About Direct tax planning and financial management decisions. Objectives of tax planning, why tax planning is necessary?

1. Tax Planning Financial
Management Decisions
A Presentation on
1

2. What is tax planning?
• Exercise carried out by the taxpayer to meet his tax obligations in
proper. Systematic and orderly manner availing all permissible
exemptions, deductions and reliefs available under the act as may be
applicable to his case

3. Why is tax planning necessary?
• The tax paid is an addition to the cost. Just as every businessman tries
to maximize his profit by reducing the cost, he should also arrange his
affairs in such a way, that he pays the least amount of tax.
3

4. Is tax planning confined only to
direct taxes?
• No. The effect of other taxes like sales-tax, customs duty and excise
duty, are to be taken into account.
4

5. The main objectives of tax
planning
• Avail all concessions and relief’s and rebates permissible under the Act.
• Arrange the affairs in a commercial way to minimize the incidence of
tax.
• Claim maximum relief where taxes are paid in more than one
country.
5

6. • Become tax compliant and avoid penalties, prosecutions and interest
payments.
• Fruitful investment of savings.
• Timely compliance of procedural requirements like tax audit, TDS,
TCS, etc.
• Appropriate record keeping
Continue…
6

7. • Avoidance of litigation.
• Growth of economy and its
stability.
• Pay taxes- not a penny more,
not a penny less.
Continue…
7

8. Tax management
• Planning which leads to filing of various returns on time, compliance
of the applicable provisions of law and avoiding of levy of interest
and penalties can be termed as efficient tax management.
• Defaults are avoided and legal compliance is secured.
• Penalty of up to Rs. 100,000 for delay in furnishing of tax audit
reports u/s 44AB can be avoided.
8

9. Tax management includes
• Compiling and preserving data and supporting documents evidencing
transactions, claims, etc.
• Making timely payment of taxes.
• TDS and TCS compliance.
• Payment of expenses or acceptance of loans or repayment thereof,
over ` 20,000 by account payee bank cheque or bank draft, etc.
9

10. • Compliance with the prescribed requirements like tax audit,
certification of international transactions, etc.
• Timely filing of returns, statements, etc.
Continue…
10

11. • Responding to notices received from the authorities.
• Preserving record for the prescribed number of years.
• Mentioning PAN, TAN, etc. at appropriate places.
• Responding to requests for balance confirmation from the other assessees.
Continue…
11

12. Financial Management
Decision
• New Capital Investments
• Make or Buy
• Own or Lease
• Retain or Replace
• Repair/Scrap or Return
• Export or Domestic Sale
• Accounting Standards for Taxes
on Income
• Expand or Contract
• Shut Down or Continue
Management decisions, which have a bearing on the bottom line are
analyzed below from the point of view of income-tax implications.
12

13. Tax management with reference to
‘Capital Structure’
• There are different sources of funds depending upon the needs,
availability, terms, etc. However for availing the tax benefits, there
should be proper debt- equity mix in the capital structure and a clear
policy on return on capital employed.
13

14. What is the Optimum Capital
Structure ?
• The optimum capital structure is a mix of equity capital and debt
funds. Their composition depends upon many factors :
• Cost of Capital and also expenditure incurred in rising of such capital.
• Expectation of shareholders by way of dividend, growth etc.
14

15. • Expansion need of the business i.e. the rate by which profits of the
business shall be again ploughed back in the business.
• Taxation policy ; and
• Rate of return on investment (Equity + Debt funds).
Continue…
15

16. Tax Considerations
• Interest on debt fund is allowed as deduction as it
is business expenditure. Therefore, it may increase the rate of return
on owner’s equity.
• Dividend on equity fund is not allowed as deduction as it is the
appropriate of profit. Dividend is exempt in the hands
of shareholders u/s 10(34) . However, the company declaring the
dividend shall pay dividend distribution tax @ 15% + surcharges +
education cess.
16

17. • The Cost of raising owner’s fund is treated as
capital expenditure therefore not allowed as deduction. However if
conditions of Sec. 35D is satisfied then specified expenditures can be
amortized.
• The Cost of raising debt fund is treated as revenue expenditure. It can
be claimed as deduction in computing the total income.
• Where interest on debt fund is payable outside India, tax should be
deducted at source otherwise deduction is not allowed.
Continue…
17

18. Tax Planning
• If the return on investment > rate of interest, maximum debt funds
may be used, since is shall increase the rate of return on equity.
However, cost of raising debt fund should be kept in mind.
• If rate of return on investment < rate of interest, minimum debt
funds should be used.
18

19. • Where assessee enjoys tax holidays under various provisions of
Income-Tax in such case minimum debt fund should be used, since the
profit arising from business is fully exempt from tax which increase the
rate of return of equity capital. But the borrowed fund reduces the
profits (profits less interest) before tax and to the extent exemption is
reduce.
Continue…
19

20. Tax Planning With Reference to
‘Investment’ decision
• Some important benefits in Investment in new plant and
machinery:
• Additional depreciation as per section 32(1) (iia): 20% of actual cost
shall be allowed in respect of new plant or machinery acquired and
installed after 31.1.2005 and used in the manufacturing or production
of any article or thing.
20

21. • Depreciation is a significant deduction from taxable income. Plant and
machinery relating to generation of power and pollution control
equipment, and those relating to Research and Development, etc., are
eligible for 100% deduction. Plant and machinery can be acquired,
replaced, repaired, purchased or hired or assembled with different tax
consequences.
Continue…
21

22. • Investment allowance will be available for the A.Y. 2014 – 15 and
2015-16 as follows:
• A.Y. 2014-15 – If the aggregate amount of actual cost of new asset
exceeds Rs.100 crore, investment allowance will be available for the
A.Y. 2014-15. The amount of allowance will be 15 per cent of actual
cost of new asset acquired and installed during the previous year 2013-
14.
•
Continue…
22

23. • The time limit increased from 31 March 2015 to 31 March2017 for claiming
investment allowance at 15 per cent of the investment made by a
manufacturing company in new plant and machinery (acquired and installed).
Further, in respect of investment made on or after 1 April 2014, the
threshold of INR1 billion has been reduced to INR250 million
• Asset is obtained on lease, deduction can be claimed in respect of lease
rentals and lease management fees and in the case of obtaining an
asset on hire, deduction can be claimed in respect of hire charges. By
comparing present value of cash outflows a correct decision can be
taken.
Continue…
23

24. Tax Planning With Reference To ‘Make
Or Buy’ Decision.
• ESTABLISHING A NEW UNIT: if the decision to manufacture a
part or component involves setting up a separate industrial unit, then
tax incentives available under sections 10AA, 32, 80-I one has to keep
in mind.
• Provision of Section 10AA: if the conditions are satisfied, the
assessee can claim deduction under section 10AA from his total
income, for a period of 10 consecutive assessment years.
24

25. • Amount of deduction: deduction depends upon quantum of profit
derived from export of articles or things or services.
• First 5 years – 100 % of profits and gains derived from the export of
articles or thing or from services is deductible.
• Deduction from sixth A.Y. to tenth A.Y. – 50% of profits and gains
derived from the export of articles or thing or from services is
deductible.
Continue…
25

26. • Deduction for 11th A.Y. to 15th A.Y. - For the next 5 years, a further
deduction would be available to the extent of 50 % of the profit provided an
equivalent amount is debited to the profit and loss account of the previous
year and credited to special Economic Zone Re-investment Allowance
Reserve Account
• Additional depreciation as per section 32(1) : 20% of actual cost
shall be allowed in respect of new plant or machinery acquired and
installed after 31.1.2005 and used in the manufacturing or production
of any article or thing.
Continue…
26

27. • Amortisation of certain preliminary expenses [sec. 35d]: After
the commencement of his business, in connection with the extension
of his industrial undertaking or in connection with his setting up a
new industrial unit, the assessee shall be allowed a deduction of an
amount equal to one-tenth (1/10 th. ) of such expenditure for each of
the ten successive previous years beginning with the previous year in
which the business commences or the new [industrial] unit
commences production or operation
Continue…
27

28. • Under section 80-IAB of the Income-tax Act, a deduction of 100%
is allowed in respect of profits and gains derived by an undertaking
from the business of development of an SEZ notified on or after
1.4.2005 from the total income for any 10 consecutive A.Y. out of
fifteen years beginning from the year in which the SEZ is notified by
the Central Government.
Continue…
28

29. • Deduction in respect of profits and gains of certain undertaking
in certain special category of states [ Sec. 80-IC]
• Amount of deduction: 100% deduction is available for the first 10
years [ however, in the case of Himachal Pradesh or Uttaranchal,
it is 100% for the first 5 years and 30% (25 % in the case of non-
corporate assessee) for the next 5 years.
Continue…
29

30. • Sale of plant and machinery: If buying is cheaper than
manufacturing and the assessee decides to “buy”
parts/components for a long period of time, he may like to sell
the existing plant and machinery. But it should be beginning of
the year to realise the fund without affecting the existing
efficiency.
Continue…
30

31. Tax Planning With Reference To
‘Dividend Decision’.
• Paying dividend involves outflow of cash. The cash available for the
payment of dividend is affected by the firm’s investment and financing
decision.
• The Domestic Company is liable to pay Dividend Distribution Tax at
16.995 per cent on such dividends. The amount of dividend
distributed to shareholders shall be increased to such amount as would
after reduction of tax on such increased amount be equal to the net
distributed profits.
Continue…
31

32. • Example where Rs.100 is to be distributed to shareholders:
Dividend paid Rs. 100
Dividend distribution
tax on at 16.995%
16.995
Amount required
for distribution
116.995
Continue…
32

33. Case Study
• Arston engg. Ltd. Are considering a proposal to buy a plant at the cost
of Rs. 20L in respect of which applicable depreciation rate is 15%.
The FOUR alternatives are available to the company as follows:
1) Utilize Rs. 20L from General Reserve, which is lying in bank’s
current a/c for working capital requirement. Alternatively promoters
are willing to contribute Rs. 20L from their own funds.
Continue…
33

34. 2) Take a loan of Rs. 20L from financial institution @ 13% p.a.
repayable in five annual equal installments.
3) Take the plant on lease from a finance company at the monthly lease
rent of Rs. 55,000. The period of lease is five years only.
4) Hire purchase option: down payment Rs. 5,00,000. And monthly
installments of Rs. 40,000
Continue…
34

35. • Present value of Rs.1 @ 15% p.a.:
Year P.V. factor
1 0.870
2 0.756
3 0.658
4 0.572
5 0.497
Continue…
35

36. 36

37. 37