kayzad

A

Project on

TAX PLANNING WITH REFRENCE TO LOCATION, NATURE & FORM OF ORGANISATION

Presented to the Faculty of the

School of Management & Entrepreneurship

AURO University

Surat

In Partial Fulfilment

Of the Requirements for the Degree of

Master of Business Administration

Submitted by

KAYZAD MADAN

PRACHI DALAL

Submitted to

PROF. C.A. DHARNA RATHOD

January 2015

TAX PLANNING

CONCEPT OF TAX PLANNING

Tax Planning is an exercise undertaken to minimize tax liability through the best use of all

available allowances, deductions, exclusions, exemptions, etc., to reduce income and/or

capital gains.

Tax planning can be defined as an arrangement of one’s financial and business affairs by

taking legitimately in full benefit of all deductions, exemptions, allowances and rebates so

that tax liability reduces to minimum. In other words, all arrangements by which the tax is

saved by ways and means which comply with the legal obligations and requirements and are

not colourable devices or tactics to meet the letters of law but not the spirit behind these,

would constitute tax planning.

Tax Planning: It means arranging the financial activities in such a way that maximum tax

benefits are enjoyed by making use of all beneficial provisions in the tax laws which entitle

the assesse to get certain rebates and reliefs. This is permitted and not frowned upon by law.

Thus, tax planning would imply compliance with the taxation provisions in such a manner

that full advantage is taken of all tax exemptions, deductions, concessions, rebates and reliefs

permissible under the Income Tax Act so that the incidence of tax is the least. Tax planning

can neither be equated to tax evasion nor to tax avoidance with reference to a company, it is

the scientific planning of the company’s operations in such a way so as to attract minimum

liability to tax or postponement or for that matter deferment of the tax liability for the

subsequent period by availing various incentives, concessions, allowances, rebates and

relief’s provided for in the tax laws. They are meant to be availed of and they have certain

clear objectives to achieve. Tax planning may, therefore, be regarded as a method of

intelligent application of expert knowledge of planning corporate affairs with a view to

securing consciously provided tax benefits on the basis of the national priorities in

consonance with the interests of the State and the public.

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OBJECTIVES OF TAX PLANNING:

Tax planning, in fact, is an honest and rightful approach to the attainment of maximum

benefits of the taxation laws within their framework. Therefore, the objectives of tax planning

cannot be regarded as offending any concept of the taxation laws and subjected to

reprehension of reducing the inflow of revenue to the Government’s coffers, so long as the

tax planning measures are in conformity with the statute laws and the judicial expositions

thereof. The basic objectives of tax planning are:

(a) Reduction of tax liability

(b) Minimisation of litigation

(c) Productive investment

(d) Healthy growth of economy

(e) Economic stability

(a) Reduction of tax liability: In this context, a tax payer can derive the maximum savings

by arranging his affairs in accordance with the requirements of law, as contained in the fiscal

statutes. In many a cases, a taxpayer may suffer heavy taxation not on account of the dosage

of tax administered by the Act, but, because of his lack of awareness of the legal

requirements. Since every taxpayer wishes to retain a maximum part of his earnings, rather

than parting with it and facing the resource crunch, it would be to his benefit to plan his tax

affairs properly and avail the deductions and exemption admissible under the Act (s). He can

succeed in doing so by keeping an awareness of the implications of the various business/other

transactions as well as updating of his knowledge about the various concessions for which he

is eligible.

(b) Minimisation of litigation: A general visualisation of the tax administration scenario

depicts a tug-of-war the tax payers trying their maximum to pay the least tax and the tax

administrator attempting to extract the maximum. This also results in, sometimes, protracted

litigations. It is in this context that a sound tax planning pays dividends. Where a proper tax

planning is adopted by the tax payer in conformity with the provisions of the taxation laws,

the incidence of litigation is minimised. This saves him from the hardships and

inconveniences caused by the unnecessary litigations, which at times even stretch up to the

High/Supreme Court levels‟

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(c) Productive Investment: Channelization, by a tax payer, of his otherwise taxable income

to the various investment schemes too is one of the prime objectives of tax planning as it is

aimed to attain twin-objectives : (i) to harness the resources for socially productive projects,

and, (ii) to relieve the tax payer not only from the initial brunt of taxation, but also to convert

the earnings so made into means of further earnings. Legal awareness of the avenues so

provided by the Government, from time to time, negates the imperative avoidance/evasion

and lend authenticity to the investments made.

(d) Healthy Growth of Economy: The growth of a nation’s economy is synonymous with

the growth and prosperity of its citizens. In this context, a saving of earnings by legally

sanctioned devices fosters the growth of both, because savings by dubious means lead to

generation of black money, the evils of which are obvious. Conversely, tax-planning

measures are aimed at generating white money having a free flow and generation without

reservations for the overall progress of the nation. Tax planning assumes a great significance

in this context.

(e) Economic Stability: In the context of the case, M.V.Valliapan v. ITO, (1988) 170 ITR

238 (Mad.), by a proper tax planning, a smooth tax flow from the tax payer to the tax

administrator, without recriminations, is ensured. This results in economic stability by way

of: (i) availing of avenues for productive investments by the tax payers and, (ii) harnessing of

resources for national projects aimed at general prosperity of the national economy and

reaping of benefits even by those not liable to pay tax on their incomes. Therefore,

notwithstanding the legal rulings in cases like McDowell and its English parallels, real and

genuine transactions aimed at a valid tax planning cannot be turned down merely on grounds

of reduction of the tax burden.

While planning a scheme relating to tax affairs, what needs to be assured is that tax planning

device does not lose its efficiency due to changes in law. It would be a shortsighted

perspective to think of a planning device that is in conformity with the law as it exists, but

gets nullified by a subsequent change in law specially where the change is of a retrospective

nature. Hence, the tax plan has to be flexible in nature. Flexibility has to be considered as a

practical feature in a tax system. Hence, a planner has to comprehend about the future

scenario too while devising a plan to save tax.

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TYPES OF TAX PLANNING

The tax planning exercise ranges from devising a model for specific transaction as well as for

systematic corporate planning. These are:

(a) Short-range and long-range tax planning.

(b) Permissive tax planning.

(c) Purposive tax planning.

(a) Short-range planning refers to year to year planning to achieve some specific or limited

objective. For example, an individual assesse whose income is likely to register unusual

growth in particular year as compared to the preceding year, may plan to subscribe to the

PPF/NSC‟s within the prescribed limits in order to enjoy substantive tax relief. By investing

in such a way, he is not making permanent commitment but is substantially saving in the tax.

It is one of the examples of short-range planning. Long-range planning on the other hand,

involves entering into activities, which may not pay-off immediately. For example, when an

assesse transfers his equity shares to his minor son he knows that the Income from the shares

will be clubbed with his own income. But clubbing would also cease after minor attains

majority.

(b) Permissive tax planning is tax planning under the express provisions of tax laws. Tax

laws of our country offer many exemptions and incentives.

(c) Purposive tax planning is based on the measures which circumvent the law. The

permissive tax planning has the express sanction of the Statute while the purposive tax

planning does not carry such sanction. For example, under Sections 60 to 65 of the Income-

tax Act, 1961 the income of the other persons is clubbed in the income of the assesse. If the

assesse is in a position to plan in such a way that these provisions do not get attracted, such a

plan would work in favour of the tax payer because it would increase his disposable

resources. Such a tax plan could be termed as “Purposive Tax Planning‟

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AREAS OF TAX PLANNING IN THE CONTEXT OF INCOME TAX ACT, 1961:

Some of the important areas where planning can be attempted in an organised manner are as

under:

(a) Locational aspects;

(b) Nature of business.

(c) Form of organisation/ownership pattern;

(d) Tax planning in respect of corporate restructuring;

(e) Tax planning in respect of financial management;

(f) Tax planning in respect of employees remunerations;

(g) Tax planning in respect of specific managerial decisions;

(h) Tax planning in respect of Non-Residents.

(A) LOCATIONAL ASPECTS

Tax planning is relevant from location point of view. There are certain locations which are

given special tax treatment. Some of these are as under:

Section 10 of Income Tax Act has given a long list of incomes which are totally exempt from

tax and so these incomes are not included in the gross total income of the assesse. In other

words, such incomes are totally Tax-Free.

While calculating Total Income in any previous year of any person, any income coming

under Sec. 10(1) to Sec. 10(23) shall be exempted.

1. Free Trade Zone (FTZ) [Section 10A] – Special Provision in respect of Newly

Established Undertaking in Free Trade Zone.

1. Conditions to be satisfied

2. Amount of Deduction-General Provisions

3. Period and Rate of Deduction

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4. Transfer under a Scheme of Amalgamation or Demerger


In order to get deduction, an undertaking must satisfy the following conditions:

Condition 1: It must begin manufacture or production in free trade zone:

It has begun or begins to manufacture or produce during the previous year relevant to the

assessment year

(a) Commencing on or after 1-4-1981, in any free trade zone; or

(b) Commencing on or after 1-04-1994, in any software technology park or electronic

hardware technology park or;

(c) Commencing on or after the 1-04-2001 in any special economic zone;

Conditions 2: It should not be formed by splitting / reconstruction of business.

Conditions 3: It should not be formed by transfer of old machinery:

It is not formed by the transfer to a new business of machinery or plant previously used for

any purpose.

1. 20% of second value machinery allowed: Where in the case of an undertaking, any

machinery or plant or any part thereof previously used for any purpose is transferred

to a new business and the total value of the machinery or plant or part so transferred

does not exceed 20% of the total value of the machinery or plant used in the business,

then, the condition specified therein shall be deemed to have been complied with.

2. Imported Machinery allowed: Any machinery or plant which was used outside India

by any person other than the assesse shall not be regarded as machinery or plant

previously used for any purpose, if the following conditions are fulfilled, namely :

i.) Such machinery or plant was not previously used in India

ii.) Such machinery or plant is imported into India from any county outside India ; and

iii.) No deduction on account of depreciation in respect of such machinery or plant has

been allowed or it allowable under the provisions of the Act in computing the total

income of any person for any period prior to the date of the installation of machinery

or plant by the assesse.

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(Value of imported machine can exceed 20% of the Total Value of Machine)

Conditions 4: Sale construction should be remitted to India in convertible foreign

exchange.:

Sale consideration should be remitted to India in convertible foreign exchange, within a

period of six months from the end of the previous year or, within such further period as the

competent authority may allow in this behalf.

Condition 5: Report of Chartered Accountant:

The deduction under [this section] shall not be admissible for any assessment year beginning

on or after the 1st day of April, 2001, unless the assesse furnishes in the prescribed Form 56 ,

along with the return of income, the report of an Chartered Accountant, as defined in the

Explanation below sub-section (2) of section 288, certifying that the deduction has been

correctly claimed in accordance with the provisions of this section.

Condition 6 : Return of income should be submitted in time.

2. Amount of Deduction-General Provisions

If the aforesaid conditions are satisfied, the deduction u/s 10A may be computed as under:

Export Turnover of eligible undertaking

Profits of the business of eligible undertaking = __________________________________

Total Turnover of eligible undertaking

'Export Turnover'': means the consideration of articles or things or computer software

received in, or brought into India by the assesse in convertible foreign exchange in

accordance with sub-section (3), but does not include

i.) Freight,

ii.) telecommunication charges or

iii.) insurance attributable to the delivery of the articles or things or computer software

outside India or

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iv.) expenses, if any, incurred in foreign exchange in providing the technical services

outside India

3. Period and Rate of Deduction

Out of the total income of an assesse a deduction of 90% of such profits and gains as are

derived by an undertaking from the export of articles, or things or computer software shall be

allowed.

Rate of deduction for unit set up in Special Economic Zone on or after 1-4-2003 shall be as

follows for first 10 assessment years:

First 5 Years – 100 % of profits and gains derived from the export of such articles or

things or computer software for a period of five consecutive assessment years

beginning with the assessment year relevant to the previous year in which the

undertaking begins to manufacture or produce such articles or things or computer

software, as the case may be, and thereafter,

Next 2 Years: 50% of such Profit and Gains is deductible for further 2 assessment

years.

Next 3 Years: for the next three consecutive assessment years, so much of the amount

not exceeding 50% of the profit as is debited to the profit and loss account of the

previous year in respect of which the deduction is to be allowed and credited to a

reserve account (to be called the ''Special Economic Zone Re-investment Allowance

Reserve Account'') to be created and utilised for the purposes of the business of the

assesse.


In case an undertaking eligible for deduction under this section is transferred, before the

expiry of the specified period, to another Indian company in a scheme of amalgamation or

demerger–

(a) No deduction shall be admissible under this section to the amalgamating or the demerged

company for the previous year in which the amalgamation or demerger takes place; and

(b) The provisions of this section shall apply to the amalgamated or the resulting company as

if the amalgamation or demerger had not taken place.

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2. Special Economic Zone (SEZ) [Section 10AA] - Special Provisions in

respect of newly established units in special economic zone.


2. Amount of Deduction

3. Consequence for mercer and demerger.


The following conditions should be satisfied to claim deduction u/s 10AA:

Condition 1: Assesse, being an entrepreneur as referred to in clause (j) of section 2 of the

Special Economic Zones Act, 2005. Entrepreneur is a person who has been granted a letter of

approval by the Development Commissioner to set a unit in a Special Economic Zone.

Conditions 2: The Unit in Special Economic Zone who begins to manufacture or produce

articles or things or provide any services during the previous year relevant to any assessment

year commencing on or after the 1st day of April, 2006.

Conditions 3: It is not formed by the splitting up, or reconstruction, of a business already an

existence.

Conditions 4: It not formed by the transfer to a new business, of old plant and machinery.

However, it can be formed by transfer of old plant or machinery to the extent of 20%.

Condition 5: The assesse has income from export of articles or thing or from services from

such unit. In other words, the assesse has exported goods or provided services out of India

from the Special Economic Zone by land, sea, air, or by any other mode, whether physical or

otherwise.

Conditions 6: Books of Accounts of the taxpayer should be audited. The Tax payer should

submit Audit Report in Form No.56F along with the return of income.

2. Amount Of Deduction:

Deduction depends upon quantum of Profit derived from Export of Articles or things or

services (including computer software). It is calculated as under-

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Profit of the Business of the undertaking X Export turnover ___________________________________________________

Total Turnover of the business

Deduction for First 5 Assessment Years – 100% of Profits and Gains derived for a

period of five consecutive assessment years beginning with the assessment year

relevant to the previous year in which the Unit begins to manufacture or produce such

articles or things or provide services.

Deduction for 6th Assessment Year to 10th Assessment Years : 50% of such Profits

and Gains for further five assessment years and thereafter;

Deduction for 11th Assessment Year to 15th Assessment Year: Amount not

exceeding 50% of the profit as is debited to the profit and loss account of the previous

year in respect of which the deduction is to be allowed and credited to a reserve

account (to be called the “Special Economic Zone Re-investment Reserve Account”)

to be created and utilized for the purposes of the business of the assesse.

3. Consequences For Merger And Demerger:

Where any undertaking is transferred, before the expiry of the period specified in this section,

to another undertaking, under a scheme of amalgamation or demerger -

No deduction shall be admissible under this section to the amalgamating or the

demerged Unit for the previous year in which the amalgamation or the demerger

takes place.

3. 100% EXPORT ORIENTED UNDERTAKINS (100% E.O.U.) [Sec 10B]

A deduction of such profits and gains as are derived by a hundred per cent. Export-oriented

undertaking from the export of articles or things or computer software for a period of ten

consecutive assessment years beginning with the assessment year relevant to the previous

year in which the undertaking begins to manufacture or produce articles or things or

computer software, as the case may be, shall be allowed from the total income of the assesse:


2. Amount of Deduction

3. Period of Deduction


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1. Conditions to be Satisfied

This section applies to any undertaking which fulfils all the following conditions, namely:-

Conditions 1: It manufactures or produces any articles or things or computer software;

Conditions 2: It is not formed by the splitting up, or the reconstruction, of a business already

in existence.

Conditions 3: No deduction under this section shall be allowed to an assessee who does not

furnish a Return of his Income on or before the due date specified under sub-section (1) of

section 139.

Conditions 4: Should not be formed as a result of the re-establishment, reconstruction or

revival by the assesse of the business of any such undertaking

Conditions 5: it is not formed by the transfer to a new business of machinery or plant

previously used for any purpose.

Conditions 6 This section applies to the undertaking, if the sale proceeds of articles or things

or computer software exported out of India are received in, or brought into India by the

assesse in convertible foreign exchange, within a period of six months from the end of the

previous year or, within such further period as the competent authority may allow in this

behalf.

Conditions 7: Audit Report should be submitted in Form No. 56G.


If the aforesaid conditions are satisfied, the deduction u/s 10B may be computed as under:

Profit of the Business of the undertaking X Export turnover _____________________________________________________

Total Turnover of the business

For the assessment year beginning on the 1st day of April, 2003, the deduction under this

sub-section shall be 90% of the profits and gains derived from the export of such articles or

things or computer software

3. Period Of Deduction:

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This deduction shall be allowed for a period of 10 consecutive Assessment Years beginning

with the assessment year relevant to the previous year in which the undertaking begins to

manufacture or produce such articles, or things or computer software.

No deduction under section 10B shall be allowed to any undertaking from the assessment

year beginning on the 1st day of April, 2010 and subsequent years.

For the removal of doubts, it is hereby declared that the profits and gains derived from on site

development of computer software (including services for development of software) outside

India shall be deemed to be the profits and gains derived from the export of computer

software outside India.

4. Transfer Under A Scheme Of Amalgamation Or Demerger:

In case an undertaking eligible for deduction under this section is transferred, before the

expiry of the specified period, to another Indian company in a scheme of amalgamation or

demerger–

(a) No deduction shall be admissible under this section to the amalgamating or the demerged

company for the previous year in which the amalgamation or demerger takes place; and

(b) The provisions of this section shall apply to the amalgamated or the resulting company as

if the amalgamation or demerger had not taken place.

4. Deductions In Respect Of Profits And Gains From Industrial

Undertakings Or Enterprises Engaged In Infrastructure Development.

[Sec. 80-IA]


2. Amount & Period of Deduction



Deduction under section 80-IA is available only to the following businesses carried on by an

undertaking:-

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Conditions 1: An enterprise carrying on the business of (i) developing or (ii) operating and

maintaining any infrastructure facility.

Conditions 2: Any undertaking providing telecommunication services, including radio

paging, domestic satellite service, network of trunking, broadband network and internet

services on or after the 1-04-1995, but on or before the 31-03- 2005.

Conditions 3: Any undertaking which develops, develops and operates or maintains and

operates an industrial park notified by the Central Government for the period beginning on

the 1st day of April, 1997 and ending on the 31st day of March, 2006:

Conditions 4: An [undertaking] which,

(a) Is set up in any part of India for the generation or generation and distribution of power if it

begins to generate power at any time during the period beginning on the 1st day of April,

1993 and ending on the 31st day of March, 2010;

(b) Starts transmission or distribution by laying a network of new transmission or distribution

lines at any time during the period beginning on the 1st day of April, 1999 and ending on the

31st day of March, 2010.

(c) Undertakes substantial renovation and modernisation of the existing network of

transmission or distribution lines at any time during the period beginning on the 1st day of

April, 2004 and ending on the 31st day of March, 2010.

Conditions 5: An undertaking owned by an Indian company and set up for reconstruction or

revival of a power generating plant, if—

(a) Such Indian company is formed before the 30-11-2005 with majority equity participation

by public sector companies for the purposes of enforcing the security interest of the lenders to

the company owning the power generating plant and such Indian company is notified before

the 31-12-2005 by the Central Government for the purposes of this clause;

(b) Such undertaking begins to generate or transmit or distribute power before the 31-03-

2008

Conditions 6: Any undertaking carrying on the business of laying and operating a cross-

country natural gas distribution network, including pipelines and storage facilities being an

integral part of such network, which fulfils the following conditions, namely:

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(a) It is owned by a company registered in India or by a consortium of such companies or by

an authority or a board or a corporation established or constituted under any Central or State

Act;

(b) It has been approved by the Petroleum and Natural Gas Regulatory Board and notified by

the Central Government in the Official Gazette;

(c) One-third of its total pipeline capacity is available for use on common carrier basis by any

person other than the assesse or an associated person;

(d) It has started or starts operating on or after the 1st day of April, 2007; and

(e) Any other condition which may be prescribed.

2. Amount & Period Of Deduction:

Note: Deductions allowed is 100% or 30% of profits from such eligible business. The profits

from such business shall be computed as if such eligible business were the only source of

income of the assesse.

Nature of Industry AssesseePeriod of commencement of business

Deductions

Infrastructure facility(new undertaking; agreement with the Central Govt.)

Indian Company On or after 1-4-1995100% for 10 years out of 20 years. In case of Port out of 15 years.

Telecommunication (New undertaking: new Plant)

Any undertaking . In case of domestic satellite Indian Company

1-4-95 to 31-3-2005100% for first 5 years; 30% for next 5 years.

Industrial Park or SEZ Any undertaking

IP- 1-4-97 to 31-3-2006. .

SEZ- on or after 1-4-2001 to 31-3-2006

100% for 10 years out of 5 years

Power ( New undertaking : New Plant)

Any undertaking

New netword – 1-4-99 to 31-3-2006. .

Substantial renova. – 1-4-2004 to 31-3-2006.

It means AY specified by the assesse at his option to be initial year not falling beyond 15 AY

starting from the AY in which the enterprise begins to generate power; or commences

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transmission or distribution of power. However, deduction can be claimed only for 10

consecutive AY falling within a period of 15 AY beginning with the AY in which an assessed

begins business.

5. Deductions In Respect Of Profits And Gains By An Undertaking Or

Enterprise Engaged In Development Of Special Economic Zone [Sec. 80-

IAB]



Section 80-IAB provides deduction to the developers of special economic zone form the

assessment year 2006-2007.

1. Conditions To Be Satisfied:


Conditions 1: The taxpayers is a developer of a Special Economic Zone.

Conditions 2: The Gross Total Income of the taxpayer includes profits and gains derived by

an undertaking from any business of developing a special economic zone.

Conditions 3: Such Special economic zone is notified on or after April 1, 2005.

Conditions 4: The Books of Accounts of the taxpayer are audited.

Conditions 5: Return of Income should be submitted on or before the due date of submission

of Return of Income given by Section 139(1).


Amount of Deduction:

If the above conditions are satisfied, the taxpayer can claim 100% deduction in respect of the

aforesaid profit.

Period of Deductions:

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The deduction may be claimed, at the option of the taxpayer, for any 10 consecutive

assessment years. The Deduction may be claimed, at the option of the taxpayer, for any 10

consecutive assessment years out of 15 years beginning from the year in which the special

economic zone has been notified by the Central Government.

6. Deduction In Respect Of Profits And Gains From Certain Industrial

Undertakings Other Than Infrastructure Development Undertaking. [Sec.

80-IB]



Where the Gross Total Income of an assesse includes any profits and gains derived from any

business of an Industrial undertaking or a Hotel or operation of a Ship, or developing,

maintaining and operating any infra structural facility or scientific and industrial research and

development assesse shall be allowed a deduction while computing total income.



Condition 1: It is not formed by splitting up, or the reconstruction, of a business already in

existence

Conditions 2: It is not formed by the transfer to a new business of machinery or plant

previously used for any purpose

Conditions 3: It manufactures or produces any article or thing, not being any article or thing

specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or

plants, in any part of India:

Conditions 4: Manufacture or production should be started within a stipulated time limit.

Conditions 5: It should employ 10/20 workers.

Conditions 6: Return of Income should be submitted on or before due date of submission of

return of income.


If the aforesaid conditions are satisfied, the deduction u/s 80 IB may be computed as under

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RATES OF DEDUCTION U/S 80-IB

Undertaking When Set upRate

PeriodCompany Others

I. Industrial Undertaking [ Section 80-IB(2)]

(a) Industry set up in Industrial backward state.

1-4-93 to 31-3-2004100%

30%

100%

25%

For first 5 years

For next 5 years

(b) Industry set up in North Eastern States

1.10.93 to 31.3.2004100%

30%

100%

25%

For first 5 years

For next 5 years

(c) Industry set up in

A. category backward district

B. category backward district

1.10.94 to 31.3.2004

1.10.94 to 31.3.2002

1.10.94 to 31.3.2004

1.10.94 to 31.3.2002

100%

30%

100%

30%

100%

25%

100%

25%

For first 5 years

For next 5 years

For first 5 years

For next 5 years

(d) Other Industries

A. in small sector co-op.

B. any other in priority sector

1.4.91 to 31.3.2002

1.4.91 to 31.3.1995

30%

30%

25%

25%

12 years for co op. other 10 years

----do----

II. Production of Mineral oilin North Eastern region or any where in India [ 80-IB(4E)]

From 1.4.97 onwards 100% 100% First 7 years

III. Refining of mineral oil in North Eastern region or any where in India [80-IB(4E)]

From 1.10.98 onwards

100% 100% First 7 years

IV. Construction and development of housing project of residential units whose area does not exceed 1,000 sq. feet.

From 1.10.98 , Project must be completed by 31.3.2003

100% 100%

V. Profit from an undertaking engaged in the integrated business of

From 1.4.2001 onwards

100% 100% For first 5 years

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handling, storage and transportation of food grains [ 80-IB(11A)]

30% 25% For next 5 years

VI. Setting up of multiplex theaters.

1.4.2002 to 31.3.2005 50% 50% For first 5 years

VII. Setting up of convention center

1.4.2002 to 31.3.2005 50% 50% For first 5 years

VIII. Hotel :

(a) in hilly area or in rural areas outside municipal limits.

1.4.90 to 31.3.1994 and

1.4.97 to 31.3.2001

50%

50%

Nil

Nil

For first 10 years

For first 10 years

(b) at place other than Clacutta, Chennai, Mumbai & Delhi

1.4.97 to 31.3.2001 50% Nil For first 10 years

(c) Any where in India 1.4.91 to 31.3.1995 30% Nil For first 10 years

7. Special Provisions In Respect Of Certain Undertakings Or Enterprises

In Certain Special Category States- How To Find Out [Sec. 80-IC]


2. Industrial Zones given u/s 80-IC(2).


Section 80-IC has been inserted form the assessment year 2004-2005.



Condition 1: It is not formed by splitting up, or the reconstruction, of a business already in

existence.

Conditions 2: It is not formed by the transfer to a new business of machinery or plant

previously used for any purpose

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Conditions 3: Industrial Undertaking should be set up in certain special category of States.

Conditions 4: The Industrial Undertaking should manufacture / produce specified goods /

articles.

Conditions 5: Manufacture or production should be started within a stipulated time limit.

Conditions 6: Return of Income should be submitted on or before due date of submission of

return of income.

Conditions 7: The Books of Accounts of taxpayer should be audited and the Audit Report in

Form No-10CCB should be submitted along with the Return of Income.

2. Industrial Zones Given Under Section 80-IC(2):

Following are the Industrial Zones notified by the Board for the relevant State -

(i) “Industrial Area” means such areas, which the Board, may, by notification in the Official

Gazette, specify in accordance with the scheme framed and notified by the Central

Government;

(ii) “Industrial Estate” means such estates, which the Board, may, by notification in the

Official Gazette, specify in accordance with the scheme framed and notified by the Central

Government;

(iii) “Industrial Growth Centre” means such centres, which the Board, may, by notification in

the Official Gazette, specify in accordance with the scheme framed and notified by the

Central Government;

(iv) “Industrial Park” means such parks, which the Board, may, by notification in the Official


Government;

(v) “Integrated Infrastructure Development Centre” means such centres, which the Board,

may, by notification in the Official Gazette, specify in accordance with the scheme framed

and notified by the Central Government;

(vi) “North-Eastern States” means the States of Arunachal Pradesh, Assam, Manipur,

Meghalaya, Mizoram, Nagaland and Tripura;

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(vii) “Software Technology Park” means any park set up in accordance with the Software

Technology Park Scheme notified by the Government of India in the Ministry of Commerce

and Industry;

(viii) “Substantial expansion” means increase in the investment in the plant and machinery by

at least fifty per cent of the book value of plant and machinery (before taking depreciation in

any year), as on the first day of the previous year in which the substantial expansion is

undertaken;

(ix) “Theme Park” means such parks, which the Board, may, by notification in the Official


Government.


If the aforesaid conditions are satisfied, the deduction u/s 80 IC may be computed as under:

Name of States

Sikkim HP or Uttaranchal North-Eastern StatesIn notified area

Any other area

In notified area

Any other area

In notified area

Any other area

Nature of article

Any article other than the article specified in Schedule XIII

Article specified in Schedule XIV





Period of commencement of Business

23-12-2002 to 31-3-2012

7-1-2003 to 31-3-2012

24-12-1997 to 31-3-2007

Amount of Deduction 100% for 10 years

100% for 5 years ; 25% for next 5 years ( in case of company take 30%)

100% for 10 years

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Section 80-ID of income tax act

(1) Where the gross total income of an assessee includes any profits and gains derived by an

undertaking from any business referred to in sub-section (2) (such business being hereinafter

referred to as the eligible business), there shall, in accordance with and subject to the

provisions of this section, be allowed, in computing the total income of the assessee, a

deduction of an amount equal to hundred per cent of the profits and gains derived from such

business for five consecutive assessment years beginning from the initial assessment year.

(2) This section applies to any undertaking,

(i) Engaged in the business of hotel located in the specified area, if such hotel is

constructed and has started or starts functioning at any time during the period beginning on

the 1st day of April, 2007 and ending on [the 31st day of March, 2010]; or

(ii) Engaged in the business of building, owning and operating a convention centre,

located in the specified area, if such convention centre is constructed at any time during the

period beginning on the 1st day of April, 2007 and ending on [the 31st day of March, 2010];

(iii) Engaged in the business of hotel located in the specified district having a World

Heritage Site, if such hotel is constructed and has started or starts functioning at any time

during the period beginning on the 1st day of April, 2008 and ending on the[31st day of

March, 2013.]

(3) The deduction under sub-section (1) shall be available only if

(i) The eligible business is not formed by the splitting up, or the reconstruction, of a

business already in existence;

(ii) The eligible business is not formed by the transfer to a new business of a building

previously used as a hotel or a convention centre, as the case may be;

(iii) The eligible business is not formed by the transfer to a new business of machinery or

plant previously used for any purpose.

Explanation: The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA

shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of

clause (ii) of that sub-section;

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(iv) The assesse furnishes along with the return of income, the report of an audit in such

form and containing such particulars as may be prescribed, and duly signed and verified by

an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying

that the deduction has been correctly claimed.

(4) Notwithstanding anything contained in any other provision of this Act, in computing the

total income of the assessee, no deduction shall be allowed under any other section contained

in Chapter VIA or section 10AA, in relation to the profits and gains of the undertaking.

(5) The provisions contained in sub-section (5) and sub-sections (8) to (11) of section 80-IA

shall, so far as may be, apply to the eligible business under this section.

(6) For the purposes of this section,

(a) Convention centre means a building of a prescribed area comprising of convention halls

to be used for the purpose of holding conferences and seminars, being of such size and

number and having such other facilities and amenities, as may be prescribed;

(b) Hotel means a hotel of two-star, three-star or four-star category as classified by the

Central Government;

(c) Initial assessment year

(i) In the case of a hotel, means the assessment year relevant to the previous year in

which the business of the hotel starts functioning;

(ii) In the case of a convention centre, means the assessment year relevant to the previous

year in which the convention centre starts operating on a commercial basis;

(d) Specified area means the National Capital Territory of Delhi and the districts of

Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad.

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(C) TAX PLANNING WITH REFERENCE TO NEW BUSINESS –

FORM OF ORGANISATION

Among other considerations (like requirement of finance, resources, personal liability of

owner, level of operation, quantum of profit, specified requirement of technical expertise),

tax incentives play important role while selecting a suitable form of organization for a new

business. One can take a decision while comparing tax liability under different organization

forms.

Aggregate amount of tax liability on firm and partners is generally higher than that of the

case when the same amount of income is generated through sole proprietorship. One should,

therefore, consider the possibility of converting firms into sole proprietorships. The same is

evident from the case studies given below:

If there is a partnership firm then computation of tax is:

Particular Case 1 Case 2

Number of partners 3 4

Profit-sharing ratio Equal Equal

Total capital contribution of partners (each contributing identical

amount)

10,00,000 15,00,000

Profit of the previous year 2010-11 6,00,000 12,00,000

Other income of each partner 60,000 50,000

Life insurance premium paid by each partner 80,000 50,000

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Tax on firm

Income of firm 6,00,000 12,00,000

Less: salary

Rs. 10,500 per month 3,78,000

Rs. 14,625 per month 7,02,000

Interest 1,20,000 1,80,000

Net income 1,02,000 3,18,000

Tax on firm @ 30.9% 31,518 98,262

Tax liability of each partner (a) 10,506 24,566

Tax on partners

Salary 1,26,000 1,75,500

Interest 40,000 45,000

Income from other sources 60,000 50,000

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Net income ( after section 80C deduction) 1,46,000 2,20,500

Tax on net income (b) Nil 6,232

Total liability of each partners [a+b] 10,506 30,798

Tax Liability when the same income is earned as a SOLE PROPRIETOR

Case 1 Case 2

Total income of the firm 6,00,000 12,00,000

Number of partners 3 4

Income earned by Individual 2,00,000 3,00,000

Income from other sources 60,000 50,000

Net Income (after section 80C

deduction)

1,80,000 3,00,000

Tax on each individual 2,060 14,420

Tax Saving when income is

earned as a sole proprietor

8,446 16,378

To avoid high tax incidence on firms, firms may be converted into sole proprietorship.

Partnership firm

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The following basic assumptions have been made

a.) There are two partners X and Y with an equal share of profit.

b.) They want to draw the maximum permissible amount as salary. Both the partners will

draw equal salary.

c.) Income is from business (not from profession)

d.) They are entitled to simple interest at the rate of 12 per cent on the capital

contribution of RS.10,00,000.

e.) Partners do not have any income.

The table given below compares tax benefits available to a firm, LLP (Limited Liability

Partnership) and Company:

Firm LLP

Tax rates 30.9% for the A.Y. 2011-12 30.9% for the A.Y. 2011-12

Applicability of surcharge Not applicable for the A.Y.

2011-12

Not applicable for the A.Y.

2011-12

Minimum alternate tax Not applicable Not applicable

Dividend tax Not applicable Not applicable

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Firm LLP

Tax treatment in the hands of

shareholders or partners

Share of profit in firm is not

taxable in the hands of

partners.

Share of profit in firm is not

taxable in the hands of

partners.

Interest on capital to partners

or shareholders

Deductible if permitted by

the partnership deed and rate

of interest does not exceed

12% conditions of section 184

should be satisfied.

Deductible if permitted by the

partnership deed and rate of

interest does not exceed 12%

conditions of section 184 should

be satisfied.

Firm LLP

Remuneration to partners or

shareholders

Deductible if conditions of

sections 40(b) and 184 are

satisfied. Aggregate amount

deductible cannot, however,

exceed 90% of first Rs. 3 lakh

of book profit and 60% of the

balance.

Deductible if conditions of

sections 40(b) and 184 are

satisfied. Aggregate amount

deductible cannot, however,

exceed 90% of first Rs. 3 lakh of

book profit and 60% of the

balance.

Applicability of sections 78 and

79 in case there is a change in

constitution of the firm or

change in the list of

shareholders of a company

Section 78 is applicable Section 78 is applicable

Firm LLP

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Loan to partners/ shareholders Not taxable as income Not taxable as income

Applicability of presumptive

tax schemes under section

44AD, 44AE and 44AF up to

the A.Y. 2010-11

Applicable Applicable

Firm LLP

Applicability of presumptive

tax scheme under section 44AD

from the A.Y. 2010-11

Applicable Not applicable

Whether expenditure for family

planning for the benefit of

employees is deductible under

section 36(1)(iX)

Cannot be claimed as

deduction under section 36(1)

(ix). However, deduction can

be claimed under section 32

and 37

Cannot be claimed as deduction

under section 36(1)(ix).

However, deduction can be

claimed under section 32 and 37

Whether weighted deduction

under section 35(2AB) is

available

Not applicable Not applicable

Referencing:

Books:

Dr. Monica Singhania Dr. V. K. Singhania, 2011. Corporate Tax Planning &

Business Tax Procedures. Edition. Taxmann Publications Pvt. Ltd..

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Websites:

2015. . [ONLINE] Available at: http://www.icsi.edu/. [Accessed 19 January 2015].

Tax Management - Tax Ready Reckoner, Tax Planning & Saving, HUF Formation,

Management & Tax Planning, Income Tax Act,, Laws & Rules - Direct Tax -

Indirect Tax - Gift Tax - Wealth Tax - Sales Tax. 2015. Tax Management - Tax

Ready Reckoner, Tax Planning & Saving, HUF Formation, Management & Tax

Planning, Income Tax Act,, Laws & Rules - Direct Tax - Indirect Tax - Gift Tax -

Wealth Tax - Sales Tax. [ONLINE] Available at: http://incometaxmanagement.com/.

[Accessed 20 January 2015].

Vakilno1.com - India Law, Online Legal Advice, Legal Documents .

2015.Vakilno1.com - India Law, Online Legal Advice, Legal Documents . [ONLINE]

Available at: http://www.vakilno1.com/. [Accessed 20 January 2015].

2015. . [ONLINE] Available at: http://www.cainindia.org/. [Accessed 21 January

2015].

Section – 44BB: 59[Special provision for computing profits and gains in

connection with the business of exploration, etc., of mineral oils.

(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43

and 43A, in the case of an assessee 60[, being a non-resident,] engaged in the business of

providing services or facilities in connection with, or supplying plant and machinery on hire

used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum

equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be

deemed to be the profits and gains of such business chargeable to tax under the head “Profits

and gains of business or profession” :

Provided that this sub-section shall not apply in a case where the provisions of section 42 or

section 44D or 61[section 44DA or] section 115A or section 293A apply for the purposes of

computing profits or gains or any other income referred to in those sections.

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http://www.cainindia.org/

http://www.vakilno1.com/

http://incometaxmanagement.com/

http://www.icsi.edu/

TAX PLANNING

(2) The amounts referred to in sub-section (1) shall be the following, namely :—

(a) The amount paid or payable (whether in or out of India) to the assessee or to any person

on his behalf on account of the provision of services and facilities in connection with, or

supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction

or production of, mineral oils in India; and

(b) The amount received or deemed to be received in India by or on behalf of the assessee on

account of the provision of services and facilities in connection with, or supply of plant and

machinery on hire used, or to be used, in the prospecting for, or extraction or production of,

mineral oils outside India.

(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower

profits and gains than the profits and gains specified in that sub-section, if he keeps and

maintains such books of account and other documents as required under sub-section (2) of

section 44AA and gets his accounts audited and furnishes a report of such audit as required

under section 44AB, and thereupon the Assessing Officer shall proceed to make an

assessment of the total income or loss of the assessee under sub-section (3) of section 143 and

determine the sum payable by, or refundable to, the assessee.

Explanation.—For the purposes of this section,—

(i) “plant” includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment,

used for the purposes of the said business;

(ii) “mineral oil” includes petroleum and natural gas.

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