Professional Documents
Culture Documents
Corporate Tax Planning
Corporate Tax Planning
Unit-I: E-Text
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.
(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.
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.
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.
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.
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.
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.
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.
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.