-Sundar

Eligibility Comes from Efforts, Luck

Comes from Opportunities Shetty
 Lecture Outcome

• Understand the relevance to study this course.

• Comprehend the meaning and basic concepts of

corporate tax planning
 WHAT IS A TAX?
• Let us begin by understanding the meaning of tax. Tax is a fee charged by a
government on a product, income or activity.

• There are two types of taxes . Direct taxes and indirect taxes.

• If tax is levied directly on the income of a person, then it is a direct tax e.g. income-
tax.

• If tax is levied on the price of a good or service, then it is called an indirect tax e.g.
GST/ Sales Tax. In the case of indirect taxes, the person paying the tax passes on
burden and the incidence of tax to another person.
 WHY ARE TAXES LEVIED?

• The reason for levy of taxes is that they constitute the basic source of
revenue to the government.

• Revenue so raised is utilised for meeting the expenses of government

like defence, provision of education, health-care, infrastructure
facilities like roads, dams etc.
 Income-tax Act

• The levy of income-tax in India is governed by the Income-tax Act, 1961. We shall
briefly refer to this as the Act.

• This Act came into force on 1st April, 1962.

• These undergo change every year with additions and deletions brought about by the
Finance Act passed by Parliament.

• In pursuance of the power given by the Income-tax Act, rules have been framed to
facilitate proper administration of the Income-tax Act.
 Meaning Of “INCOME” [ Section 2(24) ]
• The Definition given u/s 2 (24) is inclusive and not exhaustive.
According to English dictionary, the term “Income” means  periodical
monetary return coming in regularly from definite sources like one’s
business, Land, Work, Investments etc.”.

• It’s nowhere mentioned that “Income” refers to only monetary return. It

includes value of Benefits and Perquisites.
 Example:
• Mr. You is employed by XYZ Ltd. Apart from Salary , he has been provided a Rent-
Free House by the employer . the value of perquisites is respect of the Rent-Free
House is taxable as “Income” in the hands of Mr. You..

• Any Special Allowance or Benefit : All type of special allowance are given/allow to
the assessee to meet the expenses exclusively, wholly and necessarily for the duties
he performed for the office or employment is treated as “Income”.
 PERSON [ Section 2(31) ]

• The word “Person” is a very wide term and embraces in itself the following :

• Individual :         It refers to a natural human being whether Male or Female , Minor or
Major.

• Hindu Undivided Family (HUF) : It is a relationship created due to operation of Hindu
Law. The Manager of HUF is called “ Karta” and its member are called ‘Coparceners’.

• Company : It is an artificial person registered under Indian Companies Act 1956 or any
other Law.
Assessee [ Section 2(7)]
Assessee means a person by whom any tax or any other sum of money is payable under
this Act and includes the following:

Income Tax Act,1961 defines “assessee” as a person by whom any tax or any other sum of
money is payable under this Act, and includes,* Every person in respect of whom any
proceeding under this Act has been taken for the assessment of his income or income of any
other person in respect of which he is assessable, or of the loss sustained by him or such other
person, or the amount of refund due to him or to such other person.
*
Every assessee is a 'person', but every person need not be an 'assessee'. For example, X,
an individual has earned total income of Rs. 2,40,000 in the previous year. He is a person
but not an assessee because his total income is less than the maximum exemption limit of
Rs. 2,50,000 and no tax or any other sum is due from him
What is Financial Year?

A Financial Year (FY) is the period between

1 April and 31 March – the year in which you
earn an income.
 What is Assessment Year?
• The assessment year (AY) is the year that comes after the FY.

• This is the time in which the income earned during FY is assessed and
taxed.

• Both FY and AY start on 1 April and end on 31 March. For instance, FY

2019-20 and AY 2020-21 are one and the same.
Meaning Of Tax Planning
Tax Planning involves planning in order to avail all exemptions, deductions and rebates
provided in Act. The Income Tax law itself provides for various methods for Tax Planning,
Generally it is provided under exemptions u/s 10, deductions u/s 80C to 80U and rebates and
relief’s.

Some of the provisions are enumerated below :

•Investment in securities provided u/s 10(15) . Interest on such securities is fully exempt
from tax.
•Exemptions u/s 10A, 10B, and 10BA
•Residential Status of the person
•Choice of accounting system
•Choice of organization.
Tax planning is the analysis of a financial situation or plan from a tax
perspective. The purpose of tax planning is to ensure tax efficiency, with
the elements of the financial plan working together in the most tax-
efficient manner possible.

Tax planning is an important part of a financial plan, as reducing tax

liability and maximizing eligibility to contribute to retirement plans are
both crucial for success.
The avid goal of every taxpayer is to minimize his Tax Liability. To
achieve this objective taxpayer may resort to following Three Methods
1. Tax Planning
2. Tax Avoidance
3. Tax Evasion

Tax Planning is resorted to maximize the cash inflow and minimize the
cash outflow. Since Tax is kind of cost, the reduction of cost shall increase
the profitability. Every prudence person, to maximize the Return, shall
increase the profits by resorting to a tool known as a Tax Planning.
How is Tool of Tax Planning Exercised ?
Tax Planning should be done by keeping in mind following factors :

•The Planning should be done before the accrual of income. Any planning done after the accrual
income is known as Application of Income an it may lead to a conclusion of that there is a fraud.

•Tax Planning should be resorted at the source of income.

•The Choice of an organization, i.e. Taxable Entity. Business may be done through a
Proprietorship concern or Firm or through a Company.

•The choice of location of business , undertaking, or division also play a very important role.

•Residential Status of a person. Therefore, a person should arranged his stay in India such a
way that he is treated as NR in India.
 Short Term Tax Planning :
Short range Tax Planning means the planning thought of and executed at
the end of the income year to reduce taxable income in a legal way.

Example : Suppose , at the end of the income year, an assessee finds his
taxes have been too high in comparison with last year and he intends to reduce it.
Now, he may do that, to a great extent by making proper arrangements to get the
maximum tax rebate u/s 88. Such plan does not involve any long term
commitment, yet it results in substantial savings in tax.
 Long Term Tax Planning
• Long range tax planning means a plan chalked out at the beginning or the income
year to be followed around the year. This type of planning does not help immediately
as in the case of short range planning but is likely to help in the long run

• Example: If an assessee transferred shares held by him to his minor son or spouse,
though the income from such transferred shares will be clubbed with his income u/s
64, yet is the income is invested by the son or spouse, then the income from such
investment will be treaded as income of the son or spouse. Moreover, if the company
issue any bonus shares for the shares transferred , that will also be treated as income
in the hands of the son or spouse.
 Permissive Tax Planning
Permissive Tax Planning means making plans which are
permissible under different provisions of the law, such as
planning of earning income covered by Sec.10, specially by Sec.
10(1) ,

Planning of taking advantage of different incentives and

deductions, planning for availing different tax concessions etc.
 Purposive Tax Planning

It means making plans with specific purpose to ensure the

availability of maximum benefits to the assessee through
correct selection of investment,

making suitable programme for replacement of assets,

varying the residential status and diversifying business
activities and income etc.
Meaning Of Tax Planning
Tax Planning involves planning in order to avail all exemptions, deductions and rebates
provided in Act. The Income Tax law itself provides for various methods for Tax Planning,
Generally it is provided under exemptions u/s 10, deductions u/s 80C to 80U and rebates and
relief’s.

Some of the provisions are enumerated below :

•Investment in securities provided u/s 10(15) . Interest on such securities is fully exempt
from tax.
•Exemptions u/s 10A, 10B, and 10BA
•Residential Status of the person
•Choice of accounting system
•Choice of organization.
Tax planning is the analysis of a financial situation or plan from a tax
perspective. The purpose of tax planning is to ensure tax efficiency, with
the elements of the financial plan working together in the most tax-
efficient manner possible.

Tax planning is an important part of a financial plan, as reducing tax

liability and maximizing eligibility to contribute to retirement plans are
both crucial for success.
The avid goal of every taxpayer is to minimize his Tax Liability. To
achieve this objective taxpayer may resort to following Three Methods
1. Tax Planning
2. Tax Avoidance
3. Tax Evasion

Tax Planning is resorted to maximize the cash inflow and minimize the
cash outflow. Since Tax is kind of cost, the reduction of cost shall increase
the profitability. Every prudence person, to maximize the Return, shall
increase the profits by resorting to a tool known as a Tax Planning.
How is Tool of Tax Planning Exercised ?
Tax Planning should be done by keeping in mind following factors :

•The Planning should be done before the accrual of income. Any planning done after the accrual
income is known as Application of Income an it may lead to a conclusion of that there is a fraud.

•Tax Planning should be resorted at the source of income.

•The Choice of an organization, i.e. Taxable Entity. Business may be done through a
Proprietorship concern or Firm or through a Company.

•The choice of location of business , undertaking, or division also play a very important role.

•Residential Status of a person. Therefore, a person should arranged his stay in India such a
way that he is treated as NR in India.
 Short Term Tax Planning :
Short range Tax Planning means the planning thought of and executed at
the end of the income year to reduce taxable income in a legal way.

Example : Suppose , at the end of the income year, an assessee finds his
taxes have been too high in comparison with last year and he intends to reduce it.
Now, he may do that, to a great extent by making proper arrangements to get the
maximum tax rebate u/s 88. Such plan does not involve any long term
commitment, yet it results in substantial savings in tax.
 Long Term Tax Planning
• Long range tax planning means a plan chalked out at the beginning or the income
year to be followed around the year. This type of planning does not help immediately
as in the case of short range planning but is likely to help in the long run

• Example: If an assessee transferred shares held by him to his minor son or spouse,
though the income from such transferred shares will be clubbed with his income u/s
64, yet is the income is invested by the son or spouse, then the income from such
investment will be treaded as income of the son or spouse. Moreover, if the company
issue any bonus shares for the shares transferred , that will also be treated as income
in the hands of the son or spouse.
 Permissive Tax Planning
Permissive Tax Planning means making plans which are
permissible under different provisions of the law, such as
planning of earning income covered by Sec.10, specially by Sec.
10(1) ,

Planning of taking advantage of different incentives and

deductions, planning for availing different tax concessions etc.
 Purposive Tax Planning

It means making plans with specific purpose to ensure the

availability of maximum benefits to the assessee through
correct selection of investment,

making suitable programme for replacement of assets,

varying the residential status and diversifying business
activities and income etc.
TAX AVOIDANCE
 TAX AVOIDANCE
Tax avoidance is an art of dodging tax without actually breaking the law.
It is a method of reducing tax incidence by availing of certain loopholes in the
law. The expression Tax avoidance will be used to describe every attempt by
legal means to prevent or reduce tax liability which would otherwise be
incurred, by taking advantage of some provision or lack of provision in the law.

It excludes fraud, concealment or other illegal measures. In other words, it is a

device which technically satisfies the requirement of the law but in fact it isn’t
in accordance with the legislative intent.
 Substantial loss of much needed public revenue, particularly in a welfare state like ours
 Serious disturbance caused to the economy of the country by piling up of
mountains of black money directly causing inflation
 Sense of injustice and inequality which tax avoidance arouses in the breasts of
those who are unwilling or unable to profit by it.
 Ethics(or lack of it) of transferring the burden of tax liability to the shoulders of the guideless,
good citizens from those of artful dodgers.

One may not agree with the issue of generating black money by avoiding of tax. In legal tax
avoidance the money neither goes out of books nor it is spent unnecessarily but it is used for further
expansion of business.
When a person reduces his total income by
making false claims or by withholding the
information regarding his real income, so that
his tax liability is reduced, is known as tax
evasion. Tax evasion isn’t only illegal but it is also
immoral, anti-social and anti-national practice.
Therefore under the direct tax laws provisions have
been made for imposition of heavy penalty and
institution of prosecution proceedings against tax
evaders.
 LEVEL OF LTAXES – HIGHER
 SOCIAL PSYCHOLOGICAL TAX PAYER- STIGMA, REPUTATION
 THE COMPLEXITIES OF THE TAX SYSTEM
 MISUSE OR MISMANAGEMENT OF REVENUE FROM TAX- MEDIA EXPOSE DAILY
 INEQUAL DISTRIBUTION OF AMENITIES
 NATURE OF ECONOMY-AGRICULTURAL
 COMPLEXITY IN LAW-LACK OF INFO
 UNWILLINGNESS OF TAXPAYERS TO PAY TAXES
 CORRUPTIONS IN TAX ADMINISTRATION
 UNDERGRPUND ECONOMY- BLACK MONEY
 ABSENCE OF SPIRITE OF CIVIL RESPONSIBILITIES
 THE INSTABILITY OF TAX LEGISLATION AND MULTIPLICITY OF AMENDMENTS
 TAX PENALITIES-LOWER/HIGHER, HARSH
 POLITICAL CORRUPTIONS
 DOUBLE TAXATION
 TAX PLANNING
 Is an act within the r corners of the
act to achieve certain social and economic
activities and it isn’t a colourable device to
avoid tax.
 Is a legal right and a social responsibility-
certain social and economic objectives are
achieved.
 It requires through knowledge of the
relevant acts, social, economic and political
situation of the country .
 It helps in economic development of the
country by providing additional funds for
investment in desired channels.
 A tax planner enjoys his fruits freely and he
doesn’t suffer from his blood-pressure
TAX EVASION
 It is a deliberate attempt on the
part of tax payer by misrepresentation of
facts, falsification of accounts including
downright fraud.
 Is a legal offence coupled with penalty and
prosecution.
 It requires boldness to infringe
the law.
 It generates black money which is generally
utilised for smuggling, bribery, extravagant
expenses or on luxury
 A tax evader remains always in anxiety of
search and seizure
The avid goal of every taxpayer is to minimize his Tax Liability. To
achieve this objective taxpayer may resort to following Three Methods
1. Tax Planning
2. Tax Avoidance
3. Tax Evasion

Tax Planning is resorted to maximize the cash inflow and minimize the
cash outflow. Since Tax is kind of cost, the reduction of cost shall increase
the profitability. Every prudence person, to maximize the Return, shall
increase the profits by resorting to a tool known as a Tax Planning.
TAX AVOIDANCE
 TAX AVOIDANCE
Tax avoidance is an art of dodging tax without actually breaking the law.
It is a method of reducing tax incidence by availing of certain loopholes in the
law. The expression Tax avoidance will be used to describe every attempt by
legal means to prevent or reduce tax liability which would otherwise be
incurred, by taking advantage of some provision or lack of provision in the law.

It excludes fraud, concealment or other illegal measures. In other words, it is a

device which technically satisfies the requirement of the law but in fact it isn’t
in accordance with the legislative intent.
 Substantial loss of much needed public revenue, particularly in a welfare state like ours
 Serious disturbance caused to the economy of the country by piling up of
mountains of black money directly causing inflation
 Sense of injustice and inequality which tax avoidance arouses in the breasts of
those who are unwilling or unable to profit by it.
 Ethics(or lack of it) of transferring the burden of tax liability to the shoulders of the guideless,
good citizens from those of artful dodgers.

One may not agree with the issue of generating black money by avoiding of tax. In legal tax
avoidance the money neither goes out of books nor it is spent unnecessarily but it is used for further
expansion of business.
When a person reduces his total income by
making false claims or by withholding the
information regarding his real income, so that
his tax liability is reduced, is known as tax
evasion. Tax evasion isn’t only illegal but it is also
immoral, anti-social and anti-national practice.
Therefore under the direct tax laws provisions have
been made for imposition of heavy penalty and
institution of prosecution proceedings against tax
evaders.
 LEVEL OF LTAXES – HIGHER
 SOCIAL PSYCHOLOGICAL TAX PAYER- STIGMA, REPUTATION
 THE COMPLEXITIES OF THE TAX SYSTEM
 MISUSE OR MISMANAGEMENT OF REVENUE FROM TAX- MEDIA EXPOSE DAILY
 INEQUAL DISTRIBUTION OF AMENITIES
 NATURE OF ECONOMY-AGRICULTURAL
 COMPLEXITY IN LAW-LACK OF INFO
 UNWILLINGNESS OF TAXPAYERS TO PAY TAXES
 CORRUPTIONS IN TAX ADMINISTRATION
 UNDERGRPUND ECONOMY- BLACK MONEY
 ABSENCE OF SPIRITE OF CIVIL RESPONSIBILITIES
 THE INSTABILITY OF TAX LEGISLATION AND MULTIPLICITY OF AMENDMENTS
 TAX PENALITIES-LOWER/HIGHER, HARSH
 POLITICAL CORRUPTIONS
 DOUBLE TAXATION
Differences between tax evasion, tax
avoidance and tax planning
 TAX PLANNING
 Is an act within the r corners of the
act to achieve certain social and economic
activities and it isn’t a colourable device to
avoid tax.
 Is a legal right and a social responsibility-
certain social and economic objectives are
achieved.
 It requires through knowledge of the
relevant acts, social, economic and political
situation of the country .
 It helps in economic development of the
country by providing additional funds for
investment in desired channels.
 A tax planner enjoys his fruits freely and he
doesn’t suffer from his blood-pressure
TAX EVASION
 It is a deliberate attempt on the
part of tax payer by misrepresentation of
facts, falsification of accounts including
downright fraud.
 Is a legal offence coupled with penalty and
prosecution.
 It requires boldness to infringe
the law.
 It generates black money which is generally
utilised for smuggling, bribery, extravagant
expenses or on luxury
 A tax evader remains always in anxiety of
search and seizure
Case Study on Tax Avoidance - How Starbucks
avoids UK taxes
LONDON (Reuters) - Starbucks’ coffee menu famously baffles some people. In
Britain, it’s their accounts that are confusing. Starbucks has been telling investors the
business was profitable, even as it consistently reported losses.
 LEVEL OF LTAXES – HIGHER
 SOCIAL PSYCHOLOGICAL TAX PAYER- STIGMA, REPUTATION
 THE COMPLEXITIES OF THE TAX SYSTEM
 MISUSE OR MISMANAGEMENT OF REVENUE FROM TAX- MEDIA EXPOSE DAILY
 INEQUAL DISTRIBUTION OF AMENITIES
 NATURE OF ECONOMY-AGRICULTURAL
 COMPLEXITY IN LAW-LACK OF INFO
 UNWILLINGNESS OF TAXPAYERS TO PAY TAXES
 CORRUPTIONS IN TAX ADMINISTRATION
 UNDERGRPUND ECONOMY- BLACK MONEY
 ABSENCE OF SPIRITE OF CIVIL RESPONSIBILITIES
 THE INSTABILITY OF TAX LEGISLATION AND MULTIPLICITY OF AMENDMENTS
 TAX PENALITIES-LOWER/HIGHER, HARSH
 POLITICAL CORRUPTIONS
 DOUBLE TAXATION
Differences between tax evasion, tax
avoidance and tax planning
 TAX PLANNING
 Is an act within the r corners of the
act to achieve certain social and economic
activities and it isn’t a colourable device to
avoid tax.
 Is a legal right and a social responsibility-
certain social and economic objectives are
achieved.
 It requires through knowledge of the
relevant acts, social, economic and political
situation of the country .
 It helps in economic development of the
country by providing additional funds for
investment in desired channels.
 A tax planner enjoys his fruits freely and he
doesn’t suffer from his blood-pressure
TAX EVASION
 It is a deliberate attempt on the
part of tax payer by misrepresentation of
facts, falsification of accounts including
downright fraud.
 Is a legal offence coupled with penalty and
prosecution.
 It requires boldness to infringe
the law.
 It generates black money which is generally
utilised for smuggling, bribery, extravagant
expenses or on luxury
 A tax evader remains always in anxiety of
search and seizure
OVERVIEW OF FIVE HEADS OF
INCOME
1. INCOME FROM SALARY
2. INCOME FROM HOUSE
PROPERTY
3. CAPITAL GAINS
 Meaning of Capital Gains

• Profits or gains arising from transfer of a capital asset

• charged to tax under the head “Capital Gains”.
 Capital Assets are classified into two
categories
:
1.Short-Term Capital Asset :

2.Long-Term Capital Asset:

 Capital Assets are classified into two categories

:
1.Short-Term Capital Asset : Any capital asset held by the
taxpayer for a period of not more than 36 months (3 years)

2.Long-Term Capital Asset: Any capital asset held by the

taxpayer for a period of more than 36 months (3 years)
Indexation is a process by which the cost of acquisition is adjusted against
inflationary rise in the value of asset
 DEDUCTION U/S 54
Capital Gain on transfer of a long term residential house property
• Asset Transferred: Long term Residential House property
• Amount to be Invested: Capital Gain
• New Asset to be Acquired/ Constructed: Residential House Property
• Time Limit of Investment:
(a) Purchase: Within 1 Year before or 2 years after the sale of the house
(b) Construction: Within 3 years after the sale of house
• Treatment of Unutilized Amount: Deposit in Capital Gain Account
Scheme
 DEDUCTION U/S 54F
Capital Gain on transfer of a long term capital asset other than a residential house
property
• Asset Transferred: Any Long term Capital Asset
• Amount to be Invested: Net Consideration
• New Asset to be Acquired/ Constructed: Residential House Property
• Time Limit of Investment:
(a) In case of Purchase: Within 1 Year before or 2 years after the sale of the capital
asset
(b) In case of Construction: Within 3 years of after the sale of capital asset
• Treatment of Unutilized Amount: Deposit in Capital Gain Account Scheme
4. Income under the head other
sources
 Income under section 56(1)
• Income from subletting;
• Interest on bank deposits and loans;
• Income from royalty (if it is not an income from
business/profession);
• Director’s fee;
• Ground rent;
• Agriculture income from a place outside India;
• Directors’s commission for standing as guarantor to bankers;
• Director’s commission underwriting shares of new company;
• Examination fees received by a teacher from a person other
than his employer
• Rent of plot of land
• Insurance commission;
• Mining rent and royalties
• Annuity payable a will, contact trust deed
• Salary to payable to member of parliament;
• Interest on securities issued by a foreign Government;
 Income under section 56(2)
• Dividend
• Interest
• Casual income
• Gift
5. Income under the head
Business and Profession
(PGBP)
 Computation of Taxable Business
Income (Book Profit)
NET PROFIT AS PER PROFIT AND LOSS ACCOUNT

Add: DISALLOWED EXPENSES (MEANS EXPENSES AND LOSSES

DEBITED TO PROFIT AND LOSS ACCOUNT BUT NOT ALLOWED AS
DEDUCTION)

Less: DISALLOWED INCOMES (MEANS INCOMES AND GAINS CREDITED

TO PROFIT AND LOSS ACCOUNT BUT NOT ALLOWED TO BE ADDED)

ADD: INCOMES ALLOWED UNDER THIS HEAD BUT NOT CREDITED TO

PROFIT AND LOSS ACCOOUNT EARLIER

LESS:EXPENSES ALLOWED BUT NOT DEBITED TO PROFIT AND LOSS

ACCOUNT EARLIER
 ALLOWED DEDUCTIONS FOR EXPENSES

• Rent, rates, taxes, repairs and insurance of building

• Rent, repairs and insurance of machinery, plant and furniture
• Depreciation
• Insurance on stock as well as on employees
• Bonus or commission paid to Employees
• Contribution to recognized Provident fund or an approved super
annuation fund by employer
• Bad debts
 DISALLOWED EXPENSES
• 1. Donations
• 2. Charities
• 3. Gifts to relatives
• 4. Income tax
• 5. Wealth tax
• 6. Advance income tax
• 7. Fines and penalties for breach of any laws.
• 8. Personal Drawings
• 9. Salary to owner
• 10. Interest on proprietors capital
• 11. Capital expenditure
• 12. Purchase of an assets
 Disallowed Income
• Any Income which is not related to business and belongs
to any other head of income.
 Allowed Income
• Any Income which is related to business only for example
profit from business activity.