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Master of Business Administration - MBA Semester 3

FIN303-Taxation Management

Note: Answers for 10 marks questions should be approximately of 400 words. Each question is
followed by evaluation scheme. Each Question carries 10 marks 6 X 10=60.

Q1. Explain the objectives of tax planning. Discuss the factors to be considered in tax planning.

Answer. Objectives of Tax Planning

a. Reduction of tax liability by utilizing the benefits available in the tax laws.

b. Informed and pragmatic financial decisions: A person adds the dimension of tax incidence in his
decision-making on financial matters, and this helps him optimize his decisions.

c. Multi-dimensional investment decisions: In a democratic welfare state like India the

government requires substantial investment in infrastructure, education and healthcare.

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.

Answer. Categories of capital assets

For taxation purposes, the capital assets have been, divided into

(a) Short-term capital assets and

(b) Long-term capital assets.

Q3. Explain major considerations in capital structure planning. Write about the dividend policy
and factors affecting dividend decisions.

Answer. Major considerations in capital structure planning

1. Risk of two kinds, that is, financial risk and business risk: In the context of capital structure
planning, financial risk is more relevant. Financial risk is of two types:

(a) Risk of cash illiquidity:

(b) Risk of variation in the earnings to equity shareholders in relation to expectation:

2. Cost of capital: Cost of capital is an important consideration in capital structure decisions. 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.

3. Control: Along with cost and risk factors, the control aspect is also an important consideration
in planning the capital structure. When a company issues fresh equity, for example, it may dilute
the controlling interest of the present owners.

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 SET-II

Q1. 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?

Answer.

Q2. Explain the Service Tax Law in India and concept of negative list. Write about the
exemptions and rebates in Service Tax Law.

Ans. Service Tax Law in India

Service tax was introduced in India in 1994 by Chapter V of the Finance Act, 1994. It was imposed
on an initial set of three services in 1994 and the scope of the service tax has since been expanded
continuously by subsequent Finance Acts.

Q3. 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.

Answer. Customs Duty

Customs duty is the duty imposed on goods imported into the country. In the years before
globalization it was difficult to import goods on account of stiff duty rates and procedures,
especially for less developed and developing nations like India. Ajoke used to be that the word
‘customs’ was said to come from Sanskrit ‘kashtam’ meaning difficulty.

 Taxable event for imported goods – The taxable event with respect to imports is the day of
crossing of the ‘customs barrier’ and not the date on which goods land in India or enter its
territorial waters.
 Taxable event for warehoused goods – The taxable event in case of warehoused goods is
when goods are cleared from customs-bonded warehouse by submitting sub-bill of entry.

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