SAVANT FrameworkStrategy

AnticipationValue adding

NegotiationTransformation

Tax management should work to enhance the firm’s strategy and should not cause the firm to engage in tax minimizing transaction that deter it from its strategic plan.

The firm’s business level strategy is typically detailed in operations level, corporate level and International level strategy.

At the operation level, the firm’s strategy involves gaining advantage over competitors to create value for its customer through its product and services.

Strategy

Corporate strategy focuses on the diversification of the business.

International strategy focuses on taking advantage of corporate and business strengths in global market.

Firms operate in dynamic environment in which they must attempt to anticipate the action of their competitors, markets and governments.

Firms need to adjust the timing of transaction in anticipation of expected tax changes.

Anticipation

Effective tax management is no different from any other aspect of management in so far as any transaction should at some point be expected to add value.

If the Net present value of cash flows from a transaction is positive, then over time, this will translate into positive financial earnings.

Value adding

Tax management also include transforming certain types of income into gains, certain type of expenses into losses, and certain type of taxable income into non

taxable income.regarding the latter, losses on sales of capital assets are deductible only to the extent that the firm has capital gains. Thus firm would like to transform capital losses to ordinary losses.

Transforming

In the words of Justice Chinnapa Reddy, “ Tax avoidance is an art of dodging tax authorities without breaking the law.”

Tax avoidance is an attempt to manage financial affairs by using colorable devices with the intention of reducing tax liablity.

The Institution of Taxation in U.K. defined Tax avoidance as:◦ The transactions that are designed to avoid or reduce

the liability of tax or◦ The transactions that are bought into existence solely

for tax avoidance & not to achieve a commercial purpose

◦ The transactions that are clearly outside the purview of the intensions of the law makers.

Tax Avoidance

It is illegal method of saving tax and makes the person liable to penalties and prosecution.

‘Tax evasion’ refers to an exercise/attempt by a tax payer for not paying the tax legally becoming due.

Tax evasion usually involves deliberately misrepresentation or concealing the true state of financial affairs to the tax authorities to reduce the tax liability, it includes dishonest tax reporting.

Tax Evasion

A Tax evader either◦ Pay less tax than what he is supposed to pay or◦ Does not pay any tax when he is legally liable to

pay.

The method Tax evasion are :◦ Not showing income at its real level i.e. under

disclosure of income;◦ Inflating the expenses and thus reducing the real

income;◦ Manipulation of accounts to reduce the income;◦ Violation of rules and regulation of laws with

intention to save tax;◦ Manipulation of sale and purchase of property.

1. Sole proprietorship 2. Joint Hindu Family (Hindu Undivided

Family) 3. Partnership firms 4. Company 5. Co-operative form of organization

Form of organization

In this form of organization one person is all in all. He contributes whole of the capital and bears full risk with unlimited liability.

There is no distinction between personal and business assets for payment of debts.

His managerial capacity is also limited to himself or he will be dependent on hired employees.

He might be supported by his family members.

In this form of organization there is no government control.

Sole Proprietorship

This form of organization is operated under Hindu Law only.

Hindus (Jains & Sikhs also) can claim this status.

It is an extension of sole proprietary form of organization.

In this form of organization, there is no government control.

Joint Hindu Family (HUF)

This form of organization comes into existence as a result of the agreement between two or more person who agree to carry on business or profession with the object of sharing profits and losses.

The relationship is called ‘Partnership’, members are called ‘Partner’ an entity which comes into existence is called ‘Firm’.

In this form of organization availability of capital is better.

The managerial skills of partners is also available. The risk is spread over all partners. Liability of all partners is unlimited.

Partnership Firm

It is an association of persons incorporated under Indian Companies Act, 1956.

There is a clear distinction between management and ownership.

The company is managed by professional managers who are hired.

The company form of organization has to obey all the provisions of Companies Act and many other Acts.

It can be liquidated only with the prior permission of government and high court of the state in which it is incorporated.

Company

It is also a body which comes into existence by registration under cooperative societies act, 1912.

It also has limited liability and is managed by hired professionals.

The capital raised by members only and is equally spread all members. The societies are governed by the provisions of the cooperative societies Act,1912.

Co-operative Society

Sole Proprietorship and some Tax provisions1. Status under Income Tax Act: sole proprietorship business is assessed as

‘individual’ (in the name of the owner) under the Income Tax Act, 1961.

The income of sole proprietorship business is taxable as the business income of the owner.

It is responsibility of the owner to include such business income in his/her total income.

No special formalities are required to be fulfilled (as in case of firm) to claim the status of individual for assessment purpose.

Tax Planning with reference to form of orgainzation

2. Residential status under IT Act: The scope of total income of a sole

proprietor depends upon the residential status of its owner/proprietor.

Section 6 of the Income Tax Act, 1961 provides for the rules for determination of residential status of individual and accordingly a sole proprietor can have any one of the following three types of residential status:◦ Ordinary resident◦ Not ordinary resident◦ Non- Resident

3. No deduction of salary and allowances to owner:

While calculating business income any allowances like salary, fees, bonus, commission etc paid/payable to owner is not allowed as business expenditure.

4. No deduction of interest on loan or capital: A sole proprietor is not allowed any deduction

of interest on capital as business expenditure. Similarly, if owner provides any loan to

business, in addition to normal capital employed, then no deduction is allowed in respect of such interest also.

5. No deduction for rent of owned premises: If business premises is owned by the owner

of the business, then no deduction can claimed in respect of rent of such business premises.

6. Relaxed liability to deduct Tax at source.

7. Deductions are same as in the case of Individual (80C, 80CCC,80CCF etc)

1. Employ family members in the business.

2. Borrow money from the family members at reasonable rate of interest.

3. Apply taxable income for personal purpose to claim deductions.

Tax Planning for Sole Proprietor

Claim reasonable salary etc. to Karta as expense.

Employ family members in the business.

Borrow money from Karta/Family members.

Apply taxable income for the personal purpose to claim deductions.

Tax Planning for HUF

Claim salary etc. to working partner as expense.

Borrow money from partners (12 PA) Create partnership between family

members. Admit minor child to the benefit of

partnership. Disallowability of interest on capital. No deduction u/s 80 is allowed. Separate PAN is required.

Tax Planning for Partnership

Separate PAN is required. Allowability of salary etc. to Directors/MD. Interest on loan is deductible. Provisions relating to set-off of accumulate loss

and unabsorbed depreciation in certain cases of mergers (Section 72 A)

Donation u/s 80G. Deduction is allowed on the donation to political

parties (Section 80 GGB) No deductions on the donation to be given for

the benefits of any religion, cast and community. Deduction in respect of any payment made to

certain institutions (Section 80GGA)

Tax Planning for company

Status under Income Tax Act. Separate PAN is required. Allowability of salary etc. to members. 100% deduction is allowed in Banking,

providing credit, cottage industry, marketing of agriculture products of its members, processing of agriculture products and fishing and allied activities.

100 % deduction on the Income derived by the cooperative society by way of interest or dividends from its investment with any other cooperative society.

Tax Planning for cooperative society

Tax planning regarding Location of BusinessGovernment in order to encourage industrial development of certain areas announces some incentives to units established in those areas.These Incentives may be:-

Complete or partial tax holiday for certain no of years.Exemption from excise duty.Exemption from sales tax.Supply of regular electricity at concession rates.Exemption of import duty on imported raw material etc.Cash subsidy.

Undertaking setup in FTZs/SEZs may be engaged in manufacture/production of computer, software, agriculture etc.

Such undertakings has to export its entire production of goods out of India. However sales in domestic area may be allowed as per rules.

Foreign equity upto 100% is permissible in such units. Such undertakings can import free of duty all type of

goods including capital goods, required by it for manufacture, production or processing provided these items are not prohibited in the negative list of import.

Such undertakings shall be allotted industrial plot on lease at concessional rates.

Setup undertakings in Free Trade Zones and Special economic zones

The finished products of such undertakings shall be exempt from central excise.

The finished products shall also be exempt from central sales act. Also CST paid on purchase on raw material etc. for use in production shall be reimbursed to such undertaking.

Such undertakings shall be eligible to claim 100% deduction under section 10A in respect of profits of such undertakings for certain no of consecutive assessment years subjected to fulfillment of certain conditions.

Setup undertakings in North east region can claim tax heavens for 10 consecutive years.

Setup certain specified business undertakings in notified backward areas or other notified areas. Section 80 IB of the Income Tax Act grants a deduction in respect of profits and gain from the business of:◦ Industrial undertakings, or◦ A hotel, or◦ Operation of ship, or◦ Developing, maintaining, and operating any

infrastructure facility or scientific and industrial research and development.

Other locations

‘Nature of Business’ refers to the types of activities to be undertaken by the business house. The owner may decide to establish a manufacturing business, a trading business, a construction business, a service business, or an export oriented unit etc.

Set up agriculture business and enjoy 100% tax free income: entrepreneurs are advised to setup agriculture business by starting partnership firm or incorporating a company.

Tax planning regarding Nature of Business

Agriculture income is totally exempt from Income tax according to u/s 10 (1) as the central government does not have power to charge tax on agriculture income.

Tax incentives (generally 100%) for export undertakings located in certain specified zones for certain years u/s 10 A.

Tax incentives (100%) to 100% export oriented units according to u/s 10 B.

Tax incentives to undertakings engaged in export of handmade wooden articles.

Tax incentives to undertakings engaged in providing infrastructure facility (road, highway, rail transport, a water supply project etc) , u/s 80 IA provides a deduction of 100 % of profit and gains for certain no of years (generally 10 years)

Tax incentives to undertakings engaged in providing telecommunication services u/s 80 IA.

Tax incentives to develop/operate/maintain industrial park or special economic zone.

Tax incentives to power sector undertakings u/s 80 IA.

Tax incentives of undertakings engaged in production/refining of mineral oil u/s 80 IB (9).

Tax incentives for setting up hotels, multiplex theatre, industrial and scientific research, hospitals in rural areas, tea and coffee business, rubber business etc.

Any income which is received or is deemed to be received in India during relevant previous year, any income which arises or deemed to arises in India during relevant previous year.

Types of Income1. Income received in India: the source of income

may be situated, anywhere in the world but if its first receipt is in India, it is taxable for all. Income may be received by the assessee himself or by his agent on his behalf or is actually received by him or it might be credited to his account.

Income

2. Deemed to be received in India: these incomes are actually not received by assessee instead these are credited to his account to be paid at a later date.ex: interest accrued on provident fund balance, any contribution made by the central government in the previous year.

3. Income arising in India: business profit or professional gain arises where business is carried out, if it is in India then income from these sources will be arising in India.

4. Income deemed to arise in India: these incomes actually arises outside India but u/s 9 these are deemed to arise in India.

These income are: salary paid by govt. to its employees posted

abroad. Pension paid outside India but for services

rendered in India. Dividend paid by India company outside India.

5. Any income arises and received outside India but business is controlled or setup from India.(only on business income not on salary)

6. Any other income arises and received outside India.

7. Past untaxed income which is exempted earlier but is bought to India in current previous year.

Income under the head “house property” Income under the head “profits and gains of

business or profession” Income under the head “capital gain” Income under the head “income from other

sources”

Components of Income

CONDITIONS NECESSARY FOR TAXING INCOMEFROM HOUSE PROPERTYThese are:

The property should consist of any building or land,apartment

The assessee should be the owner of the property The property should not be used by the owner for the

purpose of any business or profession carried on by him, the profits of which are chargeable to tax.

Income from House Property

Under section 28 the following income chargeable to Income tax

Profit and gain of any profession or business Any compensation or other payments due

to or received by any person specified in section 28 (2)

Income derived by trade The value of any benefit whether

convertible into money or not from business Export incentives available to exporter Any interest, bonus, commission received

Income from Profit and gain of business or profession

Any sum received for not to carry out business activity, patent, technical know how, copy right

Profit and gain from managing agency Profit from speculative transaction

Chargeability u/s 45 Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year in which transfer take place under the head "Capital Gains".

Capital Asset: Sec. 2(14): Capital Asset means property of any kind (Fixed, Circulating, movable, immovable, tangible or intangible) whether or not connected with business or profession.

Exclusions — Stock-in-trade Personal effects of the assessee Agricultural land in a rural area 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National

Defence Bonds, 1980 issued by the Central Government Special Bearer Bonds, 1991 issued by the Central Government. Gold Deposit Bonds issued under Gold Deposit Scheme 1999

Income from capital gain

Any item of income chargeable to tax but does not fall within the ambit of the other four specific heads of income shall be included under this head of income.

The following income shall be charged to tax only under the head “Income from Other Sources”:

(1) Dividend income covered by sub-clause (a) to (e) of clause (22) of Section 2.

(2) Income by way of winnings from lotteries, cross word puzzles, races including horse race, card games and other games of any sort, gambling, betting, etc. It requires mention here that such winnings are chargeable to tax u/s 115BB at a flat rate of 30%.

(3) Any sum of money, the aggregate value of which exceeds Rs.50, 000 received from any person without consideration by an individual or Hindu Undivided Family on or after 01.04.2006.

Income from other sources