B. Com.

(H)

Corporate Taxation

Meaning of Tax

A tax is a mandatory fee or financial charge levied by any government on an

individual or an organization to collect revenue for public works providing the best
facilities and infrastructure. The collected fund is then used to fund different public
expenditure programs.

If one fails to pay the taxes or refuses to contribute towards it, will invite serious
implications under the pre-defined law.

Types of Taxes

Direct Tax

Direct Taxes: The individuals directly pay these taxes to the respective governments. The most
notable examples include Income tax, Capital gains tax, corporate tax, Wealth Tax and Securities
transaction tax.

Indirect Taxes: These taxes are not directly paid to the governments but are collected by the
intermediaries who sell or arrange products and services. GST (Goods and Service Tax), Service
tax, sales tax, customs duty are some of the examples.

Tax Planning

Every individual needs to pay taxes on his income. Based on the provisions of the Income-tax
Act, these taxes need to be paid. As income increases, the rate of paying taxes also increases.
Tax Planning is a basic yet integral part of financial planning. Tax planning helps an individual
to reduce tax liability and helps save more of their capital.

Tax planning is the analysis of one’s financial situation from the tax efficiency point-of-view.

Tax Planning allows a taxpayer to make the best use of the different tax exemptions,
deductions and benefits to minimize his tax liability in each financial year.

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There are many options available to save more and reduce taxes. If an individual has done
proper financial & tax planning then deductions would be subtracted from the gross total
income and income tax would be levied on the balance income as per the income tax slabs.

It is the duty of every citizen to carry out proper tax planning. There are various benefits that
you can avail with tax saving schemes based on your tax slab, social liabilities, and personal
preferences.

A good tax planning is done by using the right mix of investments in order to minimize the

tax liabilities.

Advantages of tax planning

1. To minimise litigation: To litigate is to resolve tax disputes with local, federal, state, or
foreign tax authorities. There is often friction between tax collectors and taxpayers as the
former attempts to extract the maximum amount possible while the latter desires to keep
their tax liability to a minimum. Minimising litigation saves the taxpayer from legal
liabilities.
2. To reduce tax liabilities: Every taxpayer wishes to reduce his tax burden and save
money for his future. He can reduce his tax liability by arranging his investments within
the various benefits offered under the Income Tax Act, 1961. The Act offers many tax
planning investment schemes that can significantly reduce his tax liability.
3. To ensure economic stability: Taxpayers’ money is devoted to the betterment of the
country. Effective tax planning and management provides a healthy inflow of white
money that results in the sound progress of the economy. This benefits both the citizens
and the economy.
4. To leverage productivity: One of the core tax planning objectives is channelising funds
from taxable sources to different income-generating plans. This ensures optimal
utilisation of funds for productive causes.

Types of Tax Planning in India

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 The different

methods of tax planning in India are described below -

• Short-term Income Tax Planning- It implies planning closer to the end of the financial

year and choosing the best investment options to save tax. However, you might end up

making hasty decisions to file your ITR in the nick of time.

• Long-term Income Tax Planning-As the saying goes, well begun is half done. So, when

you start planning your tax saving investments at the beginning of the financial year it is

long-term tax planning. And a well chalked out plan always helps in the long-run.

• Purposive Income Tax Planning- Planning taxes with a particular objective in mind -

Purposive tax planning means specifically planning the taxes to avail maximum benefits by

taking right investment decisions, through correct selection of investment, replacing the

assets, business expansion programme, income etc.

• Permissive Income Tax Planning- Tax planning that is under the framework of law.
Permissive tax planning refers to the plans which are permissible under the Income-tax
Act,1961. For example, planning to claim various deductions under Section 80,
incentives for getting the benefit of different tax concessions, etc.

Difference between Purposive Income Tax Planning and Permissive Income Tax Planning -
Purposive tax planning is planning taxes with a specific aim, while permissive tax planning is
performed as per the regulations of the nation’s taxation laws.

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Tax managementTax Management deals with filing returns in time, getting the accounts

audited, deducting tax at source etc. It helps in avoiding payment of interest, penalty, prosecution

etc. and is essential for every assesses.

Areas of Tax Management
Important areas of tax management are discussed below:
1. TDS
2. Collection of Tax at Source
3. Payment of Tax
4. Maintenance of Books of Accounts
5. Audit of Books of Accounts
6. Furnishing the Return of Income
7. Documentation and Maintenance of Tax Records
8. Review of Orders of Income Tax Department

S. Basis of Tax Planning Tax Management

No. Difference
1 Meaning The process of identifying tax-saving The process of implementing
opportunities tax-saving strategies
2 Objective Legally minimise tax liability Adhere to the tax provisions
3 Deals with income and investment planning to benefit Maintaining financial records,
from the various tax-saving provisions filing tax returns, account
available under the tax laws audits, and paying taxes
before the due date
4 Obligation Not mandatory Mandatory for every taxpayer
5 Focus Future tax liabilities Past and present tax liabilities
6 Involvement Typically handled by tax professionals Handled by both taxpayers
and tax professionals

Tax evasion

Tax evasion is illegal and involves fraudulent actions. Tax Evasion is an illegitimate way to
minimize tax liability through unlawful techniques like inflating expenses or understating taxable
income. Such fraudulent means are used with the motive of showing lesser profits to minimize
one’s tax burden. Certain noted illegal practices are concealing income or relevant documents,
making false statements, overstatement of the tax credit, not maintaining complete records of the
transactions or accounting personal expenses as business expenses.

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Tax evasion is an offense for which the assessee could be punished under Chapter XXII of the
Income Tax Act, 1961. One common way people adopt to evade taxes is by transacting in cash
without accounting for the same in books. However, to track and tax such transactions and the
means utilized to evade tax, the government keeps a vigilant watch and picks the cases for
assessment. If caught, a heavy penalty may be levied along with taxes.

For example, John owns a small business and generates significant cash income from his
business activities. Instead of reporting the full income and paying the appropriate taxes, John
engages in tax evasion to evade his tax obligations. John begins by intentionally underreporting
his business income on his tax return. He manipulates his accounting records, inflates expenses,
and hides some of his cash income. By doing so, he significantly reduces his reported income,
which leads to a lower tax liability. John's actions constitute tax evasion since he deliberately and
illegally manipulates financial information, hides income, and conceals assets to avoid paying
the taxes he owes.

Tax Avoidance

Tax avoidance is a legal method by which one can reduce his tax liability. Thus, tax avoidance

involves using legal methods to minimize tax liability. For instance, if someone invests in
financial instruments outlined in Section 80C of the Income Tax Act, such as Public Provident
Fund or Equity Linked Savings Scheme, he can claim deductions. This will be considered tax
avoidance.

Other examples

• Investing in a retirement account and maxing out your annual contributions

• Putting money into a health savings account (HSA)

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TDS stands for Tax Deducted at Source. It is the tax amount that the government collects
directly from the recipient’s income immediately when it is earned.

Example-Prize money for a lottery, horse race, crossword puzzle, etc., more than Rs.10,000

TCS stands for Tax Collected at Source. According to Section 206C of the Income Tax Act,
seller imposes TCS on their goods and collect them from buyers at the time of sale.

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Repeat-Difference between tax planning and tax evasion

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Company.

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Companies Act 1956.

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Or repair

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allowed as deduction on pro rata basis

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Note-Point 1, Put to use date is 2017 instead of 2018

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Minimum Alternate Tax (MAT)

It was first introduced in 1988 with the aim of including companies that were previously exempt
from taxes in the tax system. Minimum Alternate Tax is a system put in place to ensure that all
profitable companies, regardless of any tax exemptions they may have, are required to pay tax.

The implementation of MAT aims to bring "zero tax companies" into the tax net, despite the fact
that they have generated big book profits and paid out sizable dividends. This is due to the

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 numerous tax deductions and incentives provided by the Income-tax Law. The required
alternative tax rate for AY 2022–2023 is 15%.

Important points

o Minimum Alternate Tax is a provision in the direct tax laws that restricts tax exemptions
for businesses and mandates them to pay a minimum corporate tax. The corporate tax rate
for domestic companies in India is 25%.
o Life insurance companies and shipping corporations responsible for tonnage tax are
exceptions. Companies with no permanent premises are also exempted from paying
MAT.
o Minimum Alternate Tax was initially applied to only companies, but it has been
increasingly extended to other taxpayers under the Alternative Tax framework.
o In September 2019, the government reduced the MAT tax rate from 18.5% to 15% while
concurrently lowering the company tax rate from 30% to 22%.
o Furthermore, any new domestic incorporation incorporated on or after October 1, 2019,
would be exempted from tax.

Purpose of Levying MAT

The purpose of MAT is to prevent financially stable and healthy companies from escaping their
income tax obligation.

Difference between Minimum Alternative Tax and Alternative Minimum Tax

Minimum Alternative Tax and Alternative Minimum Tax aim to ensure that taxpayers pay a
minimum amount of tax, no matter the tax benefits they enjoy. However, their applicability is
different.

Calculating MAT

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o In situations, where the taxable amount determined through the provisions of the Income
Tax is less than 15% (including the relevant surcharge and cess) of the book profit as per
The Companies Act 2013. The Corporate Tax Rate for India is AY 2022 is 25%
o For example, a company with a recorded profit of Rs. 100 crore has to pay a minimum
tax of Rs 15 Crore. (based on a 15% MAT rate)
o If the normal tax liability after deductions is 10 Crore (which is less than MAT), the
company must pay 5 crores as MAT and use the MAT credit of Rs 5 crore towards future
payments.

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