Summer 2013

Master of Business Administration- MBA Semester 3

MF0012 Taxation Management - 4 Credits
(Book ID: B1760)
Note: Assignment (60 marks) must be written within 6-8 pages. Answer all questions.
Kindly note that 10 marks questions should not exceed 400 words and 5 marks should not
exceed 200 words.
Q1. Explain the objectives of tax planning. Discuss the factors to be considered in tax
planning.
(Objectives of tax planning 5 marks; Factors in tax planning 5 marks) 10 marks
Ans:
Objectives of Tax Planning

Claim Deductions under sections 80C to 80U,

It will reduce your tax liability and you have to pay less tax,
Minimize the war between Tax Payer and Tax Administrator, Tax payer wants to pay
less tax and Tax Administrator wants to extract most of the tax, by using Tax Planning
this war is minimized as tax payer is using all legal ways to reduce tax liability,
Makes Investment: - By tax planning, an Tax payer will invest his money in some
good funds which will result in productive returns for tax payer and transfer money to
government for investment too.
Helps in growth of economy,
Makes society grow,
Money saved by you will result in investment which will result in employment
generation.

Factors in Tax Planning

1. Residential status and citizenship of the assessee: We know that a non-resident in India is
not liable to pay income-tax on incomes which accrue or arise and are also received outside
India, whereas a resident in India is liable to pay income-tax on such incomes. Therefore,
every assessee would like to be a non-resident in India, if he has any income which accrues or
arises outside India.
2. Heads of income/assets to be included in computing net wealth: Before the Tax-planner
goes in for his task; he has to have a full picture of the sources of income of the tax payer and
the members of his family. Though total income includes all income from whatever source
derived, the scope of tax planning is not similar in respect of all sources of income. The
assessee can avail the benefits of exemption and deductions under each head of income.
Further he can avail the benefit of rebate and relief under the Act.

3. Latest legal position: It is the foremost duty of a tax-planner to keep him fully conversant
with the latest position of the taxation laws along with the allied laws and also the judicial
pronouncements in respect thereof. For this purpose he must have a thorough and up-to-date
understanding of the annual Finance Acts, the Taxation Laws Amendments, the amendments,
if any, of the allied laws, the latest judicial pronouncements of the High Courts and the
Supreme Court, various Circulars of the Central Board of Direct Taxes which seek to clarify
the legal position in so far as the Revenue is concerned.

Q2. Explain the categories in Capital assets.

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 4 marks ; Calculation of indexed cost of
acquisition 2 marks; Calculation of long term capital gain 2 marks; calculation of taxable
long term capital gain 2 marks) 10marks
Ans:
1. Business Assets
Fixed assets used in your business are taxed as ordinary gains. Business assets include all
furniture, equipment, and machinery used in a business venture. Examples include
computers, desks, chairs, and photocopiers. Ordinary gains are reported on IRS Form 4797.
2. Small Business Stock
Capital gains and losses on small business stock may qualify for preferential tax treatment.
Gains may be partially excluded under Section 1202, Gain on Small Business Stock, if the
company had total assets of $50 million or less when the stock was issued.

Q3. X Ltd. has Unit C which is not functioning satisfactorily. The following are the details of
its fixed assets:

The written down value (WDV) is Rs. 25 lakh for the machinery, and Rs.15 lakh for the
plant. The liabilities on this Unit on 31st March, 2011 are Rs.35 lakh.
The following are two options as on 31st March, 2011:
Option 1: Slump sale to Y Ltd for a consideration of 85 lakh.
Option 2: Individual sale of assets as follows: Land Rs.48 lakh, goodwill Rs.20 lakh,
machinery Rs.32 lakh, Plant Rs.17 lakh.
The other units derive taxable income and there is no carry forward of loss or depreciation for
the company as a whole. Unit C was started on 1st January, 2005. Which option would you
choose, and why?
(Computation of capital gain for both the options 4 marks ; Computation of tax liability for
both the options 4 marks ; Conclusion 2 marks) 10marks
Ans:

Q4. What do you understand by customs duty? Explain the taxable events for imported,
warehoused and exported goods. List down the types of duties in customs.
An importer imports goods for subsequent sale in India at $10,000 on assessable value basis.
Relevant exchange rate and rate of duty are as follows:

Calculate assessable value and customs duty.

(Meaning and explanation of customs duty 2 marks; Explanation of taxable events for
imported,warehoused and exported goods 3 marks; Listing of duties in customs 2 marks;
Calculation of assessable value and customs duty 3marks) 10marks
Ans:
A tax levied on imports (and, sometimes, on exports) by the customs authorities of a country
to raise state revenue, and/or to protect domestic industries from more efficient or predatory
competitors from abroad.
Customs duty is based generally on the value of goods or upon the weight, dimensions, or
some other criteria of the item (such as the size of the engine, in case of automobiles).
Customs duty is levied on goods imported in India. It is levied on Ports. If goods are
imported by illegal means and CD is not paid then these goods are called smuggled goods
and liable for prosecution. Only permitted goods can be imported into the country.

Q5. Explain the Service Tax Law in India and concept of negative list. Write about the
exemptions and rebates in Service Tax Law.
(Explanation of Service Tax Law in India 5 marks ; explanation of concept of negative list
2marks; Explanation of exemptions and rebates in Service Tax Law 3 marks) 10marks
Ans:
"Service" means any activity carried out by a person for another for consideration, and
includes a declared service, but shall not include
a) an activity which constitutes merely,
i) a transfer of title in goods or immovable property, by way of sale, gift or in any other
manner; or
ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the
meaning of clause (29A) of article 366 of the Constitution; or
iii) a transaction in money or actionable claim.
b) a provision of service by an employee to the employer in the course of or in relation to his
employment;
c) fees taken in any Court or tribunal established under any law for the time being in force."2
The definition prescribes the following three essential ingredients that must be present in
order to call an activity as 'service'a) it must be an activity;
b) it must be performed by a person for another person;
c) the activity is performed for a consideration.

Exception to section 66F

The subsidiary or auxiliary service itself may fall within definition of Negative List or
Exempted Service e.g. public road construction
Works contract service provided by sub-contractor to main contractor exempt if main
contractor is exempt from service tax and is under works contract

Q6. Explain major considerations in capital structure planning. Write about the dividend
policy and factors affecting dividend decisions.
(Explanation of factors of capital structure planning 6 marks; Explanation of dividend policy
2 marks; factors affecting dividend decisions 2 marks) 10marks
Ans:
There are three major considerations in capital structure planning, i.e. risk, cost of capital and
control, which help the finance manager in determining the proportion in which he can raise
funds from various sources.
Although, three factors, i.e. risk, cost and control determines the capital structure of a
particular business undertaking at a given point of time. The finance manager attempts to
design the Capital Structure in such a manner that his risk and costs are the least and the
control of the existing management is diluted to the least extent.
Risk- Risk is of two kinds, i.e. financial risk and business risk. Here we are concerned
primarily with the financial risk. Financial risk is also of two types:
Risk of Cash Insolvency: As a firm raises more debt, its risk of cash insolvency
increases. This is due to two reasons. Firstly, higher proportion of debt in the Capital
Structure increases the commitments of the company with regard to fixed charges.
This means that a company stands committed to pay a higher amount of interest
irrespective of the fact whether it has cash or not. Secondly, the possibility that the
supplier of funds may withdraw the funds at any given point of time. Thus the longterm creditors may have to be paid back in instalments even if sufficient cash to do so
does not exist. This risk is not there in the case of equity share.
Risk of Bariation in the the Expected Earning to Equity Share-holders: In case a
firm has higher debt contenting Capital Structure, the risk of variation in expected
earnings available to equity shareholder will be higher. This is because of trading of
equity. It is seen that financial leverage works both ways, i.e. it enhances the
shareholders returns by a higher or lower than rate of interest. Thus, there will be
lower probability that equity shareholder will enjoy a stable dividend if the debt
content is higher in the Capital Structure. In other words, the relative dispersion of
expected earning available to equity shareholder will be greater of the Capital
Structure of a firm higher debt content.
Cost of Capital- Cost is an important consideration in capital structure decision. 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. Hence, along with a risk as a factor; the finance manager has to
consider the cost aspect carefully while determining the Capital Structure.
Control- Along with cost and risk factor, the control aspect is also an important consideration
in planning the Capital Structure. When a company issues further equity share it
automatically dilutes the controlling interest of the present owners. Similarly, preference
shareholders can have voting rights and thereby affect the composition of the Board of
Directors in case dividend on such share is not paid for two consecutive years.
Trading on Equity- A company may raise funds either by the issue of shares or by
borrowings. Borrowings carry a fixed rate of interest and this interest is payable irrespective
of fact where there is profit or not. Preference shareholders are also entitled to a fixed rate of
dividends but payment of dividends is subject to the profitability of the company. In case of

return on the total capital employed i.e. shareholders funds plus long term borrowings, is
more than the rate of interest on borrowed funds or the rate of dividends on preference shares,
it is said that company is trading on equity.