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TAX PLANNING WITH REFERENCE

TO FINANCIAL MANAGEMENT

Presented By:
Arup Bordoloi (06)
Priyanka Mohan (45)
Samujjwal Chakraborty (53)
Sujata Mahanta (58)

TAX PLANNING

Tax Planning is an exercise undertaken to


minimize tax liability through the best use of all
available allowances, deductions, exclusions ,
exemptions, etc., to reduce income and/or capital
gains.

TAX PLANNING RELATING TO


FINANCIAL MANAGEMENT DECISIONS

CAPITAL STRUCTURE:
Importance in selection of capital structure
Serving the capital base with consistent dividend policy.
Cost of capital to be raised from the market.
Chargeability or otherwise of taxes , i.e., direct and
indirect taxes.
Keeping a margin for ploughing back of profits for future
plan towards diversification, expansion, modernization
and other development aspects.

MEANS OF FINANCING:
Generally, the following means of finance are available
for a new project:

Equity Share Capital


Debentures/Loans and borrowings/Lease Finance

TAX PLANNING IN RESPECT OF CAPITAL


STRUCTURE:
1.

.
.
.

High debt financing and no equity financing:


High Interest
Earnings before tax-low
Tax low

TAX PLANNING IN RESPECT OF CAPITAL


STRUCTURE:
2. Optimum mixture of debt and equity financing:
Interest high
Earnings before tax-low
Tax low
Dividend to be paid
Earning per share-high

TAX PLANNING IN RESPECT OF CAPITAL


STRUCTURE:
3. Low debt financing and high equity financing:
Interest low
EBT-high
Tax high
EAT-high
EPS-low
Return on capital-high

TAX PLANNING IN RESPECT OF CAPITAL


STRUCTURE:
4. No debt financing and high equity financing:
Interest-nil
Dividend-high
EBT-high
Tax-high
EAT-high
EPS-low

TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]


What is dividend ?????
Ordinary connotation means the sum paid to or
received by a share holder proportionate to his
share holding in a company out of the total sum
distributed.
Section 2(22) of the Income Tax Act,1961 has
explained little bit more.
NowWhat is Deemed Dividend ????

TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]


Any amount declared, distributed or paid by way
of dividends refereed to in section 115-O on or
after 1/4/2013 whether out of current or
accumulated profits shall not be included in
computing the total income of a previous year of
any person. Therefore no expense shall be allowed
from such dividend.
Dividend from a foreign company or deemed
dividend mentioned under section 2(22)(e) is
taxable under Income from other sources

TAXABILITY OF DIVIDEND [SECTION 56(2)(I)]


The liability of payment of tax on dividends
has been shifted to domestic companies on or
after 1/4/2013 whether out of current or
accumulated profits.
The rate of Tax for the assessment year
2013/14 shall be 15 % plus surcharge @ 5 %
plus education cess @ 2 % plus secondary and
higher education cess @ 1 %

DIVIDEND INCLUDES:
According to Section 2(22)(a) in The IncomeTax Act, 1995
Any distribution by a company to the extent of
accumulated profits, whether capitalized or not, if
such distribution entails the release by the
company to its shareholders of all or any part of the
assets of the company.

DIVIDEND INCLUDES:
According to Section 2(22)(b) in The IncomeTax Act, 1995
Any
distribution
of
debentures/Deposit
Certificates to shareholders and bonus shares to
preference share holders whether capitalized or
not.

DIVIDEND INCLUDES:
According to Section 2(22)(c) in The IncomeTax Act, 1995
Any distribution made to the shareholders of a
company on its liquidation, to the extent to which
the distribution is attributable to the accumulated
profits of the company immediately before its
liquidation, whether capitalized or not

DIVIDEND INCLUDES:
According to Section 2(22)(d) in The IncomeTax Act, 1995
Any distribution made to the shareholders by a
company on the reduction of its capital, to the
extent
to
which
the
company
possesses
accumulated profits, whether such accumulated
profits have been capitalized or not.

DIVIDEND INCLUDES:
Loans/advances to certain
shareholders/concerns[Section 2(22)(e)]
Any payment by a company of any sum by way of
advances or loan,to the extent of accumulated profits to:
(i)An equity shareholder, who is beneficial owner of shares
holding not less than ten percent of the voting power

DIVIDEND INCLUDES:
(ii)Any concern in which such is a member or a partner
and in which he has substantial interest
(iii) Any person, on behalf or for the behalf of any
Such shareholder. Such shareholder here means
a shareholder here means a shareholder who is
Beneficial owner of shares holding not less than 10%
voting share.

DIVIDEND INCLUDES:
Dividends do not include the following:
(i)Loan advanced in the ordinary course of business by the
money lending company
(ii)Dividend paid if set off against loan already
Treated as deemed dividend
(iii)Buyback of shares as per section 77A of Companies
Act.

DIVIDEND INCLUDES:
(iv)Distribution of shares to the shareholders
Of demerged company

DIVIDEND INCLUDES:
Deductions for expenses for dividend income[Section 57(i)
and 57(iii)]
Collection charges
Interest on loan
Any other expenditure

TAX PLANNINNG VIA BONUS

BENEFITS TO THE SHAREHOLDER:


.

UNDER SEC 2(22)(a) : Capitalization by issue of bonus


shares to equity shareholder does not release of assets
of a company hence shall not been deemed to be
dividend.

Two types of shareholder who invest in shares of a


company.

TREATMENT ON SALE OF BONUS SHARES:


.

Sec 55 (aa)(iiia):The cost of acquisition in relation to


financial assets allotted to the assessee
On or After 1-4-1981 without any payment and on the
basis of holding of any other financial asset ,shall be
taken nil.
If in case bonus share is allotted before 1-4-1981
assessee may opt for market value as on 1-4-1981

TREATMENT ON SALE OF BONUS SHARES:


.

Although distribution of bonus shares to equity


shareholders will not be deemed to be dividend, but
as per section 2(22)(c) the distribution of bonus
shares to preference shareholders is a dividend.

BENEFITS TO THE COMPANY:


.

If the company does not declare the dividends out of its


income then the profits are available to the company for
being ploughed back into the business.
And if company distributes its income by way of
dividends then the company shall have to look for
alternative source of raising capital .
The company must be cautious while capitalizing the
profit.

If the company is able to invest the capitalized funds


into profitable venture where the return is higher
than the existing rate of dividend, the future rate of
earnings is bound to increase.

Conclusion

Thank You