TAX PLANNING WITH REFERENCE TO FINANCIAL MANAGEMENT

Presented By:Arup Bordoloi (06)

Priyanka Mohan (45)Samujjwal Chakraborty (53)

Sujata Mahanta (58)

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 RELATING TO FINANCIAL MANAGEMENT DECISIONS

CAPITAL STRUCTURE:

Importance in selection of capital structure Serving the capital base with consistent dividend policy. Cost of capital to be raised from the market. Chargeability or otherwise of taxes , i.e., direct and

indirect taxes. Keeping a margin for ploughing back of profits for future

plan towards diversification, expansion, modernization and other development aspects.

MEANS OF FINANCING:

Generally, the following means of finance are available for a new project:

Equity Share Capital Debentures/Loans and borrowings/Lease Finance

TAX PLANNING IN RESPECT OF CAPITAL STRUCTURE:

1. High debt financing and no equity financing: High Interest Earnings before tax-low Tax low

TAX PLANNING IN RESPECT OF CAPITAL STRUCTURE:

2. Optimum mixture of debt and equity financing:

Interest high Earnings before tax-low Tax low Dividend to be paid Earning per share-high

TAX PLANNING IN RESPECT OF CAPITAL STRUCTURE:

3. Low debt financing and high equity financing:

Interest low EBT-high Tax high EAT-high EPS-low Return on capital-high

TAX PLANNING IN RESPECT OF CAPITAL STRUCTURE:

4. No debt financing and high equity financing:

Interest-nil Dividend-high EBT-high Tax-high EAT-high EPS-low

TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]

What is dividend ?????Ordinary connotation means the sum paid

to or received by a share holder proportionate to his share holding in a company out of the total sum distributed.

Section 2(22) of the Income Tax Act,1961 has explained little bit more.

Now…What is Deemed Dividend ????

TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]

Any amount declared, distributed or paid by way of dividends refereed to in section 115-O on or after 1/4/2013 whether out of current or accumulated profits shall not be included in computing the total income of a previous year of any person. Therefore no expense shall be allowed from such dividend.

Dividend from a foreign company or deemed dividend mentioned under section 2(22)(e) is taxable under “Income from other sources”

TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]

The liability of payment of tax on dividends has been shifted to domestic companies on or after 1/4/2013 whether out of current or accumulated profits.

The rate of Tax for the assessment year 2013/14 shall be 15 % plus surcharge @ 5 % plus education cess @ 2 % plus secondary and higher education cess @ 1 %

DIVIDEND INCLUDES:

According to Section 2(22)(a) in The Income- Tax Act, 1995

Any distribution by a company to the extent of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company.

DIVIDEND INCLUDES:

According to Section 2(22)(b) in The Income- Tax Act, 1995

Any distribution of debentures/Deposit Certificates to shareholders and bonus shares to preference share holders whether capitalized or not.

DIVIDEND INCLUDES:

According to Section 2(22)(c) in The Income- Tax Act, 1995

Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not

DIVIDEND INCLUDES:

According to Section 2(22)(d) in The Income- Tax Act, 1995

Any distribution made to the shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalized or not.

Loans/advances to certain shareholders/concerns[Section 2(22)(e)]

Any payment by a company of any sum by way of advances or loan,to the extent of accumulated profits to:(i)An equity shareholder, who is beneficial owner of shares holding not less than ten percent of the voting power

DIVIDEND INCLUDES:

(ii)Any concern in which such is a member or a partner and in which he has substantial interest

(iii) Any person, on behalf or for the behalf of any Such shareholder. Such shareholder here means a shareholder here means a shareholder who is Beneficial owner of shares holding not less than 10% voting share.

DIVIDEND INCLUDES:

Dividends do not include the following:(i)Loan advanced in the ordinary course of business by the money lending company(ii)Dividend paid if set off against loan alreadyTreated as deemed dividend(iii)Buyback of shares as per section 77A of Companies Act.

DIVIDEND INCLUDES:

(iv)Distribution of shares to the shareholders Of demerged company

DIVIDEND INCLUDES:

Deductions for expenses for dividend income[Section 57(i) and 57(iii)]

Collection charges Interest on loan Any other expenditure

DIVIDEND INCLUDES:

TAX PLANNINNG VIA BONUS

UNDER SEC 2(22)(a) : Capitalization by issue of bonus shares to equity shareholder does not release of assets of a company hence shall not been deemed to be dividend.

Two types of shareholder who invest in shares of a company.

BENEFITS TO THE SHAREHOLDER:

Sec 55 (aa)(iiia):The cost of acquisition in relation to financial assets allotted to the assessee

On or After 1-4-1981 without any payment and on the basis of holding of any other financial asset ,shall be taken nil.

If in case bonus share is allotted before 1-4-1981 assessee may opt for market value as on 1-4-1981

TREATMENT ON SALE OF BONUS SHARES:

Although distribution of bonus shares to equity shareholders will not be deemed to be dividend, but as per section 2(22)(c) the distribution of bonus shares to preference shareholders is a dividend.

TREATMENT ON SALE OF BONUS SHARES:

If the company does not declare the dividends out of its income then the profits are available to the company for being ploughed back into the business.

And if company distributes its income by way of dividends then the company shall have to look for alternative source of raising capital .

The company must be cautious while capitalizing the profit.

BENEFITS TO THE COMPANY:

If the company is able to invest the capitalized funds into profitable venture where the return is higher than the existing rate of dividend, the future rate of earnings is bound to increase.

Conclusion

Thank You