MF0012 Taxation Management

Q1. Explain the objectives of tax planning. Discuss the factors to be considered in
tax planning.
Ans-1. Objectives of Tax Planning
a. Reduction of tax liability by utilising 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 optimise his
decisions.
c. Multi-dimensional investment decisions: In a democratic welfare state like India the
government requires substantial investment in infrastructure, education and healthcare.
d. Discharging a citizens duty: No one likes to pay tax, and it is indeed a temptation to
hide income earned and skip paying income tax, or make purchases without bills and
escape sales tax. But these are unlawful methods of reducing tax liability and result in
economic evils like black money.
e. Reducing pressure on the legal infrastructure: The long arm of the law invariably
catches up with economic offenders, but the process is tedious and puts an enormous
burden on the legal system.

Factors to be Considered in Tax Planning

1. Residential status and citizenship of the taxpayer: It is important for the taxpayer to
know whether he is a resident or a non-resident in a country in which he earns income.
The number of days stay in the country is usually the deciding factor for residential
status.
2. Heads of income/assets to be included in computing net income/wealth: Income Tax
Act provides specific heads of income under which income earned has to be declared;
and Wealth Tax Act specifies the heads under which wealth has to be declared.
Knowledge of the items covered by each head of income/wealth is essential.
3. The tax laws: The basic Acts of law that stipulate taxes on income, wealth, products,
etc. are the Income Tax Act, the Wealth Tax Act and a set of indirect tax acts such as Sales
Tax Act, Excise Act and Customs Act.
4. Form v. Substance: The taxpayer should be focussed on the substance of a transaction,
the real intent, and not only with the form. He should at no time try to change the form
for the only purpose of reducing or eliminating tax. It is often seen that a transaction that
in substance should result in a tax liability does not

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Q2.
Ans-2. 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.
(a) Short-term capital assets: According to Section 2(42A), a short-term capital asset
means a capital asset held by an assessee for not more than:
a. 12 months before its transfer in case of company shares, (equity or preference), or any
other security listed in a recognized stock exchange, or units of UTI and mutual funds or
a zero coupon bond, and
b. 36 months before its transfer in the case of any other asset
Capital gains arising from the transfer of short-term capital asset are called short-term
capital gains.
(b) Long-term capital assets: Any capital asset other than a short-term capital asset is
termed as a long-term capital asset. Gains arising from the transfer of long-term capital
assets are called long-term capital gains. Long-term capital gains qualify for concessional
tax treatment under the Income Tax Act.
Assessment Year
2016-17

Rs. Rs.
41,00,00
Total considerration 0
Less:
1) Expenses on Transfer 1,00,000
Indexed cost of acquisition 45,30,32
2) 10,00,000*1081/244 44,30,328 8
Long-term capital
loss 430328

Here, there is Capital Loss hence the exemption u/s 54EC is not relevant.

Q 3. Explain major considerations in capital structure planning. Write about the

dividend policy and factors affecting dividend decisions.

Ans. 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.

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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.

4. Trading on equity: A company may raise funds either by issue of shares or by borrowing.
Borrowings entail interest cost, which is payable irrespective of whether there is profit or not.
Returns to shareholders on the contrary arise only when the company makes profits, but the
return expected by them is much higher since they bring in risk capital.

5. Tax consideration: While dividend on shares is declared and paid out of profit after
tax, interest paid on borrowed capital is allowed as deduction for computing taxable
income. Cost of raising finance through borrowing is deductible in the year in which it is
incurred.

6. Government monetary and fiscal policy: The annual review by Reserve Bank of India, the
nations central bank, gives shape to the monetary policy for the subsequent 12 months, which
takes into account issues such as inflation, economic growth and sectoral aspects.

Dividend Policy

Two approaches need to be considered simultaneously in dividend decisions:

1. Retention as a long-term financing decision: Payment of cash dividends reduces

funds available to finance growth and either restricts growth or forces the firm to find
other financing sources. So a company might decide to retain earnings if:
a) Profitable projects are available and need finance and
b) Capital structure needs infusion of equity funds, and a fresh issue of equity is not
advisable.

2. Dividend payment as an aid to maximisation of wealth: In this approach, a company

recognises that favourable impact of dividend payment on the market price of the share.

Factors affecting dividend decisions:

The two types of return from the purchase of common shares are:
1. Capital appreciation: The investor expects an increase in the market value of the
common shares over time. For example, if the stock is purchased at ` 40 and sold for ` 60,
the investor realises a capital gain of ` 20.
2. Dividends: The investor expects at regular intervals distribution of the firms earnings.

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Q 4.

Ans.-4:

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Q5. Explain the Service Tax Law in India and concept of negative list. Write about the
exemptions and rebates in Service Tax Law.

Ans-5. 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.

There is no separate Service Tax Act, but all pronouncements relating to service tax are in the
annual Finance Acts. Service Tax Rules, 1994 were enacted to begin with, and with
notifications from time to time the law has been amended and updated.
The new section 65B introduced in the Finance Act, 2012 defines services in Clause 44. The
list has 38 items and a few other rebates and special treatments, and except for these all other
services are taxed. Service tax is levied @ 14% plus Swatchh Bharat Cess 0.5% i.e., 14.5%
for financial year 2016-17.

Export service is not taxable, and so if the assessee has no output service that is taxable,
he/she can apply for and receive refund of the service tax collected from him/her on his/her
input services when he/she paid for those services. A transaction will qualify as export when
it meets the following requirements:

The service provider is located in taxable territory

Service recipient is located outside India

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 Service provided is a service other than in the negative list
The place of provision of the service is outside India
The payment is received in convertible foreign exchange

The Concept of Negative List

A comprehensive and elaborate note from Tax Research Unit of the Ministry of Finance
(Dept. of Revenue), issued on 16th March, 2012 sets the tone for a major paradigm shift in
regard to service tax.

1. Negative list of services A list of 17 services that will be exempt from service tax, as per
notification no. 19/2012-ST dated 5/6/2012.

2. Exemptions under mega notification A list of 34 services have been notified for
exclusion from service tax vide a Mega notification N.12/2012 dated 17.03.2012 with effect
from 1.7.2012.These are exemptions related to the kind of services being provided.

Exemptions and Rebates in Service Tax Law

Exemptions (Section 93)

If the Central Government is satisfied that it is necessary in the public interest so to do, it
may, by notification in the Official Gazette, or individual special order, exempt generally or
subject to such conditions as may be specified, taxable service of any specified description
from the whole or any part of the service tax.

Rebate (Section 93A

Where any goods or services are exported, the Central Government may grant rebate of
service tax paid on taxable services which are used as input services for the manufacturing or
processing of such goods or for providing any taxable services.

Q 6.

Ans -6.

Customs Duty

Customs duty is the duty imposed on goods imported into the country. In the years before
globalisation 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.

Taxable event for exported goods Taxable event arises for exported goods when the proper
officer makes an order permitting clearance and loading of the goods for exportation under
Section 51 of the Customs Act, 1962.

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Types of duties in customs:

Basic customs duty

Additional customs duty
Special additional duty of customs
Protective duties
Safeguard duty
Countervailing duty on subsidised articles
Anti-dumping duty

Solution of Pratical

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