Unit - 3

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Tax Planning can be defined as an arrangement of ones financial and economic affairs by taking complete legitimate of all deductions, exemptions, allowance and rebates so that tax liability reduces to minimum. Essential features of tax Planning are; It comprises arrangements by which tax laws are fully complied. All legal obligations and transactions are met. Transactions do not take form of colourable devices (those devices where statute is followed in strict words but actually spirit behind the statute is marred would be termed as colourable devices). There is no intention to deceit the legal spirit behind the tax law.
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Tax Management refers to the compliance with the statutory provisions of law. It includes maintenance of accounts, filling of return, payment of taxes, deduction of tax at source, timely payment of advance tax etc. Poor tax management may lead to levy of interest, penalty, prosecution. some cases, it may lead to heavy financial loss if proper compliance is not made e.g. if a loss return is not filed in time it will result in a financial loss because such loss will not be allowed to be carried forward.

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Tax Planning

Tax Management

The objective of tax planning is to reduce the tax liability to the minimum. Tax planning is futuristic in its approach. Tax planning is wide in its coverage and includes tax management. The benefits arising from tax planning are substantial particularly in the long run. Tax planning is optional.

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The objective of tax management is to comply with the provisions of law. Tax management relates to past, present and future. Management has a limited scope. As a result of effective tax management, penalty, interest, prosecution can be avoided. Tax management is mandatory.

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Tax avoidance is an act of lodging tax without actually breaking the law. It is a method of reducing tax incidence by availing of certain loopholes in the law. There is an element of mala fide motive involved in tax avoidance. It is every attempt by legal means to prevent or reduce tax liability which could otherwise be incurred by taking advantage of some provision or lack of provision in the law. It excludes fraud, concealment or illegal measures. Tax can be avoided with the help of following devices;

x Contd
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Use of colourable devices Instances where doctrine of substance is defeated Defeating the genuine spirit of law Misrepresentation or twisting of facts Taking only strict interpretation of law and suppressing the legislative intend behind it.

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All methods by which tax liability is illegally avoided are termed as tax evasion. An assessee guilty of tax evasion may be punished under the relevant laws. Tax evasion is not only illegal but it is also immoral, anti-social and anti national practice. The tax evader reduces his taxable income by one or more of the following steps. ` Unrecorded sales ` Claiming bogus expenses, bad debts and losses ` Charging personal expenses as business expenses Contd.
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Submission of bogus receipts for charity, donations for deduction u/s 80G. Non-disclosure of capital gains or assets Non-disclosure of income from Benami Transactions By showing excessive or bogus salary payments to near relatives By not showing taxable incomes in income tax return (ITR)

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Tax Avoidance
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Tax Evasion
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Tax Avoidance is legitimate but an element of mala fide motive is involved. It is tax hedging. It takes into account the loopholes of law. It is intentional tax planning before the actual tax liabilities arises. It is immoral but legal. It is against spirit of law but according to words of law. It is source of white money. The government can recover the tax from preceding date by making amendments in tax law.

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It is unlawful and guilty assessee may be punished under relevant laws. It is tax omission. It is an attempt to reduce tax liability with the help of unfair methods. It is intentional attempt to avoid payment of tax after the tax liability of tax has arisen. It is immoral as well as illegal. It is against the spirit of the law as well as against words of law. It is source of black money. No amendment in act is done but assessee is given penalty.
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A.K.Tiwari - Assistt. Professor

Section
10A

Location of Business
Full exemption of profit for 10 years in the case of a newly established industrial undertaking in free trade zone/special economic zone (before1.4.2005)/electronic hardware technology park/software technology park. Full exemption of profit for initial 5 years, 50% for subsequent 5 years and further deduction of 50% for next 5 years provided an equivalent amount is debited to P/L a/c and credited to Special Economic Zone re-investment Allowance Reserve Account in case of new units is set in SEZ on or after 1.4.2005.. Full exemption of profit for 10 years in the case of a newly established 100% export-oriented industrial undertaking.

10AA

10B

10BA

Full exemption of profit for 10 years in respect of profits from the export of eligible article or things (all hand made articles and things which are of artistic value and which requires the use of wood as the main raw material..

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Section
80IAB 80IB

Location of Business
Profit & Gains from industrial undertakings engaged in development of SEZ is deductible 100% for 10 consecutive years. Profit & Gains from certain industrial undertakings other than in infrastructure i.e. Business of industrial undertaking, operation of ship, hotels, industrial research, production of mineral oil, developing and building housing projects, business of processing preservation of fruits and vegetables and storage and transportation of food grain units, multiplex, convention centre, operating and maintaining a hospital in rural area and hospital located in certain areas. Profit & Gains from certain undertakings in certain special category of states(Sikkim, Himachal Pradesh, Uttaranchal or north Eastern State. 100% profit is deductible for first 10 years. Profit of hotels and convention centre in NCR is deductible 100% for the first 5 years. Profit of undertakings in North Eastern States(Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura) is deductible 100% for the first 10 years.

80IC

80ID 80IE

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Conditions to be satisfied: ` Undertakings must begin manufacture/production in Free Trade Zone, Electronic hardware technology park, software technology park, Special Economic Zone (before April 1, 2005). ` Undertaking should not be formed by splitting up/reconstruction of existing business. ` Undertaking should not be formed by transfer of old machinery. ` There must be repatriation of sale proceeds into India.

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ITR should be filed timely with audit report (56F). Amount of Deduction: Profits x Export turnover Total Turnover Period of Tax Holiday: first 10 consecutive A.Y. available only upto 2012-13.

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Conditions to be satisfied: ` The assessee is an entrepreneur who has been granted a letter of approval by the Development Commissioner to set up a unit in SEZ ` Undertakings must begin manufacture/production in SEZ during F.Y. 2005-06 or any subsequent year ` Undertaking should not be formed by splitting up/reconstruction of existing business. ` Undertaking should not be formed by transfer of old machinery. ` The assessee has income from export of articles/services from such unit out of India.

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ITR should be filed timely with audit report (56F). Amount of Deduction: Profits x Export turnover Total Turnover Period of Tax Holiday: Full exemption of profit for initial 5 years, 50% for subsequent 5 years and further deduction of 50% for next 5 years provided an equivalent amount is debited to P/L a/c and credited to Special Economic Zone reinvestment Allowance Reserve Account.

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Conditions to be satisfied: ` It must be approved as 100% EOU by Board appointed by GOI. ` It must produce or manufacture articles or computer software ` Undertaking should not be formed by splitting up/reconstruction of existing business. ` Undertaking should not be formed by transfer of old machinery. ` There must be repatriation of sale proceeds into India.

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ITR should be filed timely with audit report. Amount of Deduction: Profits x Export turnover Total Turnover Period of Tax Holiday: first 10 consecutive A.Y.

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Conditions to be satisfied:
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It must manufacture or produce eligible article or things (all hand made articles and things which are of artistic value and which requires the use of wood as the main raw material) without the use of imported raw materials... Undertaking should not be formed by splitting up/reconstruction of existing business. Undertaking should not be formed by transfer of old machinery. There must be repatriation of sale proceeds into India.

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90% sale should be in overseas market. Employment of 20 or more workers. ITR should be filed timely with audit report. Amount of Deduction: Profits x Export turnover Total Turnover Period of Tax Holiday: first 10 consecutive A.Y. available upto 2009-10.

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It covers the following cases:

` Provision of infrastructure facility `Telecommunication services `Industrial Parks `Power generation, transmission and distribution or substantial renovation and modernisation of existing distribution lines `Undertaking set up for reconstruction of a power unit `A cross country natural gas distribution network

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Infrastructure facility means road, bridge, rail, highway project, water supply/Treatment project, Sanitation & sewerage system , solid waste management, port, airport. There should be agreement with central Government and start operation on or after 1 April, 2005. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for 10 years commences from the initial assessment year (A.Y. specified by the assessee at his option but not fall beyond the 15 of A.Y. starting from P.Y. in which enterprise begins operating the infrastructure facility).
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The undertaking should be engaged in providing telecommunication services and start services at any year time after March 31, 1995 but before March 31, 2005. There should be a new undertaking not formed by transfer of old plant & Machinery. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for first 5 years and 30% for next 5 years commences from the initial assessment year (A.Y. specified by the assessee at his option but not fall beyond the 15 of A.Y. starting from P.Y. in which enterprise begins operating the infrastructure facility).
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The undertaking should be engaged in develop or maintain an industrial park or a SEZ and Park must start operating during April 1, 2006 to 31 march, 2011 or SEZ during 1 April, 1997 to March 31, 2005. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible 10 years commences from the initial assessment year (A.Y. specified by the assessee at his option but not fall beyond the 15 of A.Y. starting from P.Y. in which enterprise begins operating the infrastructure facility).

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The undertaking must be set up in any part of India for the generation or distribution of power during April 1, 1993 and March 31, 2011. There should be a new undertaking not formed by transfer of old plant & Machinery. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for 10 years commences from the initial assessment year (A.Y. specified by the assessee at his option but not fall beyond the 15 of A.Y. starting from P.Y. in which enterprise begins operating the infrastructure facility).
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The undertaking must be owned by Indian Company and set up before November 30, 2005 for reconstruction of power generating plant and such undertaking begins to generate or distribute power before March 31, 2011. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for 10 years commences from the initial assessment year (A.Y. specified by the assessee at his option but not fall beyond the 15 of A.Y. starting from P.Y. in which enterprise begins operating the infrastructure facility).

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The undertaking must be owned by Indian Company and approved by the Petroleum & Natural Gas Regulatory Board and starts functioning on or after April 1, 2007. There should be a new undertaking not formed by transfer of old plant & Machinery. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for 10 consecutive A Y. out of 15 years beginning from the year in which an undertaking begins to operate .

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The taxpayer is a developer of SEZ notified on or after April 1, 2005 . Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for 10 consecutive A Y. out of 15 years beginning from the year in which SEZ has been notified by Central Government.

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The undertaking should be set up in Sikkim, Himanchal Pradesh, Uttaranchal or North Eastern State (applicable for Dec. 24, 1997 to March 31, 2007) There should be a new undertaking not formed by transfer of old plant & Machinery. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for first 10 years but in case of H.P. & Uttaranchal, it is 100% for next 5 years and 30% (25% for non-corporate assessee) for the next 5 years.

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The taxpayer is engaged in the business of hotel/convention centre located in NCR(Delhi, Faridabad, Gurgaon, Gautam Budh Nagar & Ghaziabad) and should start functioning during April 1, 2007 and March 31, 2010. ` There should be a new undertaking not formed by transfer of old plant & Machinery. ` Deduction should be claimed in ITR and submitted timely and books of Account should be audited. ` 100% of the profit is deductible for first 5 years. Note: Deduction is also available 2/3/4 star hotel at a world heritage site.
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The taxpayer begins manufacture or production of goods or has begun to provide eligible services (hotel 2* more, nursing home, vocational training institutes and IT related training centers, during April 1, 2007 and March 31, 2017 in North Eastern States (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura) There should be a new undertaking not formed by transfer of old plant & Machinery. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for first 10 years.

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The taxpayer is in the business of collecting, processing of bio-degradable waste for generating power or producing biofertilizers, bio-pesticides or producing bio-gas or organic manure. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. 100% of the profit is deductible for first 5 years.

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The taxpayer is an Indian company. Income should include profit from manufacture or production of article or thing. There should be a new undertaking not formed by transfer of old plant & Machinery. Deduction should be claimed in ITR and submitted timely and books of Account should be audited. The amount of deduction is equal to 30% of additional wages (wages paid to new regular workmen in excess of 100 workmen employed during the year) paid to the new regular workmen employed by the assessee in P.Y.

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1. 2.

The assessee must be engaged in the business of growing and manufacturing tea/coffee or rubber in India. Income should be deposited in Special Account with NABARD within 6 months from the end of P. Y. Books of account should be audited by CA. The amount of deduction is whichever is less from following two. A sum equal to amounts deposited in Special Account. 40% of the profit of such business computed under the head of Profits and Gains of business or profession before making deduction u/s 33AB and adjusting brought forward loss .
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The expenditure is capital nature. It is incurred and actually paid for acquiring any right to operate telecommunication services.

Deduction is available in equal installments over the period starting from the year in which such payment has been made and ending in the year in which the licence comes to an end.

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It is applicable for individual, HUF, Firm from A.Y. 201112. Assessee has not claimed some deduction u/s 10 and 80. Assess should be engaged in any business expect the business of plying, hiring of leasing goods carriage referred u/s 44AE. Turnover/gross receipt in P.Y. should not exceed Rs. 40 lakh. The income is estimated at 8% of the gross receipt/turnover.
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Assessee is exempted from payment of advance tax and maintaining of books of account. ` All deductions u/s 30-38 should not be allowed. Note:
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2.

A taxpayer can declare his income lower than deemed profit but he is required to maintain books of account u/s 44AA and to get books of account audited u/s 44AB. The present sections u/s 44AD (business of civil construction or supply of labour for civil construction @ 8% but Gross receipt not exceed Rs. 40 lakh) and 44AF (Retail business @ 5% but turnover not exceed Rs. 40 lakh.will be omitted from A.Y. 201112 and new seceion 44AD has been incorporated.

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It is applicable for individual, AOP, BOI, HUF, Firm and company from A.Y. 2011-12. Assess should be engaged of plying, hiring of leasing goods carriage . Te taxpayer owns not more 10 goods carriages at any time during P.Y.

Assessee has not claimed some deduction u/s 10 and 80.

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Income from the aforesaid business shall be calculated as follows. 1. Heavy Goods Vehicle-Rs. 3500/-for every month 2. Other than Heavy Goods Vehicle- Rs. 3150/-for every month. Note: Heavy Goods Vehicle means any goods carriage
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the gross vehicle weight of which exceeds 12000 KG.

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