EXISTING AND EMERGING FRAMEWORK OF TAX PLANNING AND INTERNATIONAL TAXATION (LATEST AND SIMPLIFIED)
Tax Planning assumes significance in a growing economy like India. We need concrete Tax Planning measures to strengthen our industries and savings. It is not tax evasion. Tax planning from salaried persons, pensioners and Corporate houses are needed to avoid tax costs and increase profitability and preserve our wealth and assets.
On the other hand International taxation is related with double taxation, transfer pricing and arms-length prices. After 1990’s ,International taxation rules are very essential in a free mobility world market .Therefore this article mainly focus on various aspects of corporate tax planning and International taxation in a simple and understandable way.
Important areas in the corporate tax planning are the following –
A. Corporate Tax Planning: Concepts and significance of corporate tax planning
B. Tax avoidance versus tax evasion
C. Techniques of corporate tax planning
D. Tax considerations in specific business situations: Make or buy decisions; Own or lease an asset; Retain; Renewal or replacement of asset; Shut down or continue operations
1. Corporate Tax Planning
A. Differences between the concepts
| HEADING | TAX PLANNING | TAX
AVOIDANCE |
TAX EVASION | TAX MANAGEMENT |
| Meaning | It is a way to reduce tax liability by taking full advantages provided by the Act through various exemptions, deductions, rebates & relief. | Assessee legally takes advantage of the loopholes in the Act. | Reduce tax liability by deliberately suppressing income or sale or by increasing expenses, etc., which results in reduction of total income of the assesse | It is a procedure to comply with the provisions of the law. |
| Feature | Follow the provisions of law within the moral framework | It is a practice of bending the law without breaking it. | Tax evasion is illegal, both in script & moral. | It is implementation Part of Tax planning by an organization. |
| Object | To reduce tax liability by applying script & moral of law. | To reduce the tax liability to the minimum by applying script of law only | To reduce tax liability by applying unfair means | To comply with the provisions of laws. |
| Approach | It is futuristic and positive in nature. It is for long –term | It is futuristic but short term in nature, | It is concerned with past and applied after the liability of tax has arisen | It is a continuous approach, which is concerned with past (rectification, revisions etc.), present (filing of return, etc.) & future (corrective action). |
| Benefit | Generally, arises in long run | Generally, arises in short run. | Generally, benefits do not arise but it causes penalty and prosecution. | Penalty, interest & prosecution can be avoided. |
| Practice | It is tax saving. | It is tax hedging. | It is tax concealment | It is tax administration. |
| Treatment of Law | It uses benefits of the law. | It uses loopholes in the law | It overrules the law. | It implements the law. |
B. Specify whether the following acts can be considered as an act of (i) tax management, or (ii) tax planning (iii) tax evasion
a. B ltd maintains register of tax deduction effected by it to enable timely compliance—–Tax management
b. C deposits 700,000 in P.P.F account so as to reduce tax payable—Tax planning
c. R Ltd issues a credit note for 60,000 for brokerage payable to rishi who is son of Mr. R. Managing Director of the company .The purpose is to increase his income from 20,000 to 80,000 and reduce its income correspondingly.—-Tax evasion
d. Mr A purchased a house for self-residence of 8 lakhs by taking a loan of 60 lakhs from SBI at 10% interest, instead of using his own funds——-Tax Planning
e. Mr A invested 1 Crore in purchasing 5 acres of agriculture land in his native village in Gaya———-Tax Planning
f. Availing deduction under section 10(A) of IT Act———Tax planning
g. Misinterpreting the provisions of IT Act——————-Tax avoidance
h. Understatement of income————————————-Tax evasion
i. Making suitable arrangement of TDS———————–Tax administration.
C. Types of Tax planning-
Short term tax planning –—To attain specific objective within a financial year
Long term Tax planning——-Entering into activities to get a future Tax benefit
Permissive tax planning:–Tax planning under express provisions of Income TAX act 1961 and Finance Act 2019
Purposive tax planning- Purposive tax planning is based on the basis of circumvention of the law.
2.Tax Planning for New Business
Under this head, the following points are important.
A. Location, Nature and size of business.
Following tax benefits are available on the basis of location, nature and size of business
a. Agriculture Income is fully exempt-sec 10(1)
b. Units in Special Economic Zone-Exempt for 15 years-sec 10AA
Deductions subject to conditions
c. Profits and gains of an infrastructure development undertaking –sec 80IA.
d. Profits and gains of a undertaking engaged in other than infrastructure development—Sec80IB
e. Profits and gains of an undertaking engaged in the development of Special Economic Zone-Sec 80IAB
f. Profits and gains of undertakings in certain special category states-Sec 80IC
g. Profits and gains of undertakings of North –Eastern States-Sec 80IE
h. Business of Collecting and processing bio-degradable waste-Sec 80JJA
i. Profits and gains from Specified Business-Sec 80IAC
j. Housing Projects-Sec 80IBA
k. Capital expenditure of hospitals-Sec 35AD
l. Capital Expenditure of Hotels-Sec 35AD
m. Turnover or gross receipts below 2crore business –Sec 44AD
n- Business of Plying, Hiring or Leasing Goods carriages –Sec 44AE
B. Form of Business organization.
Form of business organization may be
A. Sole trading concern.
Tax Planning Measures for Sole trading concerns for the Assessment Year 2020-2021 (Financial Year 2019-2020).
1. If your Gross Total Income is less than 5 lakhs, no special tax planning is needed from yourself. You may claim Rebate under Section 87A which amounts to a maximum of Rs.12500 in the Assessment Year 2020-2021.Gross Total Income means total of the following Income
b.. Income from Business or Profession
c. Income from Capital Gains
2. You may claim Second House as Second Self –Occupied Property .But Total Deduction under Interest on loan taken for the House Property will be Rs.200000. You may take Joint Housing loan with your Spouse. Then you and your spouse can claim maximum deduction of Rs.200000 each.
3. If your Gross Total Income (Including Interest) is less than Rs.500,000 ,You may deposit in banks /Post-Offices (Term /Fixed/Recurring) as such:-
a. Total annual Interest on such accounts is less than Rs.40000.
Banks and Post Offices did not deduct TDS upto Rs.40000.
Banks and Co-operative Societies will deduct TDS when Interest more than 40,000.
other Cases Rs. 5000.
4. Closure or Opting out of the NPS did not attract tax up to 60% of the total amount payable.
5. Use maximum Electronic mode of payments
6. Maximum compliance of newly introduced Sections in Chapter VIA of Income Tax Act.
a. Sec 80EEA-Interest Up to 150,000 on loan taken for Residential House Property (Loan should be taken from 01/4/2019 to 31/03/2020)
Subject to conditions
b. Section 80EEB –Tax Incentives for Electric Vehicles
Maximum deduction on Interest on loan taken for purchase of an electric vehicle –Rs.150000
(Loan Should be taken from 01/04/2019 to 31/03/2023)
Subject to Conditions
7. Easy Application of Sec.89 is possible in the Assessment Year if you have received arrears of Salary (Easy Procedure).
8. Use PAN Card. Avoidance of PAN CARD attract TDS@20%. Aadhaar Card can be used as PAN CARD for certain transactions.
9. Link PAN with Aadhaar .It is most urgent
10. You cannot hide your transactions from 2020-2021 on words. CBDT will introduce Pre-filled Tax Returns in the Assessment Year 2020-2021 on words.
11. Contribute to NPS even if you are not coming under NPS Scheme. You may take NPS in Banks or Post offices.
12. Besides, You may deduct the following deductions from your Gross Total Income (Chapter VIA)
A. SEC 80 C
LIC premium paid by the You in respect of self, spouse and son and daughter can be deducted up to Rs. 150,000. In case of an individual, deduction is available in respect of policy taken in the name of taxpayer or his/her spouse or his/her children. No deduction is available in respect of premium paid in respect of policy taken in the name of any person, other than given above. Other deductions under Sec 80C are as follows
i. Tuition fees
ii. Contribution to SLI
iii. Contribution to GIS
Contribution to Government Provident Fund
B. An additional deduction of Rs. 50,000/- under Section 80CCD (1B) is available to assesse over and above the benefit of Rs. 1.50 Lakhs available as a deduction under Sec 80CCD(1). Thereby, raising the maximum limit of exemption to Rs. 2.00 Lakhs
B. Sec 80 D
a. Health Insurance Premium
Following are the important points
i. Self and family (Including Senior Citizen)-Maximum Rs.50000
ii. Parents –Maximum Rs. 25,000
iii. Parents (Senior) –Maximum-50,000
iv. Self and Family including Parents –Maximum Rs. 50,000
v. Self and Family including Senior citizen Parents –Maximum Rs. 75,000
vi. Self (Senior Citizen) and including Senior Citizen Parents –Maximum Rs. 100,000
b. Medical Expenditure
Following are the important points
i. Self and family (Senior Citizen)-Maximum Rs.50000
ii. Parents (Senior) –Maximum Rs.50000
iii. Self and Family including Parents –Maximum Rs. 50,000
Payment through cash mode is not allowed for Sec 80 D Payments except the following preventive medical checkup
c. Preventive Medical checkup
Maximum Rs. 5000 deduction is allowed for Preventive Medical checkup
C. Sec 80DD Maintenance including medical treatment of a dependant.
D. Sec 80DDB Medical treatment of Specified diseases
E. Sec 80E Interest on loan taken for Higher Education
F. Sec 80G Donations to certain funds and charitable Institutions
Following points are important in this respect
a. Pay any mode other than cash
b. Visit Income Tax Department Website and check eligibility of Institution Donations are as follows
a. Without qualifying Limit -100%
b. Without qualifying Limit- 50%
c. With qualifying Limit -100%
d. With qualifying Limit-50%
Donation to Kerala Chief Minister Draught Relief Fund can be included in Donation as 100% without limit menu.
H. Deduction in respect of Contributions Given by any Person to Political Parties or an Electoral Trust (Section 80GGC)
Any amount of contribution made by an assessee being any person to a political party or an electoral trust except local authority and every artificial juridical person wholly or partly funded by the Government shall be allowed as deduction while computing the total income of such person.
Note :Sum contributed by way of cash shall not be allowed as deduction
I. SEC 80TTA Income from interest on Saving bank Accounts
Maximum amount of Rs. 10,000 can be deducted income from interest on savings bank accounts of Banks and Post Offices included in the above Income from other sources
J. SEC 80TTB Interest on deposit in case of senior citizens.
Maximum interest of Rs,50000 can be deducted by a senior citizen from interest on deposit income included in the above Income from other sources
K. SEC 80U In case of person with disability
Following are the important points
a. Self with disability –Maximum-Rs.75000
b. Self with severe Disability –Maximum -125,000
13. A.Rates are the same as those specified in Part III of the First Schedule to the Finance Act 2018
A. In the case of every individual,being a resident in India, who is below the age of sixty years
| Upto Rs. 250,000 | Nil |
| Rs. 250,001 to Rs. 500,000 | 5 percent |
| Rs. 500,001 to Rs. 10,00,000 | 20 percent |
| Above Rs. 10,00,000 | 30 percent |
B. In the case of every individual,being a resident in India, who is of the age of sixty years or more but less than the age of eighty years at any time during previous year
| Up to Rs. 300,000 | Nil |
| Rs.300,001 to Rs. 500,000 | 5 percent |
| Rs. 500,001 to Rs. 10,00,000 | 20 percent |
| Above Rs. 10,00,000 | 30 percent |
14. New surcharge rules-
2019-2020
10 percent if total income 50 lakhs but does not exceed one crore
15 percent if total income exceeds 1 crore
2020-2021
10 percent if total income 50 lakhs but does not exceed one crore
15 percent if total income exceeds 1 crore But does not exceeds 2 crore
25 percent If total income exceeds 2 crore but does not exceeds 5 crore
37 percent If total income exceeds 5 crore
Cess. ——4% on Income Tax plus Surcharge
15. Marginal relief will get when total income exceeds 50 lakhs
B. HUF (Hindu Undivided Family).
Following deductions are available to HUF.
i. Reasonable remuneration to karta and other family members.
ii. Interest on capital is not deductible.
Chapter VIA Deductions.
a. SEC 80 C
b. SEC 80D
c. SEC80DD
d. SEC80 DDB
e. SEC80G
f. SEC80GGA
g. SEC80GGC
h. SEC80 TTA
Income TAX Rates, Surcharge and Marginal Relief are same as Sole Trader Concern.
C. Firm/Limited liability partnership
Partnership Firm
Important points
i. All partnership firms formed under the Indian partnership act, 1932 are assessed as
a. Under sec 184 Assessment
b. Not under Sec 184 Assessment
ii. Income of a firm is taxable at flat rate of 30% without any exemption
iii. Partners’ share in the income of a firm is not chargeable to tax in the hands of partners
iv. Remuneration paid to partners of a firm is allowed as deduction subject to statutory limit
v. Interest bon capital paid by affirm to its partners under the income tax act 1961 is allowed-12%.
Question
If the book profits of a partnership firm is 1,10,000,the remuneration admissible to the working partners under section 40(b) of the Income Tax act ,1961 is—-
Answer.
150,000
| Income Tax | 30% of taxable income. |
| Surcharge | 12% of Income Tax, If Total Income>1 crore |
| Health & Education Cess | 4% of (Income Tax + Surcharge). |
D. Company
. Existing Domestic Companies: Option of paying income tax at reduced base rate of twenty two percent (22%): – Section 115BA
The Surcharge would be ten percent (10%) and Cess would be 4 percent (4%). This would give an effective statutory tax rate of 25.168 percent.
New Domestic Companies: Option of paying income tax at a further reduced base rate of fifteen percent (15%): – Section 115BAB
Revised statutory tax rate applicable: The Surcharge would be ten percent (10%) and Cess would be 4 percent (4%). This would give an effective statutory tax rate of 17.16 percent.
Amendment of section 115JB
In section 115JB of the Income-tax Act, with effect from the 1st day of April, 2020,—
(a) in sub-section (1), the following proviso shall be inserted, namely:—
“Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words “eighteen and one-half per cent.”, occurring at both the places, the words “fifteen per cent.” had been substituted.
E. Co-operative Society
| Income Slab | Income Tax |
| Upto ₹ 10,000/- | 10% of the income. |
| Above ₹ 10,000/- to ₹ 20,000/- | ₹ 1,000/- + 20% of (taxable income – 10,000) |
| Above ₹ 20,000/- | ₹ 3,000/- + 30% of (taxable income – 20,000) |
| Surcharge | 12% of Income Tax, in case T.I> 1 crore. |
| Health & Education Cess | 4% of (Income Tax + Surcharge). |
3.Tax planning relating to capital structure
Following procedure may be adopted
EBIT
Less : i. Interest on debenture
ii. Interest on loans
Earnings before tax
Less tax
Profit after tax
Percentage return on equity capital
The co should opt for alternative which gives maximum rate of return on equity capital.
4. Some other Aspects of Tax planning
A. Make or buy decisions
Basically, the decision to make or buy is a costing decision and is influenced by many factors are as follows
I. Availability of factors
II. Investment required in fixed assets
III. Availability of skilled and unskilled labour
IV. Availability of suppliers
V. Existence of idle capacity in organization
With due considerations to above factors ,marginal costing and differential costing techniques of cost accounting help a lot in reaching at any conclusion
Tax consideration
Buy decision in a surplus capacity condition forced to sell an asset and attract capital gain tax
If a new industrial undertaking is established to make the product, the following deductions are to be considered
a. Tax holiday-sec 10AA
b. Deductions U/S
I. 80 IAC
II. 80IBA
III. 80ID
IV. 80IA
V. 80IB
VI. 80IC
VII. 80IE
If the product is a consumable one, raw material is required to replace a worn out part at the time of repair, its cost will be treated as revenue expense and deductible in computing the income
B. Shut down or continue operations
Sometime business is forced to shut down due to the following reasons–
a. Fall in demand
b. financial problems
c. Change in technology
d. High rate of taxation
e. Mismanagement
f. Pressure of commercial banks
Tax provisions
The tax aspects are to be considered before taking a decision are as follows—
i. loss of discontinued business can be carried forward up to 8 years
ii. The unabsorbed depreciation of discontinued business can also be set off against future business profits of other business
iii. Following deductions which were allowed in the earlier years may be withdrawn and liable to tax from the year in which business is discontinued
a. Section 33 AB-Tea Development Account /Coffee Development Account/Rubber development account
b. 115 VT-reserve for shipping business
iv. Withdrawal of certain incentive deductions already claimed by business
v. Sale of assets held for scientific research
vi. Sale of depreciable asset
Sales>W.D.V of assets –short term capital gain.
Otherwise short term capital loss
vii. Sale of non-depreciable asset May attract short term or long term capital loss on the basis of nature of Asset.
viii. No deduction with respect to retrenchment compensation
ix. If it is a Company, satisfaction of the conditions laid down in sec 72A is important in the case of amalgamation and demerger.
C. Retain, Replacement ,Renewal of Asset
Replacement expenditure is capital expenditure—- .It is not deductible
Replacement of parts only is allowed as deduction.
Renewal
Sometimes capital expenditure and sometimes revenue expenditure.
Capital expenditure—-when capacity is increased due to renewal.
Revenue expenditure –capacity is not increased .Expenses incurred to get capacity of asset back.
Routine Repair expenses are allowed as deduction.
D. Own or lease.
Following calculations are to be made
1. Calculation of present value of post -tax cash outflows in case of borrowing
A. Cash out flows =loan repayment+ interest on loan.
B. Since both depreciation and interest on loan are tax deductible while calculating business income ,therefore there will be tax savings in payment of income tax
Tax savings= (interest+ depreciation)× Tax rate applicable to buyer
c. Post tax cash out flows A-B
d. Post Tax Cash flows ×Present value factor
II. Calculation of present value of post -tax cash outflows in case of lease
A. Cash outflows =Annual lease rent +other charges
B. Tax savings=A× Tax rate applicable to Lessee.
C. Post Tax Cash flows=A-B
D. Post Tax Cash flows ×Present value factor
Should select the option which shows lesser present value of cash outflows
INTERNATIONAL TAXATION
Important areas in the International Taxation are the following –
1. International Taxation: Double taxation and its avoidance mechanism.
Tax Heavens
A.USA—- Delaware, Nevada, Wyoming
B. In Europe —–Andorra, Canary, Netherlands, Cyprus
C. In Asia ——Mauritius, Singapore, Dubai
D. In Africa—— Capetown, Nairobi
Four key factors are used to determine whether a jurisdiction is a tax haven:
A. Imposes no or only nominal taxes
B. Lack of transparency
C. Lack of effective exchange of tax information with foreign tax authorities
D. No requirement for a substantive local presence of the entity:
Economic Double Taxation
Same income is taxable in two or more country but in the hands of different taxpayers
Juridical Double Taxation.
Two or more states levy income tax on same entity on same income for same periods.
In order to prevent this hardship or to avoid double taxation,
Relief is provided to the tax-payer. Such relief is provided by two ways
A. Bilateral Relief
B. Unilateral Relief
Bilateral Relief
In this, government of two countries enters into an agreement (known as ‘treaties’) to provide relief against double taxation of same income.
a.Exemption Method: One country gives exemption to such type of income.
b.Credit Method: In this method resident remains liable in the country of residence on its global income, however ,he gets Tax Credit against its domestic tax as if the foreign tax were paid to the country of residence itself.
Unilateral Relief
Country of residence provide relief on unilateral basis.
Process of determining taxation of foreign income
Income earned outside India
Apply residential test —-a. Non-resident—–not taxable
b. Resident—-taxability test as per income tax act
After taxability test –a. not taxable
—-b. taxable
If taxable—a. DTAA u/s 90&Sec 90A exists –then taxability test as per DTAA.
—-b. No DTAA Exists –sec 91 applies –From the total tax less rebate u/s 91 applying the lower of average Indian tax rate and foreign tax rate on the doubly taxed income
Taxability test as per DTAA –a. not taxable
b. taxable—a. exemption method
– b. Tax Credit Method
Question
During the previous year 2017-2018,Ms.indu,a citizen of India, is a resident of both India and a foreign country with which India has a double Tax avoidance Agreement ,which provides that “the income would be taxable in country where it is earned and not in other country ,but would be included for computation of tax rate in such other country “.Her income is 325,000 from business in India and Rs.700,000 from business in foreign country .In the foreign country ,the rate of tax is 20% .During the year ,she paid a premium of 32,000 to insure the health of her brother ,a non –resident ,aged 82 years ,not dependent on her ,through his credit card .
i. Compute the tax payable by Ms. Indu in India for the A.Y 2018-2019
ii. Also ,show the tax payable by Ms.Indu in India ,had there been no DTAA with such foreign country
CASE 1: when DTAA Exist
| Total Income.
Tax liability ——— ——- Average tax rate in India= 1,15,875/10,00,000=11.59% Tax payable———— 300,000×11.59% Case II-When DTAA does not exist. Income from business ———–Outside India. –in India —- Income from business —– Income from other heads— Gross Total Income —– Less: deduction u/s 80D — Total income———— Tax liability ——— Less: Relief u/s 91. a. Average rate of Indian Tax——11.59% b. Rate of tax in the foreign country –20%. Whichever is less 700,000*11.59%=81,130. Tax payable |
10,00,000.
1,15,875. 34,770. 700,000. 325,000. 10,25,000. Nil. 10,25,000. 25,000. 10,00,000. 1,15,875. 81,130. 34,745
|
| Income from business
—Outside India —-in India Income from business Income from other heads– Gross Total Income Less :deduction u/s 80D —— |
700,000
325,000 10,25,000. Nil. 10,25,000. 25,000 |
2. Transfer price.
It is a price Between Associated Enterprise in international transactions in respect of the following-
A. Goods
B. Services
C. intangible
D. Loans
E. guarantee.
Meaning of associated enterprise
Associated Enterprise, in relation to another enterprise, means an enterprise which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of other enterprise
Arm’s length price means
i.a price which is applied or proposed to be applied in a transaction
(ii) between persons other than associated enterprises (i.e., unrelated person, resident or non-resident),
(iii) in uncontrolled conditions.
COMPUTATION OF ARM’S LENGTH PRICE [SEC. 92C]
Transaction Based Methods
a. comparable uncontrolled price method;
b. resale price method;
c. cost plus method;
Profit Based Methods
d. profit split method;
e. transactional net margin method;
f. such other method as may be prescribed by the Board.
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