workbook on corporate tax

7/27/2019 Workbook on Corporate Tax

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(For private Circulation Only)

WORKBOOK

ON

CORPORATE TAX

Vijaya Batth, FCA, ACS, LLB

Email: [email protected]

CONTENTS


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Chapter. No

Chapter Heading Page No.

1. Objective of the Course and other information

2. Session Plan

3. Introduction4. Taxation of Companies5. Tax Planning6. Tax Management

pg. 2

Chapter 1: Objective of the Course and otherinformation


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Objective of the Course:The course aims in providing the students with thenecessary tools to understand the dynamics of taxation, particularly, direct taxapplicable to corporates. By the end of the course, students are expected to getfamiliarized with the concepts of income tax and the essentials of tax planningand managerial decision making and how tax management is useful in corporateworld.

Learning Devices:1. Handouts will be given to each student along with case studies which shall

be worked out in the class.2. Use of Power Point Presentation for better understanding of summarized

data, graphs and diagrammatic representation of important concepts

Pedagogy:1. Case Studies

2. Interactive session

3. Class room assignment

Evaluation parameter:The following shall constitute the evaluation of the course work.Quiz = 20%Assignment = 10%Presentation = 10%

Term examination = 60%

Prescribed Syllabus

COURSE DURATION: 2 HRS PER WEEK FOR 10 WEEKSCOURSE CREDITS: 2

1. INTRODUCTION (2 HRS)

Definitions, residential status, heads of income, computation of taxable

income

2. TAXATION OF COMPANIES (7 HRS)

Special provisions in computation of profit from business

Deduction from gross total income

Amalgamation of companies and fiscal incentives Minimum alternative tax on companies

Special provisions relating to tax on distributed profits of domestic

companies

3. TAX PLANNING (7 HRS)

Concept relating to tax avoidance and tax evasion

Tax planning with reference to; location of undertaking, types of activity,

ownership pattern, dividend policy, Issue of bonus shares, Inter corporatedividends and transfer

Tax planning relating to amalgamation and mergers of companies

Tax considerations in respect of specific managerial decision like make orbuy, own or lease, close or continue, sales in domestic markets or exports,


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capital budgeting decisions, managerial remuneration, foreigncollaboration and joint ventures.

4. TAX MANAGEMENT (4 HRS)

Filing of returns and assessments

Penalties and prosecutions Appeals and revisions

Advance tax, TDS, advance rulings

Avoidance of double taxation agreements

BASIC TEXTS

Students Guide to Income Tax (by) Vinod Singhania & Monica Singhania

(Taxmann)

Corporate Tax Planning and Management (by) Girish Ahuja & Ravi Gupta

(Bharats)

References:Students are expected to read the newspapers especially, The Economic Times

and Business Standard religiously and on a daily basis.


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Chapter 2 : Session Plan

SessionNo.

Topic for discussion

1 DefinitionsHeads of income,Computation of taxable income

2 Residential status and incidence of tax3 Special provisions in computation of profit from business4 Deduction from gross total income5 Internal Test followed by discussion ( 10 marks ) Topic : Session 1 to 46 Amalgamation of companies and fiscal incentives7 Minimum alternative tax on companies8 Special provisions relating to tax on distributed profits of domestic

companies9 Internal Test followed by discussion ( 10 marks) Topic : Session 6 to 8

10 Concept relating to tax avoidance and tax evasion11 Tax planning with reference to; location of undertaking, types of activity,

ownership pattern12 Tax planning with reference to dividend policy, Issue of bonus shares,

Inter corporate dividends and transfer13 Tax considerations in respect of specific managerial decision like make

or buy, own or lease14 Tax considerations in respect to close or continue, sales in domestic

markets or exports, capital budgeting decisions15 Tax consideration in respect to managerial remuneration, foreign

collaboration and joint ventures.

16 Tax planning relating to amalgamation and mergers of companies17 Internal Test followed by discussion ( 10 marks) Topic : Session 10 to 16


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18 Filing of returns and assessmentsPenalties and prosecutions

19 Appeals and revisions20 Advance tax, TDS,21 Advance rulings

Avoidance of double taxation agreements22 Internal Test followed by discussion ( 10 marks) Topic : Session 18 to2123 Doubt clearing session24 Complete Revision

NOTE :

While every attempt will be made to stick to the lesson plan as stated above,changes may be made depending upon the level of understanding of students.

Chapter 3 : Introduction

BASIC CONCEPTS:1. Assessment year means the period starting from 1st April and ending on

31st March of the next year. Income of the previous year of an assessee istaxed during the next following assessment year at the rates prescribedby the relevant Finance Act.

2. Previous Year is the year in which income is earned.

3. The term person includes an individual, HUF, a company, a firm, an AOPor BOI, a local authority and every artificial judicial person.

4. Assessee means a person by whom income tax or any other sum ispayable under the Act. It also includes any person on whom anyproceeding under the Act has been initiated.

5. Income of a person can be computed under five heads namely :(a) Salaries(b) Income from house property(c) Profits and gains of business or profession(d) Capital gains ( Long term and Short term )(e) Income from other sources

6. Residential Status of a Company :Control andManagement ofthe AffairsWholly in India Wholly outside

IndiaPartly in Indiaand partlyoutside India

Indian Company Resident Resident ResidentNon IndianCompany

Resident Non Resident Non Resident

7. Incidence of tax on a companyType of income Resident in India Non resident in IndiaIndian Income Taxable in India Taxable in IndiaForeign Income Taxable in India Not Taxable in India


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Example based on Residential Status of a CompanyQuestionABC Limited is registered in Sri Lanka and is a subsidiary of an Indian Company.

The business of the company is stevedoring in Sri Lanka. The meetings of theBoard and general meeting of the shareholders are held in Mumbai. The affairs ofthe assessee-company are looked after by two managers under two powers ofattorney which confer upon them the widest power and authority. The directorsretain complete control over the matter delegated to the managers and fromtime to time give directions as to how things should be done and managed.Discuss.

Sl.No

Issue Analysis & Legal Provision

1 What are the variousparameters for

deciding residentialstatus of aCompany?

2 What is theresidential status ofthe company in thiscase?

2 How is control &managementestablished in thiscase?

3 What is theincidence of tax inthis case?


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4 What is therelevance of the factthat the company isregistered outsideIndia ?

5 What is Indianincome ?

6 What is foreign

income?

7 What is thedifference betweenreceipt and

remittance?

8 Legal Reference Narottam & Pereira Ltd. vs. CIT ( 1953)


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Chapter 4 : Taxation of Companies

TAX PLANNING, TAX AVOIDANCE AND TAX EVASION

Example : Pritish is an individual. For the assessment year 2011-12, his grosstotal income is Rs. 12,40,000 on which tax payable is Rs.2,32,780. To reduce thistax liability, he deposits Rs.70,000 in public provident fund account.Consequently, his taxable income and tax liability will be reduced to Rs.11,70,000 and Rs. 2,11,150 respectively.

This is an example of tax planning, as he has reduced his tax liability within thelegal framework.

Example 2 : A Company has its manufacturing unit actually taking place inHaryana. However to get the benefit of deduction under Section 80IB, thecompany takes a factory building on rent in a village in Jammu and only on paperit is shown that the new manufacturing unit is situated in a village in Jammu.

This is an example of tax evasion, as the company has tried to reduce its taxliability by making incorrect statement about the location of the manufacturingprocess.

The line of demarcation between tax planning and tax avoidance is very thin.Tax avoidance is reducing or negating tax liability in legally permissible waysand has legal sanction. Essential features are:Legitimate arrangement of affairs in such a way so as to minimise tax liability.

There is no element of mala fide motive. It actually takes into account theloopholes of law.

Example : If Rs. 90,000 is gifted by a husband to his wife, income generated

therefrom is taxable in the hands of the husband under the clubbing provision.


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However, if gift is made by the same person out of the funds of his HUF in thecapacity as Karta of the family , then it is not taxable.

This is an example of tax avoidance.

Computation of Tax liability ( under normal provisions )

Steps1 Find out taxable income2 Find out rate of income tax ( 30% or 40% ) depending on type of

company3 Add surcharge ( if applicable)4 Find out total of Step 2 & 35 Add Education and Secondary Education Cess ( 3 % )6 Deduct tax rebate or tax credit ( if applicable )7 Step 4 plus 5 less 6 is the tax payable

Computation of Tax liability ( under minimum alternate tax (MAT) provisions )

Steps8 Find out book profit9 Find out rate of income tax ( 18% presently ) of book profit10 Add surcharge ( if applicable)11 Find out total of Step 9 & 1012 Add Education and Secondary Education Cess ( 3 % )13 Tax liability = step 11 plus 12Important Tax liability of a company is step 7 or 13 , whichever is

higher

Book Profit = Net Profit as per profit and loss account after specifiedadjustments

DEDUCTIONS AVAILABLE TO A COMPANY

Section Nature of Deduction80G Donations to charitable Institutions and funds80GGA Donation for scientific research or rural development80GGB Contribution to political parties

80IA Profits and gains from industrial undertakings engaged ininfrastructure, etc

80IAB Profits and gains by an undertaking or enterprise engaged indevelopment of SEZ

80IB Profits and gains from certain industrial undertakings other thaninfrastructure development undertakings

80IC Profits and gains of certain undertakings in certain States80ID Profits of hotels and convention centres80IE Profits of undertakings in North Eastern States80JJA Profits from the business of collecting and processing of bio-

gradable waste

80JJAA Employment of new workmen80LA Income of offshore banking units


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EXAMPLE : UNDERSTANDING DEDUCTIONS UNDER CHAPTER VI

1. IF the financial year of a Company is 2009-

10 , then state thePrevious yearAssessment year

2009-10

2010-11

2. Under Section 80IA relating to deduction withrespect of profits and gains from industrialundertakings or enterprises engaged ininfrastructure development etc., if anassessee chooses initial assessment year as2014-2015 , then , state the year upto whichthe assessee will get 100% deduction

2014-15 to 2022-23

3. Name the type of company who can availbenefit u/s 80IB

IndustrialUndertaking

4. Explain the criteria for understanding thistype of Company

5. X Ltd has constructed a hotel on Delhi Agrahighway. Profits from the hotel constructionfor the previous year 2007-08 is Rs. 80 Lakhs,which is transferred to a special reserveaccount and consequently , it is notchargeable to tax. The special reserveaccount shall be utilised upto 31.03.2011 forhighway projects only.How much is taxable and how much isallowed as a deduction if Rs.70 lakhs isutilised for highway project upto 31.03.2011

Taxable Rs. 10LakhsNot taxable Rs. 70lakhs

6. A company is eligible to claim deduction u/s

80IA and also eligible as per provision toclaim u/s 80IBCan the company claim deduction under both? State YES or NO

Reason

NO

No double deductionpermissible

7. X Ltd has 2 undertakings , Unit A ( which iseligible for deduction @ 100% u/s 80IB andUnit B ( which is not eligible for a similardeduction ).Goods are transferred from Unit A to Unit Band for accounting purposes , the


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transactions are recorded at a price higherthan the market value.Due to this pricing , what is the impact ofprofitability of Unit A.

Impact on Tax liability

Impact of Profitability of Unit BImpact on Tax Liability

Is this tax planning or tax evasion

What is the stand of the Income TaxDepartment in this matter which is purelyaccounting?

As Profit will go up

No tax liability asthe unit is in anycase getting 100%deduction.

Bs Profit will comedown

Tax liability willreduce

Tax Planning if done

in the trueaccounting sense

The Assessing Officehas power to recalculate profit.

Chapter 5 : Tax Planning

TAX PLANNING WITH REFERENCE TO SPECIFIC BUSINESSDECISIONS

Sr.No

Business Decision Tax Planning

1 Tax Planning with reference toNew Business

Location1. Newly established industrial

undertaking in Trade FreeZones

2. Special Economic Zone3. 100% EOU4. North Eastern Sates

Nature1. Artistic made hand wooden

articles2. Telecommunication Services

3. Tea Development Account4. Infrastructure Development


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undertakings5. Prospecting for mineral oil

Form of Business Organisation1. Firm

2. Sole proprietorship3. Company4. Co-operative Society

2 Tax Planning with reference tofinancial management Decisions

1. Capital Structure Decision( Combination of Debt andEquity )

2. Dividend Policy ( Taxtreatment Div distributiontax , TDS)

3. Issue of Bonus Shares3 Tax Planning with reference to

managerial decisions1. Purchase of an asset or Hire

( rate of depreciation is an

important factor , interest onborrowed funds)

2. Make or buy ( check forlocation advantages,establishment of new unit )

3. Repairs , Renewals, replace orrenovation ( revenue vs.Capital expenditure )

4 Tax Planning with reference toemployees Remuneration

1. Allowances ( HRA ,Conveyance )

2. Perquisites ( rent freeaccommodation , medicalreimbursement , Motor Car )

5 Tax Planning with reference tosale of scientific research assets

1. Sec 35D Whole of Deduction2. Sale Proceeds less Discount

allowed = Capital gains3. Long Term Capital Loss can

also be claimed when capitalasset is transferred for lesservalue than indexed cost ofacquisition but asset shouldnot be used for any otherpurpose.

6 Tax Planning with reference tobusiness restructuring

Amalgamation ( Carry forward ofloss and unabsorbed depreciation )

PROBLEM FOR PRACTICE:

1. A Company is in the process of Tax Planning for its units in differentlocations, both India and Outside India. What would you advise thecompany with reference to the following aspects involving income tax.

(a) Setting up a newly established industrial undertaking or carrying onbusiness under existing undertaking and deciding upon the nature of theproduct to be manufactured


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(b) Form of Business Organisation ( Partnership firm or Company )

(c) Issue of Bonus Shares or pay equivalent amount as dividend

(d) Purchase of an asset ( by taking a term loan ) or go for a hire purchase

(e) Restructuring of Business

(f) Restructuring of capital structure by issue of convertible debentures

(g) Setting up a branch outside India or incorporating a subsidiary company inthe foreign country

(h) Availing a foreign Currency loan or INR loan

(i) Raising capital by going for a GDR ( Global Depository Receipts )

(j) Sale of assets used in Scientific Research

PROBLEM FOR PRACTICE: ( Financial Leverage)

When tax rates are falling, it is better to increase the financial leverage.

Explain the truth of this statement using the following models which has threealternatives:

1.1 Equity ( 20% dividend ) : 60% or 50% or 40%1.2 Tax rates are likely to be 35% , 30% and 25% in the next three years1.3 Average cost of debt is 12%

Chapter 6 : Tax Management

Sl.No Areas Tax Management1 Returns Original Return: 30th September

Loss Return : Due Date ( no carry forwardpermitted for business loss, capital loss andloss from the activity of owning andmaintaining race horsesBelated Return : Due date or time allowed before end of one year from the end ofrelevant Asst year ( before completion of

Assessment )Revised Return : Within one year from end of


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the Asst year or before completion ofAssessmentDefective Return : Time given by AO ( 15 days, before completion of the Assessment( provided AO condones the delay )

2 Assessment Self AssessmentInquiry before AssessmentSummary AssessmentScrutiny AssessmentBest Judgement Assessment

3 Penalties & Prosecution Failure to pay tax or interest

Default in making payment of tax

Failure to maintain books as prescribed

Undisclosed income in case of search

Failure to get accounts audited (TaxAudit) or submit timely report

Failure to deduct tax (TDS)

Taking or accepting any loan or deposit

in contravention to provisions

Failure to furnish IT return

4 Exemptions/Escape

Income exempt from tax

Agricultural income

Payments received from family incomeby a member of a HUF

Share of profit from a firm Remuneration received from a foreign

diplomat

Gratuity, LTC, Leave Salary, PF

Dividend from domestic companies

Avoidance of Double Taxation AgreementPresently with 57 CountriesModes of granting relief : Exemption Methodand Tax Credit Method ( credit in the countryof residence )If a tax liability is imposed , then DTA may be

resorted for negating or reducing the impactIn case of difference in the provisions of theAct and DTA , the latter would prevail

5 Advance Ruling The authority for Advance Rulings consist of aChairman who is a retired Judge of theSupreme court and two other members drawnfrom the Indian Revenue Service and IndianLegal Service.Authority will have powers of a civil court.Opportunity of being heard.

Matters - Determination of a transaction ordecision of an authority


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Either applicant is a non resident or thetransaction concerned is with a non resident.

The scheme of advance rulings wasintroduced by the Finance Act, 1993. Under

the scheme, the power of giving advancerulings has been entrusted to an independentadjudicatory body. The procedure prescribedis simple, inexpensive, expeditious andauthoritative.

Advance Ruling, means written opinion orauthoritative decision by an Authorityempowered to render it with regard to the taxconsequences of a transaction or proposedtransaction or an assessment in regardthereto. A ruling can be obtained by an

applicant (who may be either a non-residentor a resident having a transaction with a non-resident) in respect of any question of law orfact in relation to the tax liability of the non-resident arising out of a transactionundertaken or proposed to be undertaken.

Questions on which ruling can be sought:

The question may be on points of law as wellas on fact; therefore, mixed questions of lawand fact can also be included in the

application.

Binding nature of advance ruling:

The effect of the ruling is stated to be limitedto the parties appear before the authority andthe transaction in relation to which the rulingwas given.

6 Appeal Complaint to a superior Court for an injusticedone by an inferior court.Appellant : Party complainingRespondent : Other PartyAppeal :First Appeal : CIT ( Appeals ) Against order ofthe AO By Tax payer

Second Appeal : Income tax AppellateTribunal Against order of CIT(A) Bytaxpayer or CIT

Appeal to High Court : Substantial question of

law arising out of ITAT order Taxpayer or CIT


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Appeal to Supreme court : Judgement of highCourt By taxpayer or CIT

Revision ( S 263 ) : Order of the AssessingOfficer if it is prejudicial to the interest of

revenue Action can be taken CIT himself

First Appeal to ITAT : Appeal against therevision u/s263 By Taxpayer

Appeal to High Court/Supreme Court

Revision ( S 264 ) Order of Assessing Officer Either to CIT or suo motu by CIT No furtheraction is generally required as no order can bepassed u/s 264 which is prejudicial to theassessee. However, writ petition under article

226 is maintainable.

7 Tax Deducted at Source Depends on nature of Payment, type ofassessee and prevailing rates

8 Advance Tax FY 10-11 min tax liability Rs. 10,000Due Dates

Corporates Others15th June 15% Nil15th Sept 45% 30%15th Dec 75% 60%

15

th

Mar 100% 100%

Understanding Advance TaxMr. Rudra, an individual, 29 years of age, estimates his current income for thefinancial year 2101-11 as follows:Particulars Amount(Rs.)Profits and Gains of business or Profession 6,87,000Capital Gains ( Short Term ) 3,000Capital Gains ( Long Term ) NilIncome from other Sources 26,000Gross Total Income 7,16,000Less Deduction u/s 80C and 80D ( PPF Rs.30,000 andInsurance Premium Paid Rs.500 )

30,500

Net Income 6,85,500Tax 71,100Add : Surcharge Nil

Total 71,100Add: Education Cess 1,422Add: Secondary and Higher Education Cess 711

Total 73,233Less : Tax Deduction at Source 590Balance to be paid as Advance Tax 72,643First Instalment ( on or before 15th September 2010 - 30% of

72,643 )

21,793

Second Instalment ( on or before 15th December 2010 60% of 21,793


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PROBLEM FOR PRACTICE

The following are the particulars submitted by different tax payers for theassessment year 2010-11

Determine in a tabular format, the amount of advance tax payable in each case

Particulars Punyakalpa (Individual )

Pallav &Jyoti &Anshuman( HUF )

Kharvela &KalingaAssociates (PartnershipFirm )

Munmun &SidharthPrivateLimited( Company)

Salaries 3,80,000 - - -Income from Houseproperty

3,000 37,000 36,000 (14,000)

Profits & Gains frombusiness & Profession

- (13,000) 2,98,840 5,50,000

Capital Gains ( ShortTerm )

16,000 2,68,000 24,000 67,000

Income from othersources

13,000 43,000 38,000

Gross Total Income 4,12,000 2,92,000 4,01,840 6,41,000

Less : Deduction underChapter VI AU/s 80C 26,000 4,500 - -U/s 80G 2,000 3,000 2,000 3,000Net Income 3,84,000 2,84,500 3,99,840 6,38,000

Tax Liability 30,800 12,450 1,19,952 1,91,400Add : Education Cess 616 249 2399 3,828Add: Secondary andhigher Education Cess

308 125 1200 1,914

Total 32,724 12,823 123,551 1,97,142Less TDS 21,725 4,244 27,853 51,192Balance 9,999 8,580 95,697 1,45,950

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