revenue – Expenses.

Tax planning basically deals with:  How tax is calculated  How tax can be evaded

How tax can be properly planned.

 How various situations affect the tax planning and management?

What all persons or committees are involved in the management and planning of Tax and Liability?

Income tax
Income Tax is all income other than agricultural income levied and collected by the central government and shared with the states. According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the finance act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year. In the Income Tax any income earned by a person is broadly categorised into five heads of income. Any income earned to be taxed must come under any of the five heads of income. The five heads of income are:  Income under Head Salaries This head taxes the income earned by an individual as salary from any firm or organisation.  Income from House Property This head taxes rental income received by any person from way of renting of any immoveable property.  Profits and Gains of Business or Profession This head of income broadly covers income earned by a person as a result of some business or professional set-up by him.

 Capital Gains: This head of income taxes the income earned on sale of any investment in form of gold, precious ornaments, shares, etc or immoveable property.  Income from other Sources This head of income covers any income which is not chargeable to tax under any of the above heads of income. Any income including gambling or profit/loss on running of race horses, camels, interest income , etc are chargeable to tax under this head of income.

Assessment Year
The period of time in which the tax liability is assessed and the payment of Tax is made upon the income earned in previous year is known as Assessment Year

Previous Year
It is the year in which income is earned.

Financial Year
It is the year in which new tax laws are prepared in the Finance Act are implemented

Assessee
Assessee means a person by whom any tax or any other sum of money is payable under Income tax Act. It includes deemed assessee [section 2(7) of Income Tax Types of assessee:  Sole proprietor  Hindu Undivided Family.  Partnership Firm  Company

Sole Proprietor Merits :

Pay tax as per slab defined by Finance Act.

 Deductions that can be claimed by individual.  Sec 80 CCC-: Contribution to Pension Fund.  Sec 80 D-: Medical health insurance for family members.  Sec 80 DD-: Expenditure on Medical Treatment for disabledependant.  Sec 80 E-: Interest paid on loan of higher studies.  Sec 80 G-: Donation to approve funds.  Sec 80 GGA-: Payments for scientific research.  Sec 80-: Income of a disable person.

 Sec 80JJA-: Profit from business collecting and processing biodegradable waistes.

Demerits:
 Unlimited liability.  Don’t get deduction against payment of salaries.
 Cannot raise additional capital by way of shares and debentures issue.

 No money received as interest on capital.
 May have to liquidate assets for discharging liability of companies.

Hindu undivided
It is similar to individual or sole proprietor. It allowed as many deductions as allowed to Sole Proprietor and the salary of KARTA is fully tax deductible.

Partnership
 Firm is registered under Partnership Act.  It is limited to 20 person only.  If limit of person exceed then firm adopt company form of business organization.

Tax liability
 Pay tax @30% + 10% surcharge + 3% Education cess.  Tax deducted under Sec 80G, 80GGA and 80JJA.  Allowed deduction similar to individuals and HUF.

 Interest o capital is allowed as deduction.
 Probability of raising additional capital can be solved by admitting a new partner.

 Remuneration paid is allowed as deduction.

Demerits:
 Tax liability is similar to company form of organization but cannot raise capital by issue

of share.
 Liability of partners is limited to the extent capital contributed.  If Provident Fund wont comply with 184 Section of Income Tax it is treated as AOP

(Association of Persons).
 It comes to closure if lunacy of partners is found.

Company
It is as per Indian’s Company’s Act 1956 and an artificial person or entity.

Tax liability
 Pay tax @30% + 10% surcharge + 3% Education cess.

 Maximum amount of tax as no tax slab is available.  To pay FBT and DDT and Wealth Tax.
 Indirect taxes like custom duty, excise duty, service tax, VAT.  Deduction on interest paid on debentures and borrowings.

 Salary paid is fully deductible.

 Depreciation on assets is fully deductible

Income Tax Exemption limit- 2009-10
Basic Slabs for Individuals Exemption limit raised from Rs. 1, 50,000 to Rs. 1, 60,000 Exemption limit raised from Rs. 1, 50,000 to Rs. 1, 60,000 Up to Rs.1, 60,000 ……………… …………………………………. NIL

Rs. 1, 60,000 to Rs.3, 00,000 ………………………………………….10 % Rs. 3, 00,000 to Rs. 5, 00,000 .. ……………………………………….. 20 % Above Rs. 5, 00,000…………………………………………………... 30 %

Basic Slabs for Women under the age of 65 years old Exemption limit raised from Rs. 1, 80,000 to 1, 90,000 Up to Rs. 1, 90, 00…………………………………………………… NIL

Rs. 1, 90,000 to Rs. 3, 00,000 …………………………………………10 % Rs. 3, 00,000 to Rs. 5, 00,000 ………………………………………….20 % Above Rs. 5, 00,000 …………………………………………………. 30 %

Basic Slabs for Senior Citizen (Over 65 years): Exemption limit raised from Rs. 2, 25,000 to Rs. 2, 40,000 Up to Rs. 2, 40,000 ………………………………………………… NIL

Rs. 2, 40,000 to Rs.3, 00,000 ………………………………………… 10 % Rs. 3, 00,000 to Rs. 5, 00,000 ………………………………………. 20%

Above Rs. 5, 00,000…………………………………………………… 30%

Taxes in India are of two types,
 Direct Tax  Indirect Tax.

Direct taxes
These are those whose burden falls directly on the taxpayer like  Income Tax  Wealth Tax
  

Corporate Tax Fringe Benefit Tax Dividend Decision Tax

It is levied on Income and Assets. Tax Payer is tax Bearer. In it burden of tax cannot be shifted. Slabs are applicable. Tax planning avenues are available. It is regulated under Income Tax, Companies Act, and Partnership act. It is collected and monitored by CBDT. It is levied upon goods and services.

Indirect taxes

Tax payer is tax Bearer. Burden of tax can be shifted. There is no system of slabs No such avenues is available. Regulated under Sales Tax and Excise Duty. It is collected by Board of Excise and Customs

The burden of indirect taxes can be passed on to a third party like  Sales/ CST/ VAT
 

Excise Customs Duty

 Service Tax  Entertainment Tax

Total income of an individual

 The total income of an individual is determined on the basis of his residential status in India.

Residence Rules An individual is treated as resident in a year if present in India  for 182 days during the year or

 For 60 days during the year and 365 days during the preceding four years. Individuals

fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal for Indian citizens residing abroad or leaving India for employment abroad.) A resident who was not present in India for 730 days during the preceding seven years or who was nonresident in nine out of ten preceding years I treated as not ordinarily resident. In effect, a newcomer to India remains not ordinarily resident.

For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

Non-Residents and Non-Resident Indians

Residents are on worldwide income. Nonresidents are taxed only on income that is received in India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a nonresident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India. Capital gains on transfer of assets acquired in foreign exchange is not taxable in certain cases. Non-resident Indians are not required to file a tax return if their income consists of only interest and dividends, provided taxes due on such income are deducted at source. It is possible for non-resident Indians to avail of these special provisions even after becoming residents by following certain procedures laid down by the Income Tax act.

Status Resident and ordinarily resident Resident but not ordinary resident Non-Resident

Indian Income Taxable Taxable Taxable

Foreign Income Taxable Not Taxable Not Taxable

Needs and Objectives of Tax planning

 It is done for the reduction of Tax Burden. 

To avoid any sort of litigation.

 To avoid any type of raid and penalty.
 To avail the benefit of concessions and exemptions given under law.  The tax planning avenues provide a financial cushion or backup for the use of

contingencies in future.
 For preparation and maintenance of systematic records.

 To discharge the responsibility of a good citizen.

Perquisites of Tax planning

 To have full usage of tax planning.  To evaluate fully tax planning avenues.  To consider all direct and indirect taxes.
 It should be done as guided by Tax

Advantage of Tax Planning

 It helps in conceiving of and implementing various strategies in order to minimize the amount of taxes paid for a given period  The advantage of tax planning is that it will give you a time to choose the products that suits your requirements as per defined goal  It provides the systematic way which gives you greater advantage of rupee cost

averaging as well as liquidity (low burden on wallet)like Instead of investing Rs.12000 as a lump sum amount it is always better to make a systematic investment of Rs.1000 for 12 months and lowering the burden on wallet.  It provides the benefits like rupee cost averaging, power of compounding and have a room to study the various products available in market to better utilize your hard earned money with purpose of savings

Disadvantages of Tax Planning

 The first and the most disadvantages of tax planning is at the end of year is you do not have

enough time to search the products that matches your requirement.

 Buying without proper research sometimes you end up paying higher charges on the product

that you buy. Some products that come with 100% charge for the first year, if this is the case then the whole amount invested will be gone for that investment.
 If the people are investing in the NSC or Fixed Deposit for Tax planning as considering the

secured products that will erode the investment against the inflation. Investing lump sum amount in products that offer equity exposure will also be on risk as during such times markets may be on the higher side or moving towards downward direction. So you can not invest systematically and hence loosing the power of rupee

Tax avoidance
It is an art of dodging out i.e. actually breaking law. It is a method of reducing tax incidence by finding out loopholes of law. It can be defined as adevice which technically satisfies requirement of law but not in legal accordance. It includes attempt to prevent or reduce tax liability. The term tax mitigation is a synonym for tax avoidance. I Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law Some of those attempting not to pay tax believe that they have discovered interpretations of the law that show that they are not subject to being taxed: these individuals and groups are sometimes called tax protesters. Tax resistance is the

declared refusal to pay a tax for conscientious reasons (because the resister does not want to support the government or some of its activities) tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law

Examples: Double taxation Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm. Most countries have entered into bilateral double taxation treaties with many other countries to avoid taxing nonresidents twice—once where the income is earned and again in the country of residence (and perhaps, for US citizens, taxed yet again in the country of citizenship) -- however, there are relatively few double-taxation treaties with countries regarded as tax havens.[2] To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S. nationals, renounce one's citizenship) to avoid tax.

Tax Evasion
Tax evasion is the general term for efforts to not pay taxes by illegal means An unsuccessful tax protestor has been attempting openly to evade tax, while a successful one avoids tax. tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in

particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions).

Difference between tax avoidance and tax evasion

Tax avoidance may be considered as either the amoral dodging of one's duties to society, part of a strategy of not supporting violent government activities or just the right of every citizen to find all the legal ways to avoid paying too much tax .Tax evasion, on the other hand, is a crime in almost all countries and subjects the guilty party to fines or even imprisonment. So this is the basic difference between tax avoidance and tax evasion

Assignment no 2

Mergers And Acquisitions

MERGERS

A merger occurs when two or more companies combines and the resulting firm maintains the identity of one of the firms. One or more companies may merger with an existing company or they may merge to form a new company. Usually the assets and liabilities of the smaller firms are merged into those of larger firms. Merger may take two forms

 Merger through absorption  Merger through consolidation.

Absorption
Absorption is a combination of two or more companies into an existing company. All companies except one lose their identify in a merger through absorption.

Consolidation
A consolidation is a combination if two or more combines into a new company. In this form of merger all companies are legally dissolved and a new entity is created. In consolidation the acquired company transfers its assets, liabilities and share of the

acquiring company for cash or exchange of assets.

Types Of Mergers
Mergers are of many types. Mergers may be differentiated on the basis of activities, which are added in the process of the existing product or service lines. Mergers can be a distinguished into the following four types:  Horizontal Merger  vertical Merger  Conglomerate Merger  Concentric Merger

Horizontal merger
Horizontal merger is a combination of two or more corporate firms dealing in same lines of business activity. Horizontal merger is a co centric merger, which involves combination of two or more business units related to technology, production process, marketing research and development and management.

Vertical Merger
Vertical merger is the joining of two or more firms in different stages of production or distribution that are usually separate. The vertical Mergers chief gains are identified as the lower buying cost of material. Minimization of distribution costs, assured supplies and market

increasing or creating barriers to entry for potential competition or placing, them at a cost disadvantage.

Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in respect of technology, production process or market and management. In other words, firms engaged in the different or unrelated activities are combined together. Diversification of risk constitutes the rational for such merger moves.

Concentric Merger
Concentric merger are based on specific management functions where as the conglomerate mergers are based on general management functions. If the activities of the segments brought together are so related that there is carry over on specific management functions. Such as marketing research, marketing, financing, manufacturing and personnel.

ACQUISITION
A fundamental characteristic of merger is that the acquiring company takes over the ownership of other companies and combines their operations with its own operations. An acquisition may be defined as an act of acquiring effective control by one company over the assets or management of another company without any combination of companies.

TAKEOVER

A takeover may also be defined as obtaining control over management of a company by another company

Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example Both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased – it is always regarded as an acquisition. Whether a

purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced.

Benefits of mergers

Growth or diversification: Companies that desire rapid growth in size or market share or diversification in the range of their products may find that a merger can be used to fulfill the objective instead of going through the tome consuming process of internal growth or diversification. The firm may achieve the same objective in a short period of time by merging with an existing firm. In addition such a strategy is often less costly than the alternative of developing the necessary production capability and capacity. If a firm that wants to expand operations in existing or new product area can find a suitable going concern. Synergism: The nature of synergism is very simple. Synergism exists when never the value of the combination is greater than the sum of the values of its parts. In other words, synergism is “2+2=5”. But identifying synergy on evaluating it may be difficult; in fact sometimes its implementations may be very subtle. As broadly defined to include any incremental value resulting from business combination, synergism in the basic economic justification of merger. The incremental value may derive from increase in either operational or financial efficiency.

 Operating Synergism Operating synergism may result from economies of scale, some degree of monopoly power or increased managerial efficiency. The value may be achieved by increasing the

sales volume in relation to assts employed increasing profit margins or decreasing operating risks. Although operating synergy usually is the result of either vertical/horizontal integration some synergistic also may result from conglomerate growth. In addition, some times a firm may acquire another to obtain patents, copyrights, technical proficiency, marketing skills, specific fixes assets, customer relationship or managerial personnel. Operating synergism occurs when these assets, which are intangible, may be combined with the existing assets and organization of the acquiring firm to produce an incremental value. Although that value may be difficult to appraise it may be the primary motive behind the acquisition.  Financial synergism Among these are incremental values resulting from complementary internal funds flows more efficient use of financial leverage, increase external financial capability and income tax advantages.

Complementary internal funds flows Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by merger. If so, financial synergism results in reduction of working capital requirements of the combination compared to those of the firms standing alone.

More efficient use of Financial Leverage Financial synergy may result from more efficient use of financial leverage. The acquisition firm may have little debt and wish to use the high debt of the acquired firm to lever earning of the combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt firm thus providing additional leverage to the

combination. The financial leverage advantage must be weighed against the increased financial risk.

Increased External Financial Capabilities Many mergers, particular those of relatively small firms into large ones, occur when the acquired firm simply cannot finance its operation. Typical of this is the situations are the small growing firm with expending financial requirements. The firm has exhausted its bank credit and has virtually no access to long term debt or equity markets. Sometimes the small firm has encountered operating difficulty, and the bank has served notice that its loan will not be renewed? In this type of situation a large firms with sufficient cash and credit to finance the requirements of smaller one probably can obtain a good buy bee.

The Income Tax Advantages In some cases, income tax consideration may provide the financial synergy motivating a merger, e.g. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm B now break even, has a loss carry forward of rupees twenty crores accumulated from profitable operations of previous years. The merger of A and B will allow the surviving corporation to utility the loss carries forward, thereby eliminating income taxes in future periods.

 Counter Synergism

Certain factors may oppose the synergistic effect contemplating from a merger. Often another layer of overhead cost and bureaucracy is added.

Benefits of merger and acquisition
Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate cost efficiency through economies of scale, can enhance the revenue through gain in market share and can even generate tax gains. Benefits of Mergers and Acquisitions are the main reasons for which the companies enter into these deals. The main benefits of Mergers and Acquisitions are the following

Greater Value Generation
Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies. Mergers and Acquisitions can prove to be really beneficial to the companies when they are weathering through the tough times. If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated.

Gaining Cost Efficiency
When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. A merger or acquisition is able to create economies of scale which in

turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced.

Mergers and Acquisitions are also beneficial
 when a firm wants to enter a new market  when a firm wants to introduce new products through research and development  when a forms wants achieve administrative benefits Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital.

Need for merger and acquisition
The task of evaluating what a company is worth, as well as drawing up specific details of merger and acquisition deals, can be daunting. There are many pitfalls that must be overcome by companies attempting to merge or acquire other companies. Approximately two thirds of all mergers fail to produce profitable outcomes. That is why there are merger and acquisition companies who specialize in helping corporations through the entire process.  Common Problems A stock market that is booming often leads to mergers that play out poorly. This is because mergers that are done using high rated stock are easy to complete. This ease lures some companies into mergers that are not in the best interests of the company or its

shareholders. The egos of top level managers or CEOs can contribute to mergers that are not well considered. Upper level management is usually promised large bonuses for top level mergers or acquisitions, regardless of their final outcomes. These top level decision makers can also be negatively influenced by banks, lawyers, and financial advisors who stand to make large profits if a merger or acquisition is completed. This makes it ever more important to find advisors who have a good reputation.  Economy of scale This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.  Economy of scope This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.

MERGERS OF CENTURIAN BANK AND BANK OF PUNJAB
Bank of Punjab:
 It was incorporated on may27, 1994 under the companies act, 1956. The registered office

of the bank was situated at SCO 46-47, sector 9-D, Madhya Marg, Chandigarh- 160017.  It is banking company under the provisions of regulation act, 1949.
 The objects of bank are banking business as set out in its memorandum and articles of

association.
 The bank is a new private sector bank in operating for more than 10 years, with a national

network of 136 branches( including extension counters) having a significant presence in the most of the major banking sectors of the country.

The transferor bank offers a host of banking products catering to various classes of customers ranging from small and medium enterprises to large cooperates.

Centurion Bank
 It was incorporated on june30, 1994 under the companies act, 1956.  It is a banking company under the provisions of banking regulation act, 1949.
 The objectives of transferee bank are banking business as set out in its memorandum and

articles of association.

 The bank is a profitable and well capitalized new private sector bank having a national

presence of over 99 branches( including extension counter)
 It has a significant presence in the retail segment offering a range of products across

various categories.

Highlights of the Merger- Centurion Bank and Bank of Punjab
 Bank of Punjab is merged into Centurion Bank.  New entity is named as “Centurion Bank of Punjab”.

Centurion Bank’s chairman Rana Talwar has taken over as the chairman of the merged entity.

 Centurion bank’s MD Shailendra Bhandari is the MD of the merged entity.
 KPMG India pvt. ltd and NM Raiji & Co are the independent values and ambit corporate

finance was the sole investment banker to the transaction.
 Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of Bank of Punjab,

its shareholders would receive 9 shares of Centurion Bank.
 There has been no cash transaction in the course of the merger; it has been settled through

the swap of shares.  There is no downsizing via the voluntary retirement scheme.