CE-725

Construction
Economics and Finance

Taxation
What is tax?
Why pay taxes?
• It is the law
• Tax is the price of civilization
• Taxes fund the government to take up different
development works
Do organizations need to pay
tax?
• Yes. Income is taxed.
• Rates apply according to the Income Tax Act.
Corporate tax

Source: pwc
Minimum Alternate Tax

Source: pwc
MAT Provision
• Number of exceptions on tax
• Income tax rebates on a number of items
• MAT provides a way to avoid “Zero tax companies”

• Paying MAT will earn a MAT tax credit

• Can be carried forward for 5 years.
• No interest.
Capital Gains Tax
• If the asset is held for not more than 36 months
• Short term capital gains
• Income tax slabs for the year of sale are applicable

• If the asset is held for more than 36 months

• Long term capital gains
• Taxed at 20%

• Base period for indexation

Cost inflation index
Effective tax rate?
How is my evaluation
affected by tax?
Can I treat tax rate as
inflation?
• IRReffective = IRRbefore-tax (1-effective income tax rate)

• This can be done if all the assets involved in the

valuation are non-depreciable
After-Tax cash flow
• More effective way is to calculate the after-tax cash
flow for each year (compounding period) and
consider this cash flow in our valuations
How to calculate ATCF
• Take the actual before tax operating cash flow for
the year (EBITDA)
• Deduct from it the depreciation charge (EBIT)
• Deduct the interest paid on debt (Taxable income)
• Calculate the tax on the Taxable income

• ATCF = EBITDA – Cash for debt - Tax

Example
A testing machine was purchased for Rs. 45,000. The
MARR is 15% after taxes. The asset has a life of 5
years. Over this time, it will earn Rs. 23,000 per year
and the operating costs are Rs. 7300 per year. No
salvage value is assumed. Tax on income for
corporate is 30%. Would you buy the machine?
Example 2
• An equipment was brought Rs. 67,000 out of which
Rs. 22,000 was loan. The loan was given at 9%
which would be paid in equal annual instalments.
The life of the asset is 6 years and has a salvage
value of 20,000 at the end of its life. It will earn a
net income of Rs. 22,000 over its life. CIT is 30%.
Would you buy this equipment? MARR after tax is
15%
Example 3
• An asset was purchased for Rs. 100,000. It will provide
a revenue of Rs. 40,000 annually. Operating costs will
average Rs. 22,000 per year. The salvage value is Rs.
10,000 at the end of 5 year period. The asset is
depreciable over 5 years and the asset is depreciated to
zero book value at the end of 5 years. CIT is 30%. After
tax MARR is 15%. Out of the Rs. 100,000 required for
the purchase, Rs. 60,000 was taken as loan at 8%
interest rate paid as equal annual installments. Should
this asset be purchased? The CPI grew from 250 to 290
in the past 3 years and can be assumed to sustain that
way for the next five years.