Professional Documents
Culture Documents
Taxation Management Assignment
Taxation Management Assignment
c. Multi-dimensional investment decisions: In a democratic welfare state like India the government requires substantial
investment in infrastructure, education and healthcare. The tax laws give attractive benefits to investors in these areas;
and by taking up these investments one can contribute to nation-building and at the same time enjoy normal returns on
ones investment.
d. Discharging a citizens duty: No one likes to pay tax, and it is indeed a temptation to hide income earned and skip
paying income tax, or make purchases without bills and escape sales tax. But these are unlawful methods of reducing tax
liability and result in economic evils like black money. Tax planning provides the perfect avenue to remain a responsible
citizen while paying the least amount of tax.
e. Reducing pressure on the legal infrastructure: The long arm of the law invariably catches up with economic offenders,
but the process is tedious and puts an enormous burden on the legal system. This can be successfully prevented by
sensible tax planning.
For taxation purposes, the capital assets have been, divided into (a) short-term capital assets and (b) long-term capital
assets.
(a) Short-term capital assets: According to Section 2(42A), a short-term capital asset means a capital asset held by an
assessee for not more than:
a. 12 months before its transfer in case of company shares, (equity or preference), or any other security listed in a
recognized stock exchange, or units of UTI and mutual funds or a zero coupon bond, and
b. 36 months before its transfer in the case of any other asset
Capital gains arising from the transfer of short-term capital asset are called short-term capital gains.
(b) Long-term capital assets: Any capital asset other than a short-term capital asset is termed as a long-term capital
asset. Gains arising from the transfer of long-term capital assets are called long-term capital gains. Long-term capital
gains qualify for concessional tax treatment under the Income Tax Act.
Mr. C acquired a plot of land on 15th June, 1993 for 10,00,000 and sold it on 5th January, 2010 for 41,00,000. The
expenses of transfer were 1,00,000.
Mr. C made the following investments on 4th February, 2010 from the proceeds of the plot.
a) Bonds of Rural Electrification Corporation redeemable after a period of three years, 12,00,000
b) Deposits under Capital Gain Scheme for purchase of a residential house 8,00,000 (he does not own any house)
Compute the capital gain chargeable to tax for the AY2010-11.
Explanation of categories of capital assets
Calculation of indexed cost of acquisition
Calculation of long term capital gain
Calculation of taxable long term capital gain
charges that is, interest on borrowed capital and instalments in which it has to be repaid. If the cash is not enough to
meet these commitments the company will be in a liquidity crunch.
(b) Risk of variation in the earnings to equity shareholders in relation to expectation: In case a firm has higher debt
content in capital structure, the risk of variations in expected earnings available to equity shareholders will be higher.
When there is a liquidity issue this will be adversely affected and the share prices of the company could take a beating.
2. Cost of capital: Cost of capital is an important consideration in capital structure decisions. It is obvious that a business
should be at least capable of earning enough revenue to meet its cost of capital and finance its growth.
3. Control: Along with cost and risk factors, the control aspect is also an important consideration in planning the capital
structure. When a company issues fresh equity, for example, it may dilute the controlling interest of the present owners.
4. Trading on equity: A company may raise funds either by issue of shares or by borrowing. Borrowings entail interest
cost, which is payable irrespective of whether there is profit or not. Returns to shareholders on the contrary arise only
when the company makes profits, but the return expected by them is much higher since they bring in risk capital. A
company is said to trade on equity when it brings in
Taxation Management Unit 14
Sikkim Manipal University Page No.: 275
funds by borrowing at lower cost and thereby enhances the return to shareholders. This is also called Capital Gearing.
Capitalisation of a company is highly geared when the proportion of equity to total capitalisation is small and it is lowgeared when the equity capital dominates the capital structure.
5. Tax consideration: While dividend on shares is declared and paid out of profit after tax, interest paid on borrowed
capital is allowed as deduction for computing taxable income. Cost of raising finance through borrowing is deductible in
the year in which it is incurred. Thus, if interest is 12 per cent and the tax rate is 30 per cent, the companys effective
cost of interest is only 8.4 per cent (12%*[1-30%]). This important distinction between the tax treatments of the two
financing methods should play an important role in determining the sources of funds.
6. Government monetary and fiscal policy: The annual review by Reserve Bank of India, the nations central bank, gives
shape to the monetary policy for the subsequent 12 months, which takes into account issues such as inflation, economic
growth and sectoral aspects. This should be factoredinto a companys capital structure decisions. Similarly, rule changes
by the Securities and Exchange Board of India (SEBI) impact the share market and companies can take cues from these
changes on when to raise equity capital and when not to.
Explanation of dividend policy
14.3 Dividend Policy
Two approaches need to be considered simultaneously in dividend decisions:
1. Retention as a long-term financing decision: Payment of cash dividends reduces funds available to finance growth and
either restricts growth or forces the firm to find other financing sources. So a company might decide to retain earnings
if:
a) Profitable projects are available and need finance and
b) Capital structure needs infusion of equity funds, and a fresh issue of equity is not advisable.
c) Any distribution made to the shareholders on a companys liquidation, to the extent of accumulated profit.
d) Any distribution to its shareholders on the reduction of capital to the extent of accumulated profits that arose after
31.3.1933, and
e) Any payment by a closely held company made by way of advance or loan to a shareholder with substantial interest
unless lending of money is a substantial part of the business of the company.
14.3.3 Tax aspects to be factored into dividend decision
The profile of a companys shareholders as taxpayers is an important factor in the dividend decision. In the case of a
widely-held company with a huge number of middle-class people as shareholders, it makes sense to pay good dividends
regularly as it may be a significant source of income for the shareholder. On the contrary, if the shareholders are
typically long-time investors at the top of the tax brackets they might favour plough-back of profit by the company and
consequent reduction in the cost of financing
Taxation Management Unit 14
Sikkim Manipal University Page No.: 278
growth. If the shares are held by body corporates, payment of dividend gives rise to tax incidence and could be a
deterrent.
14.3.4 Types of dividend policies:
The firms dividend policy is formulated with two basic objectives in mind providing for sufficient financing and
maximising the wealth of the firms shareholders. Three of the more commonly adopted dividend policies are:
1. Constant payout ratio
2. Regular dividend rate
3. Low regular and extra dividend
Constant payout ratio: Payout ratio is the dividend per share divided by earnings per share. A constant payout ratio
means the company pays a constant percentage of net earnings as dividends. Dividends would therefore fluctuate with
earnings and could be volatile if the earnings vary widely.
Regular dividend rate: The regular dividend rate policy is based on the concept of a fixed rupee dividend in each period.
This policy provides the owners with positive information, thereby minimising the uncertainty. A variant of this policy is
to increase the dividend rate in steps, on achievement of threshold earnings.
Low regular and extra dividend policy: Some companies pay a regular, low dividend rate and an extra dividend when
earnings are higher than normal. This policy is especially common among companies that experience cyclical shifts in
earnings, as it distinguishes the two payments and the shareholder knows what to expect.
Question 4. X Ltd. has Unit C which is not functioning satisfactorily. The following are the details of its fixed assets:
Asset
Date of acquisition
2. Exemptions under mega notification A list of 34 services have been notified for exclusion from service tax vide a
Mega notification N.12/2012 dated 17.03.2012 with effect from 1.7.2012.These are exemptions related to the kind of
services being provided. Apart from these, we have some other exemptions related to other aspects like scale and
geography. Select abatements are also provided for specified services.
Explanation of exemptions and rebates in Service Tax Law
Question 6
Meaning and explanation of customs duty
11.3 Customs Duty
Customs duty is the duty imposed on goods imported into the country. In the years before globalisation it was difficult
to import goods on account of stiff duty rates and procedures, especially for less developed and developing
Taxation Management Unit 11
Sikkim Manipal University Page No.: 219
nations like India. Ajoke used to be that the word customs was said to come from Sanskrit kashtam meaning difficulty.
But the origin of the word is something else. Centuries ago, it was customary for a trader coming to sell his/her wares in
a particular kingdom to offer gifts to the king, and seek his approval to sell his/her goods in that kingdom. This
customary practice of gifts being collected by the Government has come to be called customs duty in the modern era.
The practice has now been extended to cover even exporters in the form of export duty.
Explanation of taxable events for imported, warehoused and exported goods
The Customs Act makes it clear that goods imported into or exported out of India create a taxable event in which
customs duty (import duty or export duty) becomes payable.
The taxable event with respect to imports is the day of crossing of the customs
barrier and not the date on which goods land in India or enter its territorial waters.
The taxable event in case of warehoused goods is when goods are cleared from
customs-bonded warehouse by submitting sub-bill of entry.
Taxable event arises for exported goods when the proper officer makes an order
permitting clearance and loading of the goods for exportation under Section 51 of the Customs Act, 1962. It was
however held in India - UOI v. Rajindra Dyeing and Printing Mills (2005) 10 SCC 187 = 180 ELT 433 (SC) that taxable event
occurs when goods cross territorial waters of India.
Rate of duty and tariff valuation for imported goods:
Date for determining the rate of duty and tariff valuation of imported goods will depend upon the imported goods
cleared for home consumption and cleared for warehousing. The determination of appropriate rate of duty can be
explained with the help of the following example:
Imported goods
Clearance for home consumption
Clearance for warehousing
Clearance for home consumption:
Taxation Management Unit 11
Sikkim Manipal University Page No.: 220
1) Bill of entry is presented before the entry inwards of the vessel or aircraft The rate of duty and tariff valuation
prevailing on the date on which entry inwards is granted or arrival of aircraft will be applicable.
2) Bill of entry is presented after the entry inwards of the vessel or aircraft The rate of duty and tariff valuation
prevailing on the date on which the bill of entry with respect to such clearance is presented will be applicable.
Clearance for warehousing:
The rate of duty and tariff valuation prevailing on the date on which a bill of entry for home consumption is presented
will be applicable.
Listing of duties in customs
-dumping duty
Calculation of assessable value and customs duty.