Q Explain the treatment of taxes in project management.

. For preparing the profitability projection, the expected tax burden for the forecast period, which is usually eight to ten years, has to be figured out. This calls for familiarity with the provisions of the income tax act that are relevant for determining the magnitude and timing of the tax burden for a new project.

FRAMEWORK FOR DERIVING TAXABLE INCOME Income tax is a charge calculated by applying the rates prescribed annually in the finance act on the base called the total income. The total income, also known as taxable income, is computed with reference to a period defined as the previous year. Determining the total income for corporate assesses Income from business + income from other heads under tax law = gross total income deduction from gross total income = total income Income from business This broadly consists of receipts less deduction associated with activities which can be attributed to the character of business. The principal sources of receipts are sale proceeds, professional fees , and labour charges. The deductions can be classified as follows: 1 Actual business expenses incurred 2 Amortisation of certain expenses 3 Capital expenditure of certain types 4 Certain contributions 5 Carried forward losses and allowances Income from other heads under tax law Income from house property Capital gains(full value of consideration on transfer of capital assets) Income from other sources (interest and other incomes which cannot be taken under any other head)

Gross total income This represents the summation of income from business and income from other heads. Deduction from gross total income Chapter VI A of the Act deals with various deductions that are allowed from the gross total income. The deductions under this chapter are allowed irrespective of the source of income and are akin to incentives. The important deductions under chapter VI A are as follows:

1: deduction in respect of profits and gains from new industrial undertaking providing infrastructure facility after a certain date(sec 80 IA) 2: deduction in respect of profits and gains of business from new industrial undertaking other than infrastructure facility as mentioned above (sec 80 IB) 3: deduction in respect of profits derived from new undertaking or enterprises in certain special category states (sec 80 IC) 4: deduction in respect of profits and gains from business of collecting and processing bio-degradable waste (sec 80 JJ) 5: deduction in respect of employment of new workmen (sec 80 JJAA) Total income This represents the difference between the gross total income and the deductions from the gross total income and is the base on which tax rate is applied to arrive at the tax liability. Important provisions and consideration relevant for deriving taxable income Expenses incurred during construction period Depreciation Deduction in respect of expenditure on scientific research Deduction in respect of certain capital expenditure Exemptions in respect of profits and gains of newly set up industrial undertakings in free trade zones and SEZ Deduction in respect of profits and gains from newly set up industrial undertakings engaged in infrastructure development undertakings Deduction in respect of profits and gains fro certain industrial undertakings in specified states Disallowances Set off, carry forward, and order of deduction for computing from business.

Expenses incurred during construction period once the date of set up of business is determined the ,the treatment of various expenses incurred up to date of the setting up of the unit may be discussed. During the construction stage of a project , a new company incurs various expenses. These expenses can be broadly classified as: (a) Direct expenses relating to construction. (b) Expenses other than direct expenses. -Preliminary expenses preliminary expenses consists of the following (a) Expenditure in connection with preparation of feasibility report, preparation of project report

(b) Legal charges for drafting agreement, MOA -Indirect expenditure relating to construction--These consist of expenses like financial charges , remuneration of various personnel engaged in construction activity, travelling and other expenses incurred for the purpose of implementing the project, depreciation on various assets used for the purpose of construction and trial production expenses. These expenses are allowed to be capitalized. -Indirect expenditure not relating to construction--expenses on marketing department, corporate status of the unit. Such expenses are not allowed to be capitalized nor are they allowed to be deducted from the income of the subsequent years. -Expenditure relating to a new project of an existing company--when an existing company with ongoing business activities sets up a new project, expenses which are directly relatable to the construction of the project is capitalized. Other indirect expenses incurred during the construction period are allowed to be claimed as a deduction from the incomes earned from other existing activities of the company. -income earned during construction period--income earned during construction period which is attributable to construction period the asset itself . Example of such income are sale of products produced during trial run, sale of packing material used for machinery , hire charges received for plant and machinery which was given to the sub contractor, sale of packing material used for machinery etc.