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A Quick Revision For NET/GSET Examination

                                  Prepared By-
                                    Anuj Bhatia
[BBA, M.Com, GSET, UGC-NET, Ph.D (Pur.)]
                           Assistant Professor,
           Anand Institute of Business Studies
            Contact: anujbhatia09@gmail.com
Tax Planning
 Tax  planning is the arrangement of financial
 activities in such a way that maximum tax benefits
 are enjoyed by making use of all beneficial provisions
 in the tax laws. It entitles the assessee to avail
 certain exemptions, deductions, rebates and reliefs,
 so as to minimize his tax liability.

 Tax planning imply compliance with the taxing
 provisions in such a manner that full advantage is
 taken of all exemptions, deductions, concessions,
 rebates and reliefs permissible under the Act so that
 the incidence of tax is the least.
Tax Avoidance
 Tax avoidance is minimizing the incidence of tax by
 adjusting the affairs in such a manner that although
 it is within the four corners of the taxation laws but
 the advantage is taken by finding out loopholes in the
 laws. The shortest definition of tax avoidance is that
 it is the art of dodging tax without breaking the law.

 In the case of tax avoidance, the tax payer apparently
 circumvents the law, without giving rise to a criminal
 offence, by the use of a scheme, arrangement or
 device, often of a complex nature but where the main
 purpose is to defer, reduce or completely avoid the
 tax payable under the law.
Tax Evasion
 Unscrupulous citizens evade their tax liability by
 dishonest means. Some of which are:
     Concealment of income;
     Inflation of expenses to suppress income;
     Falsification of accounts;
     Conscious violation of rules

 These  devices are unethical and have to be
 condemned. The courts also do not favour such
 unethical means. Evasion, once proved, not only
 attracts heavy penalties but may also lead to
 prosecution.
TAX PLANNING                    TAX AVOIDANCE                     TAX EVASION
Legal                           Legal                           Illegal
Ethical                         Unethical                       Unethical
No intention to defeat legal Intention to defeat legal spirit Intention to defeat legal spirit
spirit
By taking legitimate benefits of By taking benefit of loopholes Misstatement and falsification
Income tax law                   of law                         of accounts, incomes and
                                                                expenses
No Litigation in courts          Leads to litigation in courts  Leads to litigation in courts
No Penalty/ Prosecution         No Penalty/ Prosecution         Attracts penalty/prosecution
Good           for   National   It is evil for Nation/Society   It is evil for Nation/Society
Development/ Society…creates
employment etc
Promotes professionalism and    Encourages   bribery     and Encourages     bribery      and
strengthens economic and        weakens economic and political weakens economic and political
political situation             situation                      situation

Planning before tax liability Planning for avoidance before Tax evasion involves avoidance
arises                        tax liability arises          of payment of tax after the
                                                            liability of tax has arise.
Tax Management
 Tax management refers to the compliance with the
  statutory provisions of law.

 While tax planning is optional, tax management is
  mandatory. It includes maintenance of accounts, filling of
  return, payment of taxes, deduction of tax at source,
  timely payment of advance tax, etc.

 Poor tax management may lead to levy of interest, penalty,
  prosecution, etc. In some cases it may lead to heavy
  financial loss if proper compliance is not made, e.g. if a
  loss return is not filed in time it will result in a financial
  loss because such loss will not be allowed to be carried
  forward
Objectives of Tax Planning
 Reduction of tax liability
 Minimization of litigation
 Productive investment
 Healthy growth of economy
 Economic stability
Factors on the basis of which Tax
planning is done
 The following factors are helpful for effective tax
 planning:
   Residential status and citizenship of the assessee.
   Heads    of income/Assets     to   be   included   in
    computing net wealth.
   Latest legal position.
   Form v Substance
Specific Management Decisions
1. Capital Structure
 While selecting a particular capital structure the
 entrepreneur has to keep in view the following
 considerations:
   serving the capital base with consistent dividend
    policy
   cost of capital to be raised from the market
   chargeability or otherwise of taxes, i.e., direct and
    indirect taxes
   keeping a margin for ploughing back of profits for
    future plan towards diversification, expansion,
    modernization and other development aspects.
 Means of financing:
  Generally, the following means of finance are
    available for a new project:
   Equity share capital,
   Debentures/Loans and borrowings/Lease Finance
 Capital mix:
 A capital structure is said to be optimum when it
 has a mix of debt and equity that will yield the
 lowest weighted average cost of capital. At the
 same time, a capital mix should not have high
 debt equity ratio. A high debt/equity ratio has its
 own advantages and disadvantages.
Lease or buy decisions:
 In recent years, leasing has become a popular
 source of financing in India. From the lessees
 point of view, leasing has the attraction of
 eliminating immediate cash outflow, and the
 lease rentals can be claimed as admissible
 expenditure against the business income. On the
 other hand, buying has the advantages of
 depreciation allowance and interest on borrowed
 capital being tax-deductible. Thus, an evaluation
 of the two alternatives is to be made in order to
 take a decision.
Make or buy decision
 Now a decision regarding the manufacturing of
 these components is to be taken. It is decided
 whether the product/part/component of product
 should be bought from the market or should be
 manufactured       by      having      necessary
 manufacturing facilities. The main consideration
 affecting such a decision is cost. In a make or
 buy decision, the variable cost of making the
 product or part/component of product is
 compared with its purchase price prevailing in
 the market.
Repair/Renewal or Replacement
of an asset:
 Repairs/Renewal:            Deduction       for    expenditure       on
  repairs/renewal will be allowed as revenue expenditure in
  computation of business income as under:-
    If the building is a rented building, any expenditure on repairs
     shall be allowed as deduction.
    It may be noted that if the repairs expenditure are of capital nature
     it shall not be allowed as deduction either under section 30, 31 or
     37.

 Replacement of assets: If the asset has to be replaced, the
  expenditure incurred on replacement shall be capital expenditure
  and the assessee shall only be entitled to depreciation on such
  assets and as such, the entire expenditure cannot be claimed as
  deduction which was allowed in case of repairs.
Tax planning in case of
employee’s remuneration
 This requires consideration from the point of view of
 –

 Employer: While calculating the business income of
 the employer, the remuneration payable to the
 employee, in whatever form, should be fully
 deductible otherwise the employer will have to pay
 tax on such remuneration also as the same will not be
 allowed as deduction while computing his business
 income. In some cases, the employer shall have to
 pay fringe benefit tax on certain benefits given to the
 employees.
 Employee:The salary received by the employee, whether in
 cash or kind, should attract minimum income-tax liability.
  He should be in a position to avail maximum
 exemption/concession in respect of such salary received
 by him. Some of the exemptions/concessions available to
 employee under Income-tax Act are as under:

   Section 10(10) exemption in case of death-cum-retirement gratuity.
   Section 10(10A) exemption of commuted pension.
   Section 10(10B) exemption of retrenchment compensation.
   Section 10(10C) exemption of compensation on voluntary retirement.
   Section 10(13A) exemption of House rent allowance.
   Section 10(14) exemption of specified/notified special allowance.
   Tax free perquisites, like medical facility, reimbursement of medical expenses,
    telephone at the residence of employee, free lunch or dinner/free refreshment,
    leave travel concession, etc.
   Contribution by the employer to the provident fund or other welfare fund of
    the employee.
   Perquisites taxable at concessional rate, like rent free accommodation,
    motorcar, etc.
Inflation of expenses to suppress income is an act of
  ………….
(B)Tax Planning
(C)Tax Avoidance
(D)Tax Evasion
(E)Tax Management
The filing of return of loss u/s 139(3) to avail benefit of
  set off and carry forward of loss is called …………….
 (A) Tax Planning
 (B) Tax Avoidance
 (C) Tax Evasion
 (D) Tax Management
Mr. Aditya, an employee of Shri Ram Krishna Seva
  Mandal, stays in housing facility provided by the
  trust. This is an act of …………..
 (A) Tax Planning
 (B) Tax Avoidance
 (C) Tax Evasion
 (D) Tax Management
Mr. Yash, a businessman, purchases National Saving
  Certificates of Rs.50,000, so as to reduce his income
  chargeable to tax from Rs.4,00,000 to Rs.3,50,000.
  This is an act of ……………..
 (A) Tax Planning
 (B) Tax Avoidance
 (C) Tax Evasion
 (D) Tax Management
An assessee cannot claim the benefit of …………. for the
   purpose of tax deduction if the ‘Own’ the asset.
B.Depreciation on asset
C.Repair expenses of revenue nature
D.Interest on money borrowed to purchase the asset
E. None of the above
When the asset is owned by the assessee, he can claim
  benefit of ………… for tax deduction.
(A) Lease rental
(B) Repair and Maintenance expenses of capital nature
(C) Depreciation
(D) Cost of Asset
Which of the following will be not be allowed as
  deduction in case of ‘Lease’ of an asset?
(A) Depreciation
(B) Cost of Capital
(C) Interest on loan borrowed for acquiring the asset
(D) Rental paid to lessor
Lease rental can be claimed as ________ against
   business income.
B.Admissible expenses
C.Inadmissible expenses
D.Both (A) and (B)
E. None of the above
Deduction for expenses on repair and renewal is
   allowed as _________
B.Capital expenditure
C.Revenue expenditure
D.Differed Revenue expenditure
E. Both (A) and (C)
Remuneration paid to employee will be………
B.Fully deductible
C.Partly deductible
D.Non deductible
E. Depends on situation
Thank You…

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Corporate tax planning

  • 1. A Quick Revision For NET/GSET Examination Prepared By- Anuj Bhatia [BBA, M.Com, GSET, UGC-NET, Ph.D (Pur.)] Assistant Professor, Anand Institute of Business Studies Contact: anujbhatia09@gmail.com
  • 2. Tax Planning  Tax planning is the arrangement of financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws. It entitles the assessee to avail certain exemptions, deductions, rebates and reliefs, so as to minimize his tax liability.  Tax planning imply compliance with the taxing provisions in such a manner that full advantage is taken of all exemptions, deductions, concessions, rebates and reliefs permissible under the Act so that the incidence of tax is the least.
  • 3. Tax Avoidance  Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that although it is within the four corners of the taxation laws but the advantage is taken by finding out loopholes in the laws. The shortest definition of tax avoidance is that it is the art of dodging tax without breaking the law.  In the case of tax avoidance, the tax payer apparently circumvents the law, without giving rise to a criminal offence, by the use of a scheme, arrangement or device, often of a complex nature but where the main purpose is to defer, reduce or completely avoid the tax payable under the law.
  • 4. Tax Evasion  Unscrupulous citizens evade their tax liability by dishonest means. Some of which are:  Concealment of income;  Inflation of expenses to suppress income;  Falsification of accounts;  Conscious violation of rules  These devices are unethical and have to be condemned. The courts also do not favour such unethical means. Evasion, once proved, not only attracts heavy penalties but may also lead to prosecution.
  • 5. TAX PLANNING TAX AVOIDANCE TAX EVASION Legal Legal Illegal Ethical Unethical Unethical No intention to defeat legal Intention to defeat legal spirit Intention to defeat legal spirit spirit By taking legitimate benefits of By taking benefit of loopholes Misstatement and falsification Income tax law of law of accounts, incomes and expenses No Litigation in courts Leads to litigation in courts Leads to litigation in courts No Penalty/ Prosecution No Penalty/ Prosecution Attracts penalty/prosecution Good for National It is evil for Nation/Society It is evil for Nation/Society Development/ Society…creates employment etc Promotes professionalism and Encourages bribery and Encourages bribery and strengthens economic and weakens economic and political weakens economic and political political situation situation situation Planning before tax liability Planning for avoidance before Tax evasion involves avoidance arises tax liability arises of payment of tax after the liability of tax has arise.
  • 6. Tax Management  Tax management refers to the compliance with the statutory provisions of law.  While tax planning is optional, tax management is mandatory. It includes maintenance of accounts, filling of return, payment of taxes, deduction of tax at source, timely payment of advance tax, etc.  Poor tax management may lead to levy of interest, penalty, prosecution, etc. In some cases it may lead to heavy financial loss if proper compliance is not made, e.g. if a loss return is not filed in time it will result in a financial loss because such loss will not be allowed to be carried forward
  • 7. Objectives of Tax Planning  Reduction of tax liability  Minimization of litigation  Productive investment  Healthy growth of economy  Economic stability
  • 8. Factors on the basis of which Tax planning is done  The following factors are helpful for effective tax planning:  Residential status and citizenship of the assessee.  Heads of income/Assets to be included in computing net wealth.  Latest legal position.  Form v Substance
  • 9. Specific Management Decisions 1. Capital Structure  While selecting a particular capital structure the entrepreneur has to keep in view the following considerations:  serving the capital base with consistent dividend policy  cost of capital to be raised from the market  chargeability or otherwise of taxes, i.e., direct and indirect taxes  keeping a margin for ploughing back of profits for future plan towards diversification, expansion, modernization and other development aspects.
  • 10.  Means of financing: Generally, the following means of finance are available for a new project:  Equity share capital,  Debentures/Loans and borrowings/Lease Finance  Capital mix: A capital structure is said to be optimum when it has a mix of debt and equity that will yield the lowest weighted average cost of capital. At the same time, a capital mix should not have high debt equity ratio. A high debt/equity ratio has its own advantages and disadvantages.
  • 11. Lease or buy decisions:  In recent years, leasing has become a popular source of financing in India. From the lessees point of view, leasing has the attraction of eliminating immediate cash outflow, and the lease rentals can be claimed as admissible expenditure against the business income. On the other hand, buying has the advantages of depreciation allowance and interest on borrowed capital being tax-deductible. Thus, an evaluation of the two alternatives is to be made in order to take a decision.
  • 12. Make or buy decision  Now a decision regarding the manufacturing of these components is to be taken. It is decided whether the product/part/component of product should be bought from the market or should be manufactured by having necessary manufacturing facilities. The main consideration affecting such a decision is cost. In a make or buy decision, the variable cost of making the product or part/component of product is compared with its purchase price prevailing in the market.
  • 13. Repair/Renewal or Replacement of an asset:  Repairs/Renewal: Deduction for expenditure on repairs/renewal will be allowed as revenue expenditure in computation of business income as under:-  If the building is a rented building, any expenditure on repairs shall be allowed as deduction.  It may be noted that if the repairs expenditure are of capital nature it shall not be allowed as deduction either under section 30, 31 or 37.  Replacement of assets: If the asset has to be replaced, the expenditure incurred on replacement shall be capital expenditure and the assessee shall only be entitled to depreciation on such assets and as such, the entire expenditure cannot be claimed as deduction which was allowed in case of repairs.
  • 14. Tax planning in case of employee’s remuneration  This requires consideration from the point of view of –  Employer: While calculating the business income of the employer, the remuneration payable to the employee, in whatever form, should be fully deductible otherwise the employer will have to pay tax on such remuneration also as the same will not be allowed as deduction while computing his business income. In some cases, the employer shall have to pay fringe benefit tax on certain benefits given to the employees.
  • 15.  Employee:The salary received by the employee, whether in cash or kind, should attract minimum income-tax liability. He should be in a position to avail maximum exemption/concession in respect of such salary received by him. Some of the exemptions/concessions available to employee under Income-tax Act are as under:  Section 10(10) exemption in case of death-cum-retirement gratuity.  Section 10(10A) exemption of commuted pension.  Section 10(10B) exemption of retrenchment compensation.  Section 10(10C) exemption of compensation on voluntary retirement.  Section 10(13A) exemption of House rent allowance.  Section 10(14) exemption of specified/notified special allowance.  Tax free perquisites, like medical facility, reimbursement of medical expenses, telephone at the residence of employee, free lunch or dinner/free refreshment, leave travel concession, etc.  Contribution by the employer to the provident fund or other welfare fund of the employee.  Perquisites taxable at concessional rate, like rent free accommodation, motorcar, etc.
  • 16. Inflation of expenses to suppress income is an act of …………. (B)Tax Planning (C)Tax Avoidance (D)Tax Evasion (E)Tax Management
  • 17. The filing of return of loss u/s 139(3) to avail benefit of set off and carry forward of loss is called …………….  (A) Tax Planning  (B) Tax Avoidance  (C) Tax Evasion  (D) Tax Management
  • 18. Mr. Aditya, an employee of Shri Ram Krishna Seva Mandal, stays in housing facility provided by the trust. This is an act of …………..  (A) Tax Planning  (B) Tax Avoidance  (C) Tax Evasion  (D) Tax Management
  • 19. Mr. Yash, a businessman, purchases National Saving Certificates of Rs.50,000, so as to reduce his income chargeable to tax from Rs.4,00,000 to Rs.3,50,000. This is an act of ……………..  (A) Tax Planning  (B) Tax Avoidance  (C) Tax Evasion  (D) Tax Management
  • 20. An assessee cannot claim the benefit of …………. for the purpose of tax deduction if the ‘Own’ the asset. B.Depreciation on asset C.Repair expenses of revenue nature D.Interest on money borrowed to purchase the asset E. None of the above
  • 21. When the asset is owned by the assessee, he can claim benefit of ………… for tax deduction. (A) Lease rental (B) Repair and Maintenance expenses of capital nature (C) Depreciation (D) Cost of Asset
  • 22. Which of the following will be not be allowed as deduction in case of ‘Lease’ of an asset? (A) Depreciation (B) Cost of Capital (C) Interest on loan borrowed for acquiring the asset (D) Rental paid to lessor
  • 23. Lease rental can be claimed as ________ against business income. B.Admissible expenses C.Inadmissible expenses D.Both (A) and (B) E. None of the above
  • 24. Deduction for expenses on repair and renewal is allowed as _________ B.Capital expenditure C.Revenue expenditure D.Differed Revenue expenditure E. Both (A) and (C)
  • 25. Remuneration paid to employee will be……… B.Fully deductible C.Partly deductible D.Non deductible E. Depends on situation