Importance of corporate tax
planning
&
Tax planning of new business
SUBMITED BY:
KUSHAL BHAGAT
YOGITA CHHABHAYA
KRUNAL KAPADIA
RAGINI PATEL
02
05
16
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 planning
•
•
•
•
Tax 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 units
Corporate 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
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 80HHC.
• 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.
Thank
you
Any queries?