TEX PLANNING FOR NEW BUSINESS

TAX PLANNING WITH REFERENCE TO New business - location of a business New business - nature of a business New business - form of organization

TAX PLANNING WITH REFERENCE TO NEW BUSINESS - LOCATION OF A BUSINESS

Many factors affect location of a business. The following tax incentives are available under the ActSpecial provision in the case of a newly established industrial undertaking in Free Trade Zone. ( Section-10 A) 2. Newly established undertakings in Special Economic Zones. Section -10AA) 3. In the case of a newly established 100% export-oriented undertaking. (Section-10B) 4. Full exemption for in the respect of Artistic hand made wooden article of thing. (Section 10BA) Deduction in case of newly set up industrial undertaking in an industrially backward state or district. (Section- 80 IB)
1.

FREE TRADE ZONES:

As per the Income Tax Act, the declared Free Trade Zones are as under1. K andla Free Trade Zones 2. Santacruz Electronics Export Processing Zone 3. Falta Export Processing Zone 4. Madras Export Processing Zone 5. Cochin Export Processing Zone 6. NOIDA Export Processing Zone The FTZ notified by the Government of India in the Ministry of Commerce are1. Electronic Hardware Technology Park (EHTP) 2. Software Technology Park (STP)

Essential conditions to be satisfied:

Conditions:

1. Production or Manufacture:
The production or manufacture of articles or things or computer software has begun
Location Any Free Trade Zone Any Export Hardware Technology Park or Software Technology Park Any Special Economic Zone year On or after 1.4.19 8 0 On or after 1.4.19 9 3 On or after 1.4.2000

2. Formation of Business:
It should not be formed by splitting up or reconstruction of an existing business.

3. Old Machinery:

It should also not to be formed by the transfer of machinery or plant, previously used for any purpose, to a new business.
Exemption- 1.Upto 20% of the second hand machinery 2.Machinery or plant which was used out side India

Cont...

4. To bring Foreign Exchange in India:

To bring convertible foreign exchange in India within a period of six months from the end of the previous year or period allow by authority

5. Audit:
From A.Y2001-02- form no 56F- along with the return of incomereport of C.A -deduction has been correctly claimed

6. Period of Tax Holiday:

The undertakings set up on or before 31-3-2000 shall be entitled to a deduction for a period of 10 years, that set up during the period 200001 for a period of 9 years, that set up in 2001-02 for a period of 8 years and so on. No exemption will be allowed from the assessment year 2010-11 and onwards.

Amount of Deduction
If the aforesaid conditions are satisfied, Profit of the business of the undertaking Export turnover total turnover of the business carried on by the undertaking. An undertaking established in SEZ on or after 1.4.2002, shall allowed a deduction as under-

First five consecutive assessment years

Next two consecutive assessment years Next three consecutive Assessment years

100 % of profits and gains from export business (starting from assessment year relevant to year of start of production/manufacture)

50 % of profits and gains from export business (a) 50 % of profits from export business or (b) amount transferred from profit and loss a/c to the special economic zone reinvestment allowance reserve a/c

Consequences of Amalgamation / Demerger

Deduction in case of amalgamation and demerger: Transfer of undertaking by one Indian company to another Indian company by way of amalgamation or demerger, then

(i)

No deduction will be allowed to amalgamating and demerged company for previous year in which transfer takes place.
Deduction will be available to amalgamated or resulting company from year of transfer and thereafter.

(ii)

Applicability Deduction Profit of business of the undertaking Export turnover total turnover of the business carried on by the undertaking.

Special economic zone reinvestment reserve A/c Amalgamation or demerge Report from a chartered accountant

It must be an approved 100% export oriented undertaking It must be manufacture or producing articles or computer software Splitting and reconstruction Old machinery Sale proceed are received to be in India in RBI a/c approved by foreign bank a/c Audit Amount of deduction: Profit of the business of the undertaking Export turnover total turnover of the business carried on by the undertaking. Demerger and amalgamation

Full exemption for in the respect of Artistic hand made wooden article of thing. (Section 10BA)
Hand

made: Manufacture or produce by means human skill, craftsmanship and labour.

of

Artistic:

Expression or application of creative skill imagination, especially through a medium such as painting.

and visual

CONDITIONS
1. 2.

3.
4.

5.

Manufacture eligible articles or things New undertaking Machinery Employment of 20% or more workers Audit Form No. 56H

Amount of Deduction
If the aforesaid conditions are satisfied than deduction is available on the basis of amount computed as...
Profit of the business of the undertaking export turnover in respect of eligible articles or things total turnover of the business carried on by the undertaking.

 Backward

state of district: 1. State- Arunachal pradesh, Aasam, Goa, Himachal pradesh, Jammu and Kashmir, Nagaland, Sikkim, Div and Daman 2. DistrictCategory A- Dang, Godda, Gumla, Jaisalmer, Almora, Sidharthnagar Category B- Banaskantha, Sabarkantha, Saran, Nalanda, Bhagalpur.

Qualifying Conditions
Splitting

up & reconstruction, Old plant & machinery Mfg. product Employ

Eligible assesses

Industrial undertaking engaged in business of setting up and operating a cold chain facility for agricultural produce Deduction: 100 % for first 5 assessment and 25% for next 5 year

Business start between 1-4-99- to 31-3-04

Industrial undertaking located in an industrial backward State specified in Eighth schedule.

(A) Notified Industries in north-eastern region Deduction: 100% for 10 year (B) Any other case Deduction: 100% for 5yr, 25% for next 5 yr Business start from 1-4-93 to 31-3-04

Industrial undertaking located in notified industrially backward districts. Condition : Deduction: 100% for first 5yr and 25% for next 5yr

Condition: Deduction: 100% for first 3yr 25 % for next 5yr

Business start Between 1-10-94 to 31-3-04

SSI undertaking which manufactures or produces articles or things or operates its cold storage plant. Deduction: 25 % for 10yr Business start from 1-4-95 to 31-3-02

Undertaking engaged in processing, preservation or packaging of fruits and Vegetables or integrated business of handling, storage and transportation of food grains. Deduction : 100% for 5yr & 25 % for next 5yr Business must begin On or after 1-4-01

Approved Hotel

Located in hilly or rural area or place of pilgrimage or other notified place. Deduction : 50% for 10yr Any Other place. Deduction : 30% for 10yr Business start from 1-4- 97 to 31-3-01 Hotel business is owned and carried on by a company registered in India with a paid up capital of Rs 5,00,000 or more

Multiplex Theatre
Not situated within Kolkata, Chennai, Delhi or Mumbai Convention Centre Deduction : 50% for 5yr Business start from 1-4-02 to 31-3-05

Company registered in India carrying on scientific research and development

Deduction : 100% for 10yr Approved at any time within 1-4-2000 to 31-3-07
Business

of operating and maintaining H ospital in rural area,

Condition : 1. Has at least 100 beds for patients 2. Constructed in accordance with the regulations of the local authority Deduction : 100% for 5yr It must be construct during 1-10-04 to 31-3-08

Production or refining of mineral oil

Deduction : 100% for 7yr Business start on or after 1-4-97

Undertaking development and building housing projects approved before 3 1 3 - 07 by a local authority. Condition : 1. size of a plot of land which has a minimum area of one acre Deduction: 100% for any assessment year The project must start on or after 1-10- 98

Tax Planning in Relation to Nature of Business:

Many incentives are available under the act which are directly corelated in the nature of business. Some of these incentives are as follow:

Newly established industrial undertaking in free trade zone (sec.10A) Newly established units in SEZ (sec.10AA) Newly established 100% export oriented undertakings. Site restoration fund (sec.33ABA) Amortization of certain preliminary expenses (sec.35D) Deduction for expenditure on prospecting for certain minerals (sec. 35E)

Deduction for special reserve created by a financial corporation under section 36(1)(viii) Special provision for deduction in the case of business of prospecting for mineral oil. (sec.42 and 44BB) Special provisions for computing profits and gains of business of civil construction. (sec.44AD) Special provisions on case of business of plying, hiring or leasing goods carriages (sec.4AE) Special provisions for computing profits and gains of retail business (sec.44AF) Special provisions in the case of shipping business (sec.44B)

Special provisions in the case of business of operation of aircraft (sec.44BBA) Special provisions in the case of certain turnkey power projects. (sec.44BBB) Special provisions in the case of royalty income of foreign companies (sec.44D) Special provisions in the case of royalty income of non-resident (sec.44DA) Profits & gains of industrial undertakings or enterprises engaged in infrastructure development (sec. 80IA)

 Profits

& gains from certain industrial undertaking other than infrastructure development undertakings (sec.80IB) Special provisions in respect of certain undertakings or enterprises in certain special category states (sec. 80IC) Profits & gains from the business of collecting and processing of bio-degradable waste (sec.80 JJ A) Employment of new workmen (sec.80JJAA) Special tax rate under section 115A, 115AB, 115AC, 115AD, 115B, 115BB, 115BA and 115D. Tea or coffee or rubber development account (sec.33AB)

Tea or Coffee or Rubber Development A/C (sec.33AB)

Any

assesses have to deposit with the NABARD in scheme approved by tea, coffee or rubber board
Deduction

shall be allowed to the extent of profit utilized as above or 40% , whichever is less.
Any

amount withdrawn from the special account shall be in accordance with the purpose specified in the scheme
The

amount standing in the special account or deposit account is allowed to be withdrawn on happening of any of the following: a. b. c. d. e. Closure of business Death of assesses Partition of H.U.F. Dissolution of partnership firm Liquidation of company

In case an assessee utilizes the amount released by NABARD towards the purchase of non-eligible items, then the whole of such amount utilized shall be chargeable to tax in the year which such utilization is done. Non-Eligible items: P & M installed and used in any office premises or residential accommodation including guest house. Office appliances excluding computers. Any new machinery or plant installed in an industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing specified in the eleventh schedule. Any P & M in respect of which the cost is allowed to be written off in one year. The amount withdrawn at any point of time shall be taken as income of the year of withdrawal unless it is utilized for the specified purposes. But, the amount withdrawn will not be taxed even if it is not so utilized in the following cases:

A. B.

C.

D.

A. withdrawal on account of death of assessee.

B. C.

withdrawal on account of partition of HUF withdrawal on account of liquidation of company. The asset in respect of which deduction is claimed should not be transferred for a period of 8 years from the end of the previous year in which it was acquired. However the following transfers are exceptions:

A. Transfer to Govt./Govt. com./Local authority. B. Transfer at the time of takeover of a firm by a company.

In case of succession of a firm by a company as mentioned in point (b) above. The following requirement needs to be fulfilled:
1. 2.

All the properties and liabilities of the firm before succession shall become the properties and liabilities of the company. All the shareholders of the company were partners of the firm immediately before the succession. The account of the assessee shall be audited by a C.A. and the report in Form 3AC shall be furnished along with the return of income.

Areas of Tax Planning with Reference to form of business

Apart from location and nature of business, form of business is another important area where tax planning with reference to setting up of new business could be exercised.
There are different forms of organizations having different tax incidences at a given level of operation. Selection of form of organization depends upon financial requirements of the particular form of organization, liability of the owner thereof, legal requirements and tax considerations as well. The form of ownership proprietorship, partnership, operative society etc may be company, sole co-

Tax treatments under different forms of ownership Individuals and HUFs are assessed at a slab system.

Company is assessed at a flat rate with no exemption limit.

Taxation of a firm does not have a specific shape as that a part of the income attributable to interest and salary to partner may be taxed at normal rates relatable to such partner and the remaining part is taxed at a flat rate as for companies.

These forms of ownership are also allowed different tax concession and rebates under tax laws. The different forms of organizations are 1) Sole Proprietorship 2) Partnership Firm 3) Company