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MBA -CORPORATE TAX PLANNING &
MANAGEMENT
UNIT-
Tax Planning-
Tax planning may be defined as an arrangement of an assessee in such a way that full advantage is taken of all exemptions and deductions without violating the legal provisions of an Act. But tax planning is not possible without tax management. So, tax management is the first step towards tax planning and provides a suitable system by which all legal formalities relating with exemptions, deduction, reliefs and rebates are compiled for making tax planning successful. It includes revision, filing of return of income and corrective measures. In a summarised form, the tax planning is an arrangement of financial activities (all exemptions, deductions, rebates, reliefs etc.) in such a way that maximum tax benefits are enjoyed by the use of beneficial provisions in the tax laws, whereas in tax management the conditions are complied with (all legal formalties)
to claim the exemptions, deductions and reliefs.
Tax planning is an art and the exercise of arranging financial affairs in such a manner that, without violating the legal provisions in any way under tax and other laws, full advantage is taken of all tax exemptions, deductions, rebates, reliefs, allowances and other benefits under the tax law so that the burden of taxation on the tax payer is reduced to the minimum. So, under Tax planning the tax payer would be in a position to reduce his tax liability at the lowest level without violating in any way the legal provision of the law.
OBJECTIVES OF TAX PLANNING -
Tax planning is not only the need of the tax-payers but also of the society as a whole and the Government. The exemptions, deductions, rebates and reliefs have been provided by the governing body to achieve social and economic goals. To achieve these objectives people are encouraged for their tax planning. The main objectives of tax planning are –
1. Reduction in tax liability - Every taxpayer wishes to retain a maximum part of the earnings. The basic need of tax planning is to reduce the tax liability so that enough surplus remains for his personal and social needs and also for future investments in his business. This is only possible by planning his tax affairs properly and availing the deductions, exemptions and reliefs, etc. which are admissible under the Acts. 2. Minimisation of litigation - The tax-payers try their best to pay the least tax and the tax administrators attempt to extract the maximum. Whenever a tax-payer wants to reduce his tax liability by finding a loophole in the Act and the tax administrator does not agree with the interpretation of the
assessee under which he is demanding exemption or deduction, it results in litigation. A good tax planning is always based under the provisions of the taxation laws. In such a case the chances of litigation are minimised.
3. Productive investment - A proper tax planning brings fiscal discipline in the functioning
of a tax-payer and reduces the transfer of money, from the person to the Government. The amount so saved enhances the capacity of the tax-payer for expansion and growth, which in turn increases the tax revenue of the Government.
4. Reduction in cost - Incidence of tax (direct and indirect) forms a part of cost of production.
The reduction of tax-by-tax planning reduces the overall cost. It results in more profit and more tax revenue.
5. Healthy growth of economy - The tax planning plays an important role in the
development of backward states/districts and development of infrastructure facilities or in other words, it takes the economy in the future direction. So, savings through tax planning devices encourage the healthy growth of economy.
6. Employment generation - The amount saved by tax planning is generally invested in
commencement of new undertakings/business. This creates new employment opportunities in the business. Further, due to the complications in the taxation laws, some tax-payers cannot plan their financial affairs efficiently and needed the services of chartered accountants or financial planners. This encourages the employment generation.
METHODS OF TAX PLANNING
As we know that the prime objective of tax planning is to minimise the tax-liability. To achieve this objective, an assessee makes tax planning in different ways and forms. Some of methods/forms are – (1 ) Short-term tax planning - Short-term tax planning means a planning for current year only. Under this, an assessee makes tax planning for the previous year and ascertains the channels of investments so that his tax-liability for the previous year is reduced to the minimum. Such tax planning is done by salaried assessees and assessees having income from irregular sources. ( 2) Long-term tax planning - Long-term tax planning means a planning for future. Under this, an assessee makes investments in such plans/schemes which help him in reducing his future tax- liability. An assessee plans for present and future both so that his liability for the current year as well for years to come is reduced to the minimum. Such tax planning is done by the assessees carrying on business or profession or whose future income is likely to increase. (3) Investment tax planning - Investment tax planning means a planning for investment’s income which creates minimum tax-liability. These incomes are in form of interest or dividends which are either exempt from tax or, attract a low rate of tax. So, under this planning, investments are made in such securities whose incomes are either exempt in full or are partly
TAX PLANNING FOR INDIVIDUALS
Tax planning for all individual means the planning of income, investments and expenditures in such a way that the tax-liability of an individual comes to the minimum without avoiding the tax. As per Income-tax Act 1961, an individual may be an employee, a sole-proprietor, a partner in a firm, a member in a Hindu Undivided Family (HUF) or an Association Of Persons (AOP) or a Body Of Individuals (BOI) or a non-resident or otherwise. On the other hand, the individuals having income from various sources falling under different heads may sometimes find it difficult to derive maximum advantage because of the complicated provisions of taxation laws. Accordingly, they become frustrated on their efforts for taxplanning. The tax-planning in the case of an individual should cover the following aspects:
- Planning for ‘Residential status’.
- Planning under ‘Income from salary’.
- Planning under ‘Income from house property’.
- Planning under ‘Income from business or profession’.
- Planning under ‘Income from capital gains’.
- Planning under ‘Income from other sources’.
- Planning for ‘Deductions from gross total income (GTI)’
1. Planning for ‘Residential Status’ –
Tax liability of an assessee is determined on the basis of his residential status. The term tax liability does not mean the calculation of tax but it means the scope of the total income on which an assessee is chargeable to income tax. An assessee receives or earns income from different sources. Some incomes are earned or received from source within India and some from outside India. Whether he is charged on his Indian income or on his foreign income or on both the income, it is to be determined on the basis of his residential status. In the case of a not ordinary resident individual, he is liable to pay tax on all his Indian incomes and such foreign incomes which accrues or arises from a business or profession which is established in India or controlled from India. He is not liable to pay tax on his other foreign income. In the case of a non-resident individual, he is liable to pay tax only on his Indian incomes. Thus, it is clear that the tax-liability of a resident individual assessee is the maximum and that of a non-resident case, it is the minimum. Hence, an individual assessee must, if it is possible, try to have the status of a non-resident by not fulfilling of the conditions of becoming a resident. Tax planning may be done as follows: (i) If an individual wants to enjoy non-resident status, he should not stay in India for more than 181 days during any previous year and should plan in such a way that
(x) A salaried person may donate the sum to certain institutions and funds and can get
benefit of deduction regarding this donation u/s 80G. It will also reduce the tax liability of the assessee.
3. Planning under ‘Income from House Property’ –
(i) The house property must be constructed by taking loan because the interest on loan is deducted while computing taxable income of house property. On the other hand, if an assessee has more than one house, he should choose the house for his self-residence which is of higher annual value because the house having higher annual value which is being used for self-residence by the owner, is not considered for tax. This will reduce the taxable income of house property. (ii) If any assessee owns only one house, he should keep it as self-occupied house. Annual value of self-occupied house is taken to be ‘nil’. However, interest on loan, taken to purchase or construct the house, upto Rs.2,00,000 is allowed as deduction. Thus, income of this house may be in loss upto Rs.2,00,000. Such loss may be deducted from income of other house property. (iii) The assessee should never take loan for house construction from his any friend or relative as no deduction is allowed for such loan. (iv) The deduction regarding municipal tax (including service tax) is allowed on actual payment. Hence, as far as possible the tax should be paid before the end of the financial year. (v) If any house property is let out and the owner provides certain facilities to the tenant for which he has enhanced the rent of the property, then the owner assessee should enter into an agreement with the tenant specifying the rent to be charged for such facilities. Thus, rental value be separated for amenities and for house. In this way the rent charged for amenities shall not be considered for calculating annual value. If it is not done the whole rental value shall be considered for computing annual value and no deduction in respect of the expenditure for such amenities shall be allowed u/s 24. Thus, in order to minimize the tax liability, the owner should specify these charges separately. (vi) If any interest on loan, taken to purchase or to construct the house, is payable outside India, it should be paid after deduction tax thereon. If no tax deducted at source (TDS) is made, no deduction will be available in respect of such interest. It is, therefore, necessary that TDS must be made before paying such interest.
4. Planning under ‘Income from Business or Profession’ –
(i) Form of the business should be choosen wisely and carefully. (ii) If it is located in Free Trade Zone or backward states, he will be entitled to exemption or deduction (u/s 10A/80-IB/80-IC). It will reduce his tax liability. (iii) He should select such type of business in which the income is either exempt or deduction is allowed at a prescribed rate from such income. For example,
agricultural income is exempt and in case of hotel business, he will get deduction from gross total income. (iv) If he needs capital, he should borrow it from friends or relatives instead of taking gifts. The interest on loan is a deductible expenditure. This will reduce his tax liability. (v) He should not incur such expenses which are not deductible in computing business income. Similarly, he should not incur such expenses which are prohibited by law.
(vi) If the payment of an expense exceeds Rs.20,000, it should be paid by account
payee cheque or account payee draft otherwise such payment will be treated as disallowed expense (not for deduction).
(vii) If an assessee requires a building, plant, machinery or furniture for his business,
he should acquire it and put to use for at least 180 days during previous year, so that he may claim deduction of depreciation on it for full year.
Numerical in copy
Assessment year-
Assessment Year, as the name signifies, is the year in which income of the person is assessed, i.e. verified, and taxed. Here the word ‘person’ covers Individual, Hindu Undivided Family (HUF), Association of Persons (AOP)/Body of Individual (BOI), Partnership Firm, Local Authority, Company or Any artificial juridical person. In the Income Tax Act, 1961 , the term ‘ assessment year ‘ has been defined under section 2 sub- section 9 , which describes it as a period of 12 months starting from 1st of April every year. Hence, the financial year to which the income belongs is termed as the previous year, and the immediately succeeding financial year in which the income of the assessee is evaluated, the income tax return is filed, the tax liability is computed and becomes due for payment, is termed as the assessment year. Further, the due date for filing an income tax return for the previous year, in the assessment year will be: 31st July for individuals/AOP/BOI/HUF, who does not need an audit of their accounts, 30th Sep for Companies, Partner (working) of a firm or individuals whose accounts need to be audited under any law, 30th November for those businesses which require Transfer Pricing report.
Previous year-
(c) Every person who is deemed to be an assessee in default under any provision of this Act."
Types of Assessee-
The Income Tax Act, 1961 in India categorizes assesses into different types based on the nature of their income and their legal status. The following are the different types of Assessee as per the Act: 1) Individuals: An individual is a person who is assessed on his or her personal income, including income from salary, business or profession, capital gains, and other sources. 2) Hindu Undivided Families (HUF): HUF is a separate entity that is taxed on its income under the Act. An HUF consists of all persons lineally descended from a common ancestor, including their wives and unmarried daughters. 3) Companies : A company is a legal entity that is taxed on its income under the Act. There are different types of companies, including domestic companies, foreign companies, and one-person companies. 4) Partnerships : A partnership is an association of two or more persons who come together to carry on a business or profession. Partnerships are taxed on their income under the Act. 5) Association of Persons (AOP): An AOP is a group of two or more persons who come together to carry on any business or profession, and who are not necessarily partners. AOPs are taxed on their income under the Act. 6) Body of Individuals (BOI): A BOI is a group of individuals who come together to carry on any business or profession, but who are not necessarily partners. BOIs are taxed on their income under the Act. 7) Trusts : A trust is a legal arrangement where a person or entity (the trustee) holds property or assets for the benefit of one or more beneficiaries. Trusts are taxed on their income under the Act. 8) Artificial Juridical Persons (AJP): An AJP is an entity that is not a natural person but is treated as a person under the law. Examples of AJPs include local authorities, universities, statutory corporations, and other similar entities. AJPs are taxed on their income under the Act.
Residential status-
The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a particular year.
How to determine residential status?
For the purpose of income tax in India, the income tax laws in India classifies taxable persons as: A resident A resident not ordinarily resident (RNOR) A non-resident (NR) The taxability differs for each of the above categories of taxpayers.
Resident-
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :
1. Stay in India for a year is 182 days or more or 2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year.
Exceptions to Residential Status-
In the event an individual who is a citizen of India or person of Indian origin leaves India for employment during an FY, he will qualify as a resident of India only if he stays in India for 182 days or more. Such individuals are allowed a longer time greater than 60 days and less than 182 days to stay in India. However, from the financial year 2020-21, the period is reduced to 120 days or more for such an individual whose total income (other than foreign sources) exceeds Rs 15 lakh.
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