This document discusses tax planning relating to financial management decisions. It covers how capital structure, means of financing, and dividend policy can impact tax liability. Optimal capital structure and use of debt versus equity can lower tax costs. Dividends are taxable but distributing bonuses shares to equity holders does not incur tax liability and increases the shareholder's cost basis. The document provides details on what qualifies as a dividend and how expenses related to dividend income can be deducted.

1. TAX PLANNING WITH REFERENCE TO
FINANCIAL MANAGEMENT
Presented By:
Arup Bordoloi (06)
Priyanka Mohan (45)
Samujjwal Chakraborty (53)
Sujata Mahanta (58)

2. TAX PLANNING
Tax Planning is an exercise undertaken to
minimize tax liability through the best use of all
available allowances, deductions, exclusions ,
exemptions, etc., to reduce income and/or capital gains.

3. TAX PLANNING RELATING TO FINANCIAL
MANAGEMENT DECISIONS

4. CAPITAL STRUCTURE:
Importance in selection of capital structure
 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.

5. MEANS OF FINANCING:
Generally, the following means of finance are available for
a new project:
 Equity Share Capital
 Debentures/Loans and borrowings/Lease Finance

6. TAX PLANNING IN RESPECT OF CAPITAL STRUCTURE:
1. High debt financing and no equity financing:
 High Interest
 Earnings before tax-low
 Tax low

7. TAX PLANNING IN RESPECT OF CAPITAL STRUCTURE:
2. Optimum mixture of debt and equity financing:
 Interest high
 Earnings before tax-low
 Tax low
 Dividend to be paid
 Earning per share-high

8. TAX PLANNING IN RESPECT OF CAPITAL STRUCTURE:
3. Low debt financing and high equity financing:
 Interest low
 EBT-high
 Tax high
 EAT-high
 EPS-low
 Return on capital-high

9. TAX PLANNING IN RESPECT OF CAPITAL STRUCTURE:
4. No debt financing and high equity financing:
 Interest-nil
 Dividend-high
 EBT-high
 Tax-high
 EAT-high
 EPS-low

10. TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]
What is dividend ?????
Ordinary connotation means the sum paid to or
received by a share holder proportionate to his share
holding in a company out of the total sum distributed.
Section 2(22) of the Income Tax Act,1961 has explained
little bit more.
Now…What is Deemed Dividend ????

11. TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]
Any amount declared, distributed or paid by way
of dividends refereed to in section 115-O on or after
1/4/2013 whether out of current or accumulated profits
shall not be included in computing the total income of a
previous year of any person. Therefore no expense
shall be allowed from such dividend.
Dividend from a foreign company or deemed
dividend mentioned under section 2(22)(e) is taxable
under “Income from other sources”

12. TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]
The liability of payment of tax on dividends has
been shifted to domestic companies on or after 1/4/2013
whether out of current or accumulated profits.
The rate of Tax for the assessment year 2013/14 shall be
15 % plus surcharge @ 5 % plus education cess @ 2 % plus
secondary and higher education cess @ 1 %

13. DIVIDEND INCLUDES:
According to Section 2(22)(a) in The Income- Tax Act, 1995
Any distribution by a company to the extent of
accumulated profits, whether capitalized or not, if such
distribution entails the release by the company to its
shareholders of all or any part of the assets of the
company.

15. DIVIDEND INCLUDES:
According to Section 2(22)(b) in The Income- Tax Act, 1995
Any distribution of debentures/Deposit Certificates
to shareholders and bonus shares to preference share
holders whether capitalized or not.

17. DIVIDEND INCLUDES:
According to Section 2(22)(c) in The Income- Tax Act, 1995
Any distribution made to the shareholders of a
company on its liquidation, to the extent to which the
distribution is attributable to the accumulated profits of
the company immediately before its liquidation,
whether capitalized or not

18. DIVIDEND INCLUDES:
According to Section 2(22)(d) in The Income- Tax Act, 1995
Any distribution made to the shareholders by a
company on the reduction of its capital, to the extent to
which the company possesses accumulated profits,
whether such accumulated profits have been
capitalized or not.

20.  Loans/advances to certain shareholders/concerns[Section
2(22)(e)]
Any payment by a company of any sum by way of advances
or loan,to the extent of accumulated profits to:
(i)An equity shareholder, who is beneficial owner of shares
holding not less than ten percent of the voting power
DIVIDEND INCLUDES:

21. (ii)Any concern in which such is a member or a partner and in
which he has substantial interest
(iii) Any person, on behalf or for the behalf of any
Such shareholder. Such shareholder here means
a shareholder here means a shareholder who is
Beneficial owner of shares holding not less than 10% voting
share.
DIVIDEND INCLUDES:

22. Dividends do not include the following:
(i)Loan advanced in the ordinary course of business by the
money lending company
(ii)Dividend paid if set off against loan already
Treated as deemed dividend
(iii)Buyback of shares as per section 77A of Companies Act.
DIVIDEND INCLUDES:

23. (iv)Distribution of shares to the shareholders
Of demerged company
DIVIDEND INCLUDES:

24. Deductions for expenses for dividend income[Section 57(i) and
57(iii)]
 Collection charges
 Interest on loan
 Any other expenditure
DIVIDEND INCLUDES:

25. TAX PLANNINNG VIA BONUS

26.  UNDER SEC 2(22)(a) : Capitalization by issue of bonus shares
to equity shareholder does not release of assets of a
company hence shall not been deemed to be dividend.
 Two types of shareholder who invest in shares of a
company.
BENEFITS TO THE SHAREHOLDER:

27.  Sec 55 (aa)(iiia):The cost of acquisition in relation to financial
assets allotted to the assessee
 On or After 1-4-1981 without any payment and on the basis of
holding of any other financial asset ,shall be taken nil.
 If in case bonus share is allotted before 1-4-1981 assessee
may opt for market value as on 1-4-1981
TREATMENT ON SALE OF BONUS SHARES:

28.  Although distribution of bonus shares to equity
shareholders will not be deemed to be dividend, but as
per section 2(22)(c) the distribution of bonus shares to
preference shareholders is a dividend.
TREATMENT ON SALE OF BONUS SHARES:

29.  If the company does not declare the dividends out of its
income then the profits are available to the company for
being ploughed back into the business.
 And if company distributes its income by way of dividends
then the company shall have to look for alternative source
of raising capital .
 The company must be cautious while capitalizing the profit.
BENEFITS TO THE COMPANY:

30.  If the company is able to invest the capitalized funds into
profitable venture where the return is higher than the
existing rate of dividend, the future rate of earnings is
bound to increase.