Assignment Of Business Tax Procedure And Management

As a student of commerce, we are supposed to know that what are the various methods through which we can plan our tax liability as an individual, firm or company. This assignment gives the overview of different ways of tax planning according to the circumstances prevailing at that context.

FINDING OUT THE WAYS TO MINIMIZE THE TAX LIABILITY OF INDIVIDUAL, FIRM AND COMPANIES

Name: SATENDER Course: BCOM (hons.) 3 year Section B Page 1 Roll No. : 3483
rd

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012

1) METHODS OF REDUCING TAX LIABILITY OF INDIVIDUAL.

1. Exhaust your entire Section 80c deduction: Under Section 80C, the maximum deduction available is Rs 100,000 pa which investors should seek to utilize. Make sure that financial products which you are choosing here are in line with your overall financial planning. In addition, individuals do understand that the benefits are capped. For instance , investing 70,000 in Public Provident Fund and 50,000 in ELSS funds will give you tax benefit of 1,00,000 only. In addition make sure that you deduction.

make investments of over Rs 1, 00,000 in Section 80C designated avenues but they need to

keep in mind your Employee Provident Fund (EPF) yearly amount too while investing for 80c Always look at the investments from the perspective whether it will meet your specific requirements on maturity. You should also try to diversify your savings in different instruments.

Following are some of the investments/contributions qualify for Section 80C deductions, Public Provident Fund: Assured and tax free returns have made Public Provident Fund (PPF) as a

preferred choice for risk adverse investors for years. It is an excellent tool for long term investment professionals or businessmen not covered under Employees Provident Fund. We believe PPF should Long term goals can definitely be realized through PPF.

and is risk free as it is backed by government. It is even more significant for self-employed ideally be a very crucial part of any individuals portfolio but there can be differed opinion on this. Employee Provident Fund: We normally hate any kind of deductions in our monthly salary slips its income tax deduction, professional tax deduction or even an EPF deduction. Very few of us really know that this small EPF deduction each year can in reality make you a crorepati by the time you

retire. Encouraging fact is that this statement is applicable to even with those having modest salaries. money till retirement.

Theres many ifs and buts to achieve that, most notably being resisting the temptation to withdraw Equity Linked Savings Scheme (ELSS): This product can help people in all tax brackets to save taxes while giving inflation-adjusted returns. The investor does not need to pay any tax on withdrawal too. ELSS has a lock-in period of three years, the shortest among all tax-saving instruments.

Unit-linked insurance plans (Ulips): These products too can provide inflation adjusted returns and opportunity to create wealth in the long term, as they invest in equities and debt papers. However, you need to keep investing regularly and wait until the maturity, as high upfront charges eat into returns of the older products (issued before Sept. 1, 2010). Even after the recent regulatory changes in Ulips, they are still expensive investment vehicle compared to mutual funds.

Other insurance plans: Covering risks is essential for your goals. Buy insurance for actual requirement rather than for saving taxes. Thats why opt for a term plan, as oppose to endowment eligible for deduction under Section 80C.
Roll no. : 3483

and money back, as the former offers highest risk cover for low premiums. The premiums paid are

Page 2

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012

New Pension Scheme (NPS): This is the most recent entrant to the Section 80C instruments. It can be a good option for retirement planning with tax savings. The drawback is that the amount is taxable on withdrawal on maturity.

Pension Plans: Contribution in pension plans is allowed as deduction under Section 80CCC. Pension plans can be traditional or unit-linked, or from mutual fund houses. Other products that are covered under Section 80C are national savings certificate, senior citizen savings scheme, 5-year fixed deposits, including accrued interest, tuition fee for two children for 80C, 80CCC and 80CCD is `1lakh. full time courses, home loan principal repayment. The combined limit of deductions under Section 2.Long Term Infrastructure Bonds: Govt. of India has allowed certain Infrastructure companies to issue Long Term Tax Saving Infrastructure Bonds. Investors of these Infra Bonds can claim tax exemption under section 80 CCF of the Income Tax Act, 1961 for an amount up to Rs. 20000. This with section 80CCE.

deduction is in addition to Rs. 1, 00,000 limit available under sections 80C, 80CCC and 80CCD read Should you invest: It makes sense for people in the over Rs 8 lakh taxable income slab to use the infrastructure bonds as a tax-saving instrument. For the people in the Rs 5-8 lakh bracket, it would be advisable to invest in infrastructure bonds if it would be an absolute no-no to invest in Infrastructure Bonds for tax-saving purpose.

the period of investment is 3 years, but not for five years and for those in the Rs 1.6-5 lakh bracket,

3. HRA and Tax Benefits: Everyone who is receiving the HRA benefits from their employer is eligible to declare the HRA as the tax savings. Note that, if you are staying in the rental house then only it is applicable. If you are reside in your own house, and then you will not be eligible to claim the tax benefits for HRA paid by your employer. The details about the HRA exemption in described under Section 10 (13A) of the Income Tax act 1961. The following are the three conditions to eligible for HRA exemption: a. HRA must be included in your salary component

b. c.

You are staying in the rented house Your rent is more than 10% of your salary

4. Opt for Joint Home Loan:

If you are planning to buy a house, opting for joint home loan can be a better option. The principal eligible for a deduction of up to Rs 150,000 per year.

repayment on a home loan is eligible for a deduction of up to Rs 100,000 pa and the interest paid is

Roll no. : 3483

Page 3

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012

In cases where the home loan is for a substantial sum, it is not uncommon for the interest and individual can consider opting for a joint loan with his spouse or parent or sibling.

principal repayment to exceed the stated limit. To ensure that the tax benefit is optimally utilized, an

This will ensure that both the co-owners can claim tax deductions in the proportion of their holding in the loan. The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximized.

5. Medical insurance: An individual who pays medical insurance premium for self or spouse/dependent children is allowed a deduction of up to Rs 15,000 pa under section 80D. An additional deduction of up to Rs 15,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 per year. 6. Other deductions for salaried taxpayers:

If your employer provides medical allowance, you can available an income tax deduction of up to Rs 15,000 per year by offering proof of the relevant expenses.

If the employer gives leave travel allowance as a part of your salary, you can avail income tax the taxpayer).

deduction on travel expenses (family travel expenses can also be covered if family travels along with

Leave travel allowance can be availed twice in a block of four calendar years. Presently, the block incurred on domestic travel. However, the travel mode can be anything (taxi, bus, train or air).

applicable is from 2010 to 2013. Leave travel allowance can only be availed on the expenses

Donations: Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section

Salaried individuals who plan to pursue higher education should avail of an education loan as the entire interest is eligible for deduction under Section 80E. The loan can be for self, spouse or child from an approved charitable institution or a notified financial institution. 6. Turn Stock Losses into Tax Gains:

80G.

You can gain from short term losses you made in stocks according to income tax act. If you have made long term capital gains from sale of property, gold or debt funds, you can set them against short term capital losses made on stocks and bring down the tax liability. Short term capital losses can be set off against both short term capital gains as well as taxable long term capital gains. Proofs resulted in losses. required are records of your equity trading account statements with details of the transactions that

Roll no. : 3483

Page 4

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012

Lets understand it with help of an example: If you have sold a property and made a long term capital gains of 30 lakhs after indexation. At 20%, during this year and made a short term of 3 lakhs, you can set this against gains from the property. Then the gain from the property will get reduced to 27 lakhs and tax payable will be 5.4 lakhs Long term capital losses, however, can only be set off against taxable long term capital gains. 7. Dependent is ill Pay Lower Tax:

the tax payable on this long term capital gain is 6 lakhs. However if you have sold some junk stocks

Income tax act allows a taxpayer to claim a deduction of 40,000 if there is a dependent who suffers

from ailment specified under Section 80DDB. The deduction is higher at 60,000 if patient is a senior citizen. Dependents can include spouses, children, parents and siblings. However, there is a condition wherein the patient should be wholly dependent on tax payer and should not have separately claimed deduction for the disability. If the amount spent is reimbursed by an employer or expense, the balanced can be claimed as deduction. 8. Claim benefits on education loan: an insurance company, there is no deduction. If the taxpayer gets partial reimbursement of the

Rising cost of higher education is forcing people to borrow money to pay fees of their children professional courses. The interest paid on the education loan is fully deductible from the taxable for the interest paid for up to eight successive years, starting from the year in which year is interest is first paid. Proof required here is loan statement from the lender. income under Section 80E. If a parent of legal guardian takes the loan, he can claim deduction too

For instance, if you take an education loan at 10% interest for 8 years, you can save 1.41 lakhs in tax in highest tax bracket. This can bring effective cost of loan to 7% per annum.

2) METHODS OF REDUCING TAX LIABILITY OF HINDU UNDIVIDED FAMILY.

The Income-Tax Act recognises the Hindu Undivided Family (HUF) as a separate tax entity in addition to individuals who are members of such family. All Hindus, Buddhists, Sikhs and Jains governed by Hindu law, can have an HUF as a separate entity to claim income-tax and wealth tax benefits.

Roll no. : 3483

Page 5

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012 In addition to the separate tax exemption available to an HUF, an HUF is presently equal to what is available to an individual who is not a senior citizen. Since it is a separate entity, it can own immovable property and also run its own business. > Separate basic exemption

An HUF is a separate and distinct entity and can claim a separate basic exemption limit independent of its members who, in their own status as individuals, can also claim the limit in their respective tax returns. > Exemptions available Since an HUF can own a house property and earn capital gains on the sale of such property; it can also claim exemption on the long-term capital gains on the sale, if the capital gains are invested for buying another house or for constructing a new house. In respect of capital gains from other assets, it can likewise, invest the net consideration for purchase of property or construction of a residential house and claim exemption. Since there is some adverse tax impact in case you own more than one residential house, it makes sense to buy one house in the name of the HUF, instead of in your own name. An HUF can also take the benefit of investing its capital gains in the bonds of NHAI or REC within six months from the date of sale of an asset up to `50 lakh in a financial year. > Deductions available

An HUF can claim deductions in respect of certain payments under Section 80C of the Income-Tax Act up to Rs1 lakh. It can claim deduction for payments made for life insurance policy for any of its members, money deposited in Public Provident Fund and for investment in Ulips by any of its members. It can also claim a deduction of Rs15, 000 towards payment for premium for taking health insurance for any of its members under Section 80D of the Income-Tax Act. In case the member in respect of whom this health insurance premium is being paid is a senior citizen, the deduction available will go up to Rs20,000.

As the cost of the medical insurance have gone up significantly in recent times, a separate limit for an HUF will be great relief for individual taxpayers where the premium being paid for health insurance is more than the limit threshold limit, as the excess can be claimed in the income-tax return of HUF. In the proposed DTC, the deduction in respect of life insurance premium, school fee for full-time education and premium for medical insurance will be available to individuals and
Roll no. : 3483 Page 6

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012 HUF up to Rs50, 000 against Rs1 lakh at present. So if you are among the taxpayers whose to have an HUF so that you do not lose out of the Rs50,000 deduction. Also, and HUF can invest up to Rs20,000 in long-term infrastructure bonds and claim deduction from its income under Section 80CCF. This deduction is in addition to the deduction available up to Rs1 lakh discussed above. Not only this, an HUF can separately claim a deduction up to Rs50,000 in respect of any life insurance policy for upkeep and maintenance of a person who is physically

school fees and insurance premiums total up to the present limit of Rs1 lakh, it makes sense

expenses incurred on medical treatment, rehabilitation and training etc or for taking out disabled and suffers from specified disease under Section 80DD of the Income-Tax Act. It can also claim deduction up to Rs40, 000 and Rs60, 000 in case of senior citizen in respect of expenses incurred for treatment of any of its members from specified disease under Section 80DDB. From the present draft of DTC, it seems that the deduction in respect of saving-based contribution is proposed to be withdrawn for HUF as per clause 69. This anomaly needs to be brought to the notice of the lawmakers to continue the benefit.

3) METHODS TO REDUCE TAX LIABILITY OF INDIAN COMPANIES. Indian Companies had been given deductions and exemptions to adjust their tax liability subject to fulfilling certain conditions. they can minimise their tax liability: Setting up the newly established business undertakings in FREE TRADE ZONES u/s Setting up newly established units in SPECIAL ECONOMIC ZONES u/s 10AA. Setting up business enterprises in 100% EXPORT ORIENTED UNDERTAKINGS u/s 10B. o Deductions available to the Indian companies are as given: 10A. Following are some of the exemptions available to the Indian companies through which

Sec80-IA: Deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development.
Roll no. : 3483 Page 7

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012 80-IAB: Deduction in respect of profits and gains by an undertakings or enterprises engaged in development of Special Economic zone. 80-IB: Deductions in respect of profits and gains from certain industrial 80-IC: Deductions in respect of profits and gains of certain industrial undertakings in certain special category of states. 80-ID: Deductions in respect of profits and gains of hotels and convention centres in NCR. 80-IE: Deductions in respect of profits and gains of certain undertakings in North Eastern States. 80JJAA: Deduction in respect of employment of new workmen. 33-AB: Deduction provided to companies for having Tea Development Account. 35-ABB: Deductions allowed to Indian Companies if they are providing Telecommunications Services. 35-AD: Expenditure on specified business. agricultural extension project. 35CCD:Weighted deduction for expenditure for skill development for mineral oil. 42 and 44BB: Special provision for deduction in the case of business for prospecting 44AD: Special provisions for computing profits and gains for a business. 44AE: Special provisions in the case of business of plying, hiring or leasing goods carriages. TAX PLANNING WITH REFERENCE TO FINANCIAL MANAGEMENT DECISIONS Before commencing a new project a vital managerial decision regarding selecting right type of capital structure has to be taken. An optimum capital structure is one which maximises the shareholders return. The tax planner should properly balance risk, cost, and control and tax consideration. Under the tax laws, dividend on shares is not deductible and 35CCC: Weighted deduction for expenditure incurred on agricultural extension on undertakings other than infrastructure development undertakings.

distributed profit is subject to dividend tax. on the other hand, interest paid raising finance through borrowings is deductible in the year in which it is

on borrowed capital is allowed as deduction under section 36(1)(iii).cost of incurred(if however, it is incurred during pre-commencement period, it has
Roll no. : 3483 Page 8

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012 to be capitalised).cost of issue of shares is allowed as deduction in five years under section 35D.because of the aforesaid provisions, corporate taxation financing. plays an important role in determine the choice between different sources of

TAX PLANNING WITH REFERENCE TO MANAGERIAL DECISIONS

Purchase of an asset

The factors which determine effective tax savings are: a. Rate of depreciation; and b. Marginal tax rate.

Purchase by instalment v/s hire purchase

If an asset is purchased by instalments, then taxpayer can claim depreciation

under section 32.besides interest payable on unpaid purchase price can also be claimed deduction. In the case of obtaining an asset on hire, deduction can be claimed in respect of hire charges. By comparing present value of cash outflows a correct decision can be taken.

Make or Buy

Many costing or non-costing considerations guide the decision relating to make or buy. some of these considerations are-(a) utilisation of capacity,(b) inadequacy of funds,(c) latest technology ,(d) variable cost of manufacturing vis-vis purchase price,(e) dependence upon supplier,(f) labour problem in the factory,etc.the following tax considerations one has to keep in mind while taking make or buy decision1)establishing a new unit-if the decision to manufacturer a part or component involves setting up a separate industrial unit, then tax incentives available under sections 10A,10B,32,80-IA,80-IB and 80-IC one has to keep in mind. 2) Sale of plant and machinery-if buying is cheaper than manufacturing and the assesses decides to buy parts/components for a long period of time, he may like 50, one has to consider for taking the decision. to sell the existing plant and machinery. Tax implications, as specified by section

Roll no. : 3483

Page 9

[ASSIGNMENT OF BUSINESS TAX PROCEDURE AND MANAGEMENT] October 23, 2012

Repairs, replace, renewel or renovation

The main tax consideration which one has to keep in mind is whether expenditure on repairs, replace or renewal is deductible as revenue expenditure under section 30, 31, or 37(1).if the expenditure is deductible as revenue reduced to the extent of tax saved... expenditure under these sections, then cost of financing such expenditure is

Sale of scientific research assets

If the asset is sold without having been used for other purposes, sale proceeds or deduction allowed, whichever is less, is chargeable to tax as business income of the previous year in which the sale took place [section 41(3)].the excess of sale proceeds over deduction allowed is, however, chargeable to tax as capital gains according to the provisions of section 45.

Lets sum up this write-up with some significant points of tax planning:
1. Preferably do your tax planning in the beginning of the financial year and it should be in sync with your overall financial planning.

2. Tax planning should not be done with intent of saving tax only but to meet your overall financial goals.

3. Do exhaust the quota for Section 80C but dont overdo it as tax exemption is up to 1, 00,000 only. 4. Keep all your bill receipts with you systematically so as to submit them as proofs when required.

Roll no. : 3483

Page 10