Importance of corporate tax planning

&Tax planning of new business

 SUBMITED BY:

KUSHAL BHAGAT 02YOGITA CHHABHAYA 05 KRUNAL KAPADIA 16RAGINI PATEL 34

Introduction

A major portion of the income tax revenue of the government of India is contributed by the corporate sector, i.e. the companies. It cannot be denied that the income tax law, in particular, and the tax laws in general, have become quite complicated in recent years. Hence, legal saving of income tax through proper tax planning has become all the more essential. This is because the income tax legally saved by a company goes to mop up its internal recourses which would otherwise help in its expansion and diversification. It also helps in the distribution of higher dividends to shareholders and enhances the status and reputation of the company concerned in the corporate world.

Definition

• Exercise undertaken to minimize tax liability through the best use of all available allowances, deduction, exclusions, exemption, etc., to reduce income and/or capital gains.

• Considering the tax implication of individual or

• business decision throughout the year, usually with the

• goal of minimizing the tax liability

• Corporate tax planning provides strategies that are

• significant in minimizing taxes.

Corporate tax planning has legal sanction

Benjamin Franklin statement: are two certainties in this world –

death and taxes. This naturally makes all the taxpayers in

general, and the companies in particular, realize the bitterness

or hardship of taxes. As a result companies start findings ways

to save taxes.

• Three methods of savings taxes:

1) Tax evasion

2) Tax avoidance

3) Tax planning

Cont……

For example:

Tax planning may be legitimate provided it is within the framework of law. Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting dubious method. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

Objective of tax planningTax planning is the legitimate right of every

taxpayer. However, the scope of tax planning and the methodology to be applied in achieving optimum tax planning with a view to saving maximum income tax and avoiding undue harassment is not appreciated by many companies. Hence we should begin by understanding the very objective of tax planning.

The various objectives could be grouped under four different heads:

• Having maximum taxpayer units;

• Taking maximum advantage of the exemption, deduction,

rebates, relief and other tax concession

• Legally avoiding unwarranted addition to the income;

• Avoidance of tax worries and tension through voluntary tax

compliance and tax management

These objectives are described in brief below, to throw light on the importance of the subject of corporate planning .

Maximum taxpayer unitsCorporate tax planning lies not merely in

planning for one or few companies in the corporate sector of a particular group but it consist in planning for the different types of companies and also for those individuals and other entities that control the corporate enterprise.

• Thus the tax planning of allied partnership firms, trust, promoters

and other individuals controlling the corporate tax planning.

• A company should not only adopt tax planning for its own income

and expenditure but also plan for various other units or incomes

tax files, i.e. independent income tax entities in the controlling

group of the promoters or directors of the Indian companies to

48% for the nonresident or foreign companies.

• A company should adopt tax planning not only for its total income but should also see that the various disbursement by it suffer the least possible income tax. The various important disbursement of a company for which tax planning is to be adopted, relate to:

- Profit

- Rent

- Interest

- Salary to senior personnel

- Commission

- Dividends.

• This disbursement should legally be so distributed that they go to

the various units in the promoters families in a legal manner.

• Example:

The shares of a company on which dividends is declared should not merely by held the husband, wife or the adult members of the family but should also be so held by the HUF, if any, the minor children, parent and distant relatives of the family as well. Dividend income should be so distributed as to enable every unit of the family to enjoy total exemption under section 10(33) and also take the benefit of the initial exemption of Rs. 40000 which is generally available to a non corporate taxable entity as per the financed act, 1997.

The scope of having a public limited company vs. a private limited company should be fully explored. As regard various activities of a company or group of company like trading, industrial, manufacturing, investment etc. they should be distributed well in different taxable entities. The scope of holding company and subsidiary company having a separate explore company to achieve 100% tax exemption should be achieved in actual practice.

Maximum exemptions and deductions:

• Tax planning to be adopted by a company is to secure maximum exemptions and deductions allowed under the Income Tax Act.

• There are certain types of income which if earned from a particular source and in a particular locality or area or zone are also completely exempt from income tax for a specified period.

• E.g. special Economics Zones, Free trade Zone, under sec. 10-A and 100% E.O.Us under section 10B.

• Some of the companies engaged in a new industries whether start new business unit or by way of expansion or diversification, become eligible to the 30% deduction allowed under section 80 IB for a period 10 years and some backward states, Union Territories and industrially backward districts @1005 tax exemption for 5 years.

Avoiding unwarranted addition to trading account:

• Tax planning is to avoid unwarranted additions to the trading account of low gross profit or excess shortage.

• Whenever there is variation in the regarding result in comparison to the immediately preceding year so that the Assessing Officer is fully satisfied about Bona fides of explanation. If however, an addition is made by the AO to the Trading Account for lower margin of gross profit.

• If proper planning is adopted in this regard to no addition can be made by the AO likewise an area of addition which could be made by AO is about cash expenditure in exceed Rs.20000 at particular time.

Avoiding Worry and tension:

• tax planning is to avoid worry and tension.• Lack of proper tax management.• it may suffer penal interest for payment.

• Corporate tax management and other obligations:

• A number of obligation have been cast upon a company.• not only in the matter of compliance with the rules regarding the

deduction of tax at source but also in various other spheres regarding the filling of returns.

• The ideal tax management should be such that it does not become costly and at the same time is able to tackle the need for maintence of proper records, statements and the furnishing of proper statements and returns to the Income Tax Department

Tax Planning of a

New Business

Introduction

• Tax planning, to be really effective, must precede the management decisions.

• Decision on whether it should invest its funds in acquiring the immovable property, plant and machinery, etc., of the business or it should go in for leasing of these assets.

• Salary and perks package which it should offer to its senior executives.

Tax planning Regarding Organizational Setup

• Organizational set-up of a new business may differ a great deal from the case of an existing company in comparison to a new company.

• 1% wealth tax payable by companies on certain assets like farm houses, motor cars, jewellery, etc.

• Separate company for the purpose of export so that 100% of the export profits could be exempted from income tax under Section 80-HHC.

Tax planning Regarding Organizational Setup

• Organizational set-up of a new business may differ a great deal from the case of an existing company in comparison to a new company.

• 1% wealth tax payable by companies on certain assets like farm houses, motor cars, jewellery, etc.

• Separate company for the purpose of export so that 100% of the export profits could be exempted from income tax under Section 80-HHC.

• Where a company is interested in setting up a hotel, it can be so set up as to enjoy the 30% to 50% tax deduction of its profits.

• Rate of interest and tax concession.

Tax planning through location of business

• Where a company is dealing in exports, it will have to decide where to set up a new industrial undertaking in a ,

Free Trade Zone or Software Technology Parks (STPs) or Electronic Hardware Technology Parks (EHTPs) or to set it up as a 100% export oriented unit (EOU) or to set it up as an export company at any place.

Tax concession for a period of 5 years within the first 8 assessment years (100% exemption section 10-A or 10-B)

Tax planning regarding financial structure of a company

• E.g. if a company utilize maximum capacity for loans from banks, from directors, from friends and others it can get 100% deduction in respect of interest payable on loans.

• Loan from associate concern in the same group.

• The manner of incurring the cost before actual commencement of production is also to be decided only by a company through proper tax planning, as all the expenditure incurred by a company forms part of the “actual cost” of the plant and machinery on which the benefit of depreciation can be obtain by a company.

Tax planning regarding commencement of production

• Commencement of production should be done after the closing date of the financial year.

• As a general rule, wherever possible, a company, having a new industrial undertaking should commence its production in a commercial sense as soon after the closing date of the financial year as possible.

Statistical charts

• Exercise of preparation statistical data of charts and diagrams or tables alone for 4 to 5 years would help in the proper adoption of tax planning while setting up a new business and taking several management decisions in relation thereto.

Ownership versus leasing of assets

• Decision regarding whether it should own the various assets or if it should take these on lease or hire.

• The main advantage in having the ownership of an office building or a factory building is that the company gets depreciation on the cost of the building. Further, it has the advantage of appreciation of the value.

Tax planning of salary and perquisites of executives

• As a part of its management decision while starting a new business, a company should devise the salary and perks packages in such a manner as to secure maximum tax-free perquisites to the senior executives concerned as well as middle level executives.

Method of accounting

• Mercantile system

• Cash system

• The decision regarding the method of accounting to be followed should be made after proper deliberations about the utility of the system to the special facts and circumstances of the cash system of accounting or the mercantile system; it cannot normally be changed later

Conclusion

• So, from the above discussion we can understand the importance of the tax planning to be adopted by the company in setting up a new business. In particular, we have seen the significance of various decisions particularly when a new industrial undertaking is being set up, so that the benefit of maximum deductions and exemptions is obtained by the company in saving income tax.

Thankyou

Any queries?