Corporate Tax Planning

Unit-I: E-Text

Module -1: Concepts & Objectives tax planning

Concept of Tax Planning

Tax planning is well thought out scheme of the tax payers to reduce their tax burden by methods which
are sound and legal. It has assumed far-reaching importance in the confounded complexities of the
taxation laws. The planning has proved a saviour of the economic life of the tax payer who can reduce
the incidence of tax to the minimum if he can diligently and intelligently plan his tax affairs. On the
other hand government is to collect the maximum revenue from tax as tax is an important source of
revenue in the hands of the government. A tax payer attempts to take all possible advantages over the
taxation laws. It is the legitimate right of every assessee to minimize the tax liability with an objective
of maximizing the net of tax income within the legal framework. So tax planning is particularly an
attempt to minimize tax in permissible ways without breaking any law.

Concept of Tax Evasion and Tax Avoidance

Tax evasion: It is a method of evading tax liability by dishonest means like suppression of sales, inflation
of expenses, concealment of income, etc. Any attempt of an assessee to evade tax is criminal and
economic offence.
Tax avoidance: According to G.S.A. wheat Craft tax avoidance is ‘the art of dodging tax without
actually breaking the law’. It is a method of reducing tax liability by taking advantage of certain
loopholes in the law. Wheat craft analyses tax avoidance as a transaction which could not be adopted it
the tax planning. Taking the advantage of loopholes of the act, the tax payer intentionally minimize the
tax. Though it is not criminal offence but may be treated as economic offence.

The tax planning is a method of planning the affairs by availing of incentives and benefits provided by
the act and thus promoting the spirit behind the provisions made in the law. Tax planning is neither ‘tax
evasion’ nor ‘tax avoidance’. The Wanchoo Committee report brought out the distinctions as follows:-
“The distinction between tax evasion and tax avoidance, therefore, is largely dependent on the
difference in the methods of escape resorted to.

To avoid tax, tax planning is necessary. The planning is nothing but chalking out a plan by a tax payer
before his/ her income accrues or arises by execution of which he /she may can make best use of
alternatives of deduction, allowances, rebate as provided by the law.

Objectives of Tax Planning

Tax planning is an honest and valid approach to the taxation laws within the framework to achieve the
objective of tax reduction and therefore, the objectives of tax planning cannot be regarded as offending
any concept of taxation laws. The important objectives of tax planning may be discussed as follows:
(i) Lowering the tax liability
(ii) Maximizing the tax savings from allowable deductions, allowances
(iii) Maximizing the net of tax income
(iv) Avoiding penalty and prosecution

The points are explained below..

(i) Lower the tax liability: The main objective of tax planning is to minimize the tax liability.
Every asseessee tries to minimize his/her tax liability to keep maximum amount of income in the pocket.
It is right of the assessee to minimize the tax liability within the legal framework. The planning creates
economic stability of the nation and its people by even distribution of economic resources.

(ii) Maximize the tax savings from allowable deductions, allowances: Income Tax Act provides
different types of deductions, incentives, allowances for different types of assessees. The tax payer may
use these provisions judiciously to maximize the amount of tax savings, thereby retain the maximum
take home earnings.

iii) Maximize the net of tax income: Through a well chalked out plan a tax payer may maximise the
net of tax income which may result in increase in savings. If savings increase the assessee may invest
in various schemes in respect of which the assessee may also avail deductions. Rebate etc. An income
saved and wealth accumulated in violation of law are the scours on the economy of the people.
Generation of black money darkens the horizon of the national economy and leads the nation to
avoidable economic destruction.

iv)Avoid penalty: Under tax planning, asseessee may pay taxes which is legally computed and paid to
the government in time. Since the tax liability has been computed within the legal framework, the
assessee may avoid penalty as well as avoid legal action.

Module -2: Factors & Methods

Factors for tax planning

A tax planning may be for a short--- term, that is to say, yearly like the annual plans of the
Government and it may also be for a long- term depending upon the exigencies of the sources of income,
like five- year plans of the Government. But both types may be employed in a given situation because
both are supplementary to each other and they may not be found overlapping. When a tax planner is
prepared to do his job meticulously, efficiently and intelligently, he has to take into consideration the
following factors:
(i) Residential status
(ii) Complete information of financial position of tax payer
(iii) Heads of income
(iv) Latest legal provisions
(v) Genuineness of transactions regarding income and expenditure

Methods of Tax Planning

Short term tax planning-
Long term tax planning-
Purposive tax planning-

Module -3: Tax Planning and Corporate Planning

In the corporate planning process, various phases like strategy formulation and functional plans are very
important. It is at this stage of strategy formulation corporate tax planning helps corporate planners.
Depending upon the results of gap analysis, company develops strategy to fill the gap. It may be in any
form like expansion, diversification or the closure of the units. To make right choice it is necessary to
inducts taxation into the corporate planning process. The chart shows the areas where corporate
management should seek the guidance and advice of the corporate tax planner. If we go through the
diagram, we can see that there is a linkage between corporate planning and tax planning. This may be
discussed as follows:
Production planning: The possible problems in production after setting out production plans are
maintenance, capacity utilization, etc. tax laws provide depreciation allowance and maintenance
allowance like allowance for repairs, etc. similarly, investment allowance, taxation of capital gains and
should be considered for acquiring more machines or selling obsolete machines and also for deciding
the time for replacement e.g. either purchase or sale of assets.

Chart: linkage between corporate planning & corporate tax planning

Marketing planning: The assessee can claim export incentives/ deductions in addition to allowances for
entertainment and advertisement expenditure u/s 37. However market plans depend upon strategy
formulation which includes expansion, diversification and closure of certain units. Expansion involves
promoting a new business undertaking adding one more department or amalgamation of two or more
companies.

Financial Planning: In Financial management, capital structure decision have been considered as very
important. Specially for selecting an optimum capital structure, the proportion of the different sources
of capital may be considered after considering tax advantage because the interest on borrowings enjoys
the tax advantage. Tax planning helps in deciding the capital gearing required and in computing the
optimum capital mix and the cost of capital as well.

Personnel planning: personal management in companies in not only a social responsibility but has
become a statutory obligation too. To arrive at proper remuneration plans and to evolve sound wage
policies companies should pay the utmost attention to the tax implication involved in the fixation of
salary with perquisites, allowances and other employee welfare benefits.

Research and development planning: without research and development companies may not survive in
the market. The tax benefits have provided stimulus for expansion of research activity in industry u/s
35. But without proper tax planning, companies might loose these tax benefits of weighted deduction
as provided by the Act.

Many companies pursue corporate planning as an isolated and independent legal exercise. However, it
may be argued that tax planning should be integrated into overall corporate long- term planning process.
The scheme of corporate taxation is comprehensive affecting all important areas of corporate
management.

Any planning activity done exclusively for a single area creates imbalances in the master plan and leads
to sub-optimal utilization of corporate resources. Such an integrated approach to the planning process
requires that tax planning be an important and equal partner along with other segments like production
planning, marketing planning and so on. To get the fruits of tax provisions, the corporate planning
process is required to be integrated with corporate tax planning.

Module - 4: Different types of Company

Company is an important person in India from whom the government collects major share of
the direct tax revenue in terms corporate income tax (CIT). Income tax authority also provides
various incentives, deductions to corporate assessees. we are going to discuss first, what is
company?
Under section 2(17) of the Income Tax Act 1961, “company” means:

i) Any Indian company or

ii) Any corporate incorporated under the laws of a foreign country i.e. outside India ; or iii)
Any institution, association or a body which is assessed or was assessable/ or was assessed
as a company for any assessment year commencing on or before April 1, 1970, or
iv) Any institution, association or a body, whether incorporated or not and whether Indian or non-
Indian, which is declared by general or special order of the Central Board of Direct Taxes
to be a company.
 As per Income Tax Act 1961, the following companies have been identified for the purpose
of tax.
Indian Company [U/s 2(26)]
Domestic Company [U/s 2(22A)]
Foreign Company [U/s 2(23A)]
Company in which public are substantially interested [U/s 2(18)]
Investment Company
Widely held Company
Closely held Company

Indian Company [U/s 2(26)]

An Indian company means a company formed and registered under the Companies Act, 1956. And also
it includes the following:
i) a company formed and registered under any law relating to companies formerly in force in
any part of India other than the State of Jammu and Kashmir and the Union territories;
ii) a corporation established by or under a Central, State or Provincial Act;
iii) Any institution, association or body which is declared by the central Board of Direct Taxes
to be a company under section 2 (17);
iv) In case Jammu and Kashmir, a company formed and registered under any law in force in
the State of Jammu and Kashmir;
v) In case of Union Territories, a company formed and registered under any law for the time
being in force in the Union territories

In the aforesaid cases, a company, corporation, institution, association or body will be treated as an
Indian company only if its registered office is situated in India.

Domestic Company [U/s 2(22A)]

“Domestic company” means
i) an Indian company or
ii) any other company which fulfils the following two conditions
a) It pays tax against its income under the Act
b) It makes prescribed arrangements for the declaration and payment of dividends out of
such income within India according to section 194.

The prescribed arrangements mean

i) The share register of the company for all shareholders are regularly maintained at its
principal place of business in India, in respect of any assessment year, at least from April 1
of the relevant assessment year.
ii) To pass the accounts of the relevant previous year and to declare dividends in respect
thereof, the General Meeting is held only at a place within India.
iii) The dividends declared, if any, is paid only within India to all shareholders.

So, an Indian company will automatically be considered as a domestic company. Other than Indian
company, a foreign company may also be considered as domestic company if it fulfils the above two
conditions a & b.

Foreign Company [U/s 2(23A)]

Foreign company means a company which is not a domestic company.
Investment Company
Investment company means a company whose gross total income consists mainly of income chargeable
under the heads “Income from house property”, “Capital gains” and “Income from other sources”.

Company in which public are substantially interested [U/s 2(18)]

A company is regarded as a company in which the public are substantially interested in the following
cases where:
1. Owned by Government / RBI- i) A Company owned by the Government or the Reserve Bank
or ii) in which not less than 40 per cent shares are held by the Government or the Reserve Bank India
or a corporation owned by the Reserve Bank India.
2. Section 25 companies- A company registered under section 25 of the Companies Act, 1956,
for the purpose of promotion of commerce, art, science, religion, charity. Such companies are prohibited
from the payment of any dividends to its members.
3. A company without share capital – A company having no share capital and declared by the
Central Board of Direct Taxes (CBDT) to be a company in which the public are substantially interested.
4. Nidhi or Mutual Benefit Society –A company which carries on, as its principal business, the
business of acceptance of deposits from its members and is declared by the central government as a
Nidhi or Mutual Benefit Society u/s 620A.
5. Company owned by a co- operative society – A company in which shares carrying not less than
50 per cent of the voting power having been allotted unconditionally to or acquired unconditionally,
held by one or more co- operative societies through out the relevant previous year.
6. Public limited company- A company which is not a private company as defined by the
Companies Act 1956 and fulfils any one of the following conditions will be treated as a company in
which public are substantially interested.
i) its equity shares are listed in a recognized stock exchange in India as on the last day of
the previous year or, ii) its shares carrying 50 per cent of voting power (40 per cent in the case of
industrial companies) have been allotted unconditionally to, or acquired unconditionally and
beneficially held throughout the relevant previous year by-
a) The Government; or
b) A statutory corporation; or
c) A company in which the public are substantially interested or any wholly – owned
subsidiary Company.

Widely held Company

A company in which the public are substantially interested is known as widely- held company

Closely held Company

A company in which the public are not substantially interested is known as a closely- held company.

Industrial Company
An Industrial company means a company which is mainly engaged in the construction of Ships or in the
manufacture or processing of goods or in mining or in the business of Generation or distribution of
electricity or any other form of power. A company is deemed to be mainly engaged in the business of
generation or distribution of electricity or any other form of power or in construction of ships or in the
manufacture or processing of goods or in mining, if the income attributable to any one or more of the
aforesaid activities, included in its total income of the previous year is not less than 51 per cent of such
total income.

CASE STUDIES
Case Study I:
For individual: A non resident in India is not liable to pay tax on income which accrues or arises and
received outside India. Only a resident in India is liable to pay tax on such income. So, if the assessee
has such income, he would like to be a non-resident to escape the tax liability. In this case the conditions
laid down u/s 6(1) are to be kept in mind where the physical presence of the assessee during the previous
year has been discussed regarding residential status.

For company: If it is resident in India, the income of such company is taxable In case of Indian Co., it
is always resident in India and accordingly, the income will be taxed.

Case Study II:

There are so many dedications available under Chapter VIA both for individual & corporate assessees.

For Individual: For instance the provisions of section 80C may be mentioned. The individuals can take
the benefits of the provisions of section 80C of the Income Tax Act. These are investment linked
exemption. The assessee can deduct to the extent of Rs.1,50,000/- (PY 2017-18) in respect of his
contribution or deposits as prescribed in the Sec.80C from his Gross Total Income.

For Corporate: The corporate assessees may avail the benefit of the Provisions of Sec. 80IA, 80IB and
so on if certain conditions are fulfilled.

Case Study –III:

A company is formed and registered by the Act of a foreign country ---What would the status of this
company as per Income Tax Act 1961

Ans>Since it is formed and registered outside India, it will be a foreign company.

As per Income Tax Act of our country, a foreign company may be treated as a company resident in India
or a domestic company subject to certain conditions.

A foreign company may be a resident in India if its place of effective management is situated in India
during the relevant previous year. Here “place of effective management” means the place where the
key management and commercial decisions are taken place to conduct business activities. If the entire
business activities are carried out outside India and key management and commercial decisions are taken
place within India i.e. the heads and brains of the company are in India, it will be a resident in India.
Accordingly it has to pay tax in India.

A foreign company may be a domestic Company if it

a) pays tax against its income under the IT Act &
b) makes prescribed arrangements for declaration & payment of dividend out of such income in
India.
The prescribed arrangements are---
i) Share register of co is well maintained at its principal place of business in India ii) The general
meeting has held at a place within India to pass the accounts for declaring dividend
iii) Such dividend is payable only within India to all its shareholders.

If a foreign company is a domestic company it has to pay tax accordingly.