corporat tax planning

APRESENTATION

ONTAX PLANNING – SETTING UP OF NEW

BUSINESS

PRESENTED BY : GROUP NO.8GROUP MEMBERS

JALPESH BAVISHI(09015)MAYUR PATADIA(09075)BHAVESH PATEL(09080)

MAHESH SOLANKI(09101)MAYUR THACKER(09107)

MILAN VADHER(09114)PINTU VAISHNAV(09115)

JAY VIDHANI(09119)

2

Location of The New Business 1. Tax Holiday for New Industrial Unit Situated in

Free Trade zone(Sec.10A)

100% of the profit, derived from the industrial undertaking are allowed as to be deduction. available up to assessment year 2009-2010.

From the assessment year 2003-2004 an industrial undertaking set up in Special Economic Zone is entitled to claim 100% deduction in respect for the first 5 year and 50% for the next 2 year.

50% deduction is further continued for the 3 year but amount as does not exceed 50% of is debited to profit and loss account and credited to “Special Economic Zone Re-investment Allowance Reserve Account” used within specified purpose.

Tolani Institute of Management Studies

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From the AY 2006-2007 tax holiday for profits derived from the export of articles or things manufacturing in units set in SEZ is available for 15 year.

100% deduction during first 5 year. 50% deduction during next consecutive 5 year last 5 year percentage of profit not exceeding 50% as is transferred to SEZ Re- investment A/c to be utilised for purchasing machinery and plant during the immediately succeeding to 3 year


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2. Profit derived From Operating Industrial Park or Special Economic Zone(Sec. 80IA)

100% deduction allowed of its respect of its profit for 10 assessment year subject to certain condition.


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3.Profit From Industrial Undertaking located in the State of Jammu and Kashmir

100% deduction allowed for the first 5 year

The next 5 year 30% for Company assessee 25% non Company assessee


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4.Profit from the certain Undertakings or enterprises in certain Special Category States(Sec. 80-IC)

100% deduction allowed in respect of the profit derive from the certain enterprises set up by end of the march 2012 in

certain special category State for 10 assessment year.


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5.Profit and Gain from Business of Hotel and Convention Centers.

100% deduction is allowed for consecutive 5 years and profit set up during financial year 2007-2008 to 2009-2010 in the National Capital Territory of Delhi, districts of Faridabad, Gurgaon, Gautam Budh Nager and Ghaziabad.

6. Profit and Gain from certain Undertaking in North-Eastern States(Sec. 80-IE)

100 % deduction is allowed and profit set up during the financial year 2007-2008 to 2016-2017


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Nature of the Business

1. Agricultural income [Sec.10(1)]

fully exempt from tax.

2. Dividends and Long –term Capital Gain accruing to Venture Capital Fund or a Venture Company[sec.10(23)FB]

exempt from the tax.


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3. Tax holiday for 100% Export –oriented Undertaking (Sec. 10b)

100% of the profit derived from 100% export- oriented undertaking is deducted in computing its taxable income.

Deduction is allowed up to the assessment year 2009-2010


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4.Tax holiday for Industrial Units situation in Free Trade zone(sec.10A)

100% profit is deducted .

Tax holiday period is available up to the assessment year 2009-2010


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5.Amortisation of Telecom Licence Fees(Sec.35ABB)

Every assessee is entitled to claim deduction in respect of capital expenditure incurred for acquiring the licence of operate telecommunication services.


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6.Special Reserve created by Financial Corporation [Sec.36(1)(viii)]

Where any reserve is created and maintained by a specified entity for specified objects, it is entitled to deduction

(i) reserve so created (ii) 20% of the profits derived from such long

term finance

which ever is less.


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7.Business of civil Construction(Sec.44AD)

Where receipt does not exceed Rs.40 lakh the taxable income from such business is computed on deeming basis-8% of the receipts from such business.

assessee does not require maintain any account


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8. Business of Plying, Hiring or Leasing Goods carriage[Sec. 44AE]

Where an assessee is does not possess more than 10 trucks, taxable profit from carriage will be computed on deeming basis.


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9. Income of Retail Business [Sec.44AF]

Where an assessee is engaged in the business of retail trading of goods or merchandise and the gross receipts from such business does not exceed RS.60 lakh, his income is computed on deeming basis 8% of the total turnover.

He is not require to maintain the books of account.


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10.Profit from industrial Undertakings or Enterprises engaged in Infrastructure

Development[Sec.80-1A] 100% deduction is allowed Started on or after1 April 1995 for 10 consecutive

assessments year out of 15 year in which facility starts operating.

11.Profit from the Generation/distribution of Power[Sec.80-IA(4)]

100% deduction is allowed Substantial renovation and modernisation of the existing

network of transmission of distribution line for 10 assessment year undertaking, set up to31 March 2010.


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12.Profit from the business of processing, Preservation and Packing of Fruits or Vegetables of from Integrated business of Handling, Storage and

Transportation of Food Gains[Sec.80-IB(11A)

100% of such profit are allowed to be deducted for first 5 assessment years and thereafter a Company assessee is allowed 30% of such profits

A non company assessee 25% of such profit for next 5 assessment year


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13.Profit from operation Cross-country natural Gas Distribution Network [Sec.80-IA(4)(Vi)

100% deduction is allowed for 10 consecutive assessment year out of 15 year for undertakings set up on April 2007.


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14.Profit from a Undertaking /Enterprise engaged in Development of Special Economic Zone [Sec.80—IAB]

100% deduction is allowed for 10 consecutive assessment years out of 15 years. from the year in which SEZ has been notified.


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SEC.33AB TEA/COFFEE/RUBBER DEVELOPMENT ACCOUNT


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CONDITIONSCONDITION ONE

The assessee must be engaged in tea, coffee or rubber plantation.

CONDITION TWO

It must make a deposit in “special account”.

CONDITION THREE

The deposit should be made within specified time limit.

CONDITION FOUR

The accounts of the assessee should be audited.


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• Engaged in tea, coffee or rubber plantation in India.• Deposit: Following deposits in “special accounts”-

a) deposit with NABARD any amount in an maintained by the assessee with the bank in accordance with and for the purpose specified in a scheme approved by the tea board or coffee board or rubber board; or

b) deposit any amount in the deposit account opened by the assessee in accordance with and for the purposes specified in, a scheme framed by the tea board or coffee board or rubber board with the previous approval of the central government.


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• Time limit: amount shall be deposited within 6 months from the end of previous year or before the due date of furnishing the return of income, whichever is earlier.

• Audit: should be audited by Chartered Accountant and report of the auditor in form no.3AC is to be filed along with the return of the relevant assessment year.


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AMOUNTS OF DEDUCTIONS

• A sum equal to amount deposited in special account.• 40% of the profit of such business computed under

the head “ profits and gains from business and profession” before making any deduction u/s 33AB and before adjusting brought forward business loss u/s 72.


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IMPORTANT POINTS• Where any deduction is claimed under this section,

no deduction shall be allowed in respect of such amount in any other previous year.

• Where a deduction is claimed and allowed under this section to an association of person or body of individual, no deduction shall be allowed to any member of the association or body in respect of the same deposit.

• Any excess deposit in special account made during a previous year is not treated as deposit made in the next year or any other year.


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• The amount standing to the credit of the special account may be withdrawn only for the purpose specified in approved scheme. Except in the circumstances: if the amount released from the special account in a year is not utilized in the same previous year for the purpose for which it is released, the amount not so utilized will be treated as taxable profits of the year and taxed accordingly.


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CASE

X LTD. is engaged in the business of growing and manu. Tea in India. During the pre. Year 08-09, it deposits Rs.100 lakh in special account and claims the same as deduction u/s33AB (i.e., 40% of the business profit Rs. 250 lakh). During 09-10 the company withdraws Rs. 35 lakh from the special account and details are as under;a) Rs. 25 lakh on 31/12/2009 for the purpose of the

scheme framed by the tea board,b) Rs. 4 Lakh for other purposes on 27/01/2010.Rs. 6 lakh is not utilized up to 31/03/2010.Find the amount chargeable for the tax for the year 2010-11.


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SOLUTION• For the year 2010-11 Rs. 10 lakh is treated as

business income (i.e. Rs 4 lakh, being the amount misutilised by the company + Rs. 6 lakh, being the amount which is not utilized by the company during 09-10). Out of Rs. 10 lakh 40% (i.e. Rs. 4 lakh) is taken as non agricultural income and 60% (i.e. Rs. 6 lakh) is deemed as agricultural income.


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AMOUNT ALLOWED TO BE WITHDRAWN FROM

SPECIAL ACCOUNT IN FOLLOWING CIRCUMSTANCES: When the amount can be withdrawn and it is

treated as taxable profit

When the amount can be withdrawn and it is not treated as taxable

profit

1) Closure of business 1) Death of taxpayer

2) Dissolution of firm 2) Partition of HUF

----------- 3) Liquidation of company


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• The amount withdrawn from the special account cannot be utilized for the purpose of purchase of any machinery or plant to be installed in any office premises or residential accommodation including guest houses; any office appliance (other than computers); any other plant or machinery which either is installed in an undertaking producing low priority items specified in the eleventh schedule in the income tax act or is an item of plant and machinery entitled to 100% write off by way of depreciation or for any other reason in any one year.


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• The deduction is allowed under this section shall be withdrawn if the asset acquired out of the money withdrawn from the special account is sold or otherwise transferred. Provisions are;

To whom it is transferred

Transfer within 8 year from the end of the previous year in which the asset is acquired.

Transfer after 8 years

Transfer to the central government, a state government, a local authority, a statutory corporation or a govt. company

Deduction will not be withdrawn


Transfer in a scheme of succession of a firm by company (NOTE)



Transfer in any other cases Deduction will be withdrawn



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NOTE: TRANSFER IN A SCHEME OF SUCCESSION OF A FIRM BY COMPANY

• The scheme continues to apply to the company in the manner applicable to the firm;

• The successor company takes over all the properties and the liabilities of the firm;

• All the shareholders of the company were partners of the firm before the succession.


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CASE 1

Business profit of X Ltd., a tea growing and manufacturing company, is Rs.70 lakh for the A.Y 09-10. it deposits Rs.25 lakh in the special account for claiming deduction u/s 33AB. It wants to claim set off of brought forward business loss of Rs.12 lakh.

find the tax consequences .


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SOLUTION• Amount deductible for A.Y 09-10 is;

a) Rs.28 lakh (i.e. 40% of Rs.70 lakh); orb) Rs.25 lakh (being the deposit in special a/c)

whichever is lower.so, Rs.25 lakh is deductible

Business income Rs.70 lakhLess: deduction u/s 33AB Rs.25 lakhNet income Rs.45 lakh

Non agricultural income (40% of Rs.45 lakh) Rs.18 lakhLess: brought forward loss Rs.12 lakhNet income Rs.6 lakh


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CASE 2

• By withdrawing Rs.20 lakh on 20/01/2010 from the special account X Ltd. Purchased a non depreciable asset for Rs.18 lakh according to the scheme framed by the tea board. The remaining amount of Rs.2 lakh is not utilized up to 31/03/2010.

SOLUTION:Rs.2 lakh being not utilized upto31/03/2010 will be business income (40% of which will be taxable as non agriculture income) for the A.Y 2010-11.


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CASE 3• The asset which is purchased for Rs.18 lakh is sold for

Rs.31 lakh on 03/12/2012.SOLUTION:

The new asset is transfer within 8 years so the taxable income will be;Business income(40% of non agri. income) Rs.18 lakhShort term capital gain (31-18) Rs.13 lakh

Taxable income Rs.31 lakh


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• When any amount standing to the credit of the assessee in the special account is utilized by the assessee for the purpose of any expenditure in accordance with the scheme, such exp. shall not be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.


THE PROVISION OF SECTION 35ABB

TELECOME LICENSE FEES______________________________________________________________________________

______________________________________________________________________________

Deduction under section 35ABB is available if following conditions are satisfied

condition one The expenditure is capital in nature

Condition two It is incurred for acquiring any right to operate telecommunication services.

Condition three The expenditure is incurred either before the commencement of business or there after at any time during previous year.

Condition four The payment for which has actually been made to obtain licence.

Cont…

• The payment will allowed as deduction in equal installment over the period starting from the year in which such payment has been made and ending in the year in which the license comes to an end. It may be noted that the deduction starts from the year in which actual payment of expenditure is made irrespective of the pervious year in which the liability for the expenditure is incurred according to the method of accounting regularly employed by the assesses.

Cont…

• Any profit or loss on sale of telecom license is taken into consideration while computing business income. The relevant rules are given below. In the table given below, WDV is the written down of value on the first of the previous year in which telecom license in transferred

Situations and Tax treatmentDifferent situations Tax treatment

1. Entire telecom license is transferred

1.1 when sale consideration is less than WDV

WDV – sales consideration is allowed as deduction under section 35 ABB in the year of sale.

1.2 when sale consideration is more than WDV

The excess of the sales consideration over WDV is taxable as business income in the year of sale.

2. When a part of telecom license is transferred

2.1 when sale consideration is less than WDV

WDV – sales consideration will be allowed as deduction over the unexpired period

2.2 when sale consideration is more than WDV

Same tax treatment as is given in .12

CASE

X ltd., a company providing telecommunication service, obtains a telecom license on April 20, 2009 for a period of 10 years which ends on march 31 ,2019 (license fee being Rs. 18 lakh). Find out the amount of deduction under section 35ABB1. The entire amount is paid on may , 20092. The entire amount is paid on April 1, 20103. The entire amount is paid in three equal installments on April

30, 2009, April 30, 2010 and April 30, 2011

SITUATION 1.

• The payment of Rs. 18 lakh is deductible in 10 installments over a period of 10 years from the previous year’s 2009-10 to 2018-19 (The amount deductible each year being Rs 1.8 lakh)

SITUATION 2.

• The payment is deductible in 9 years starting from the year of payment, I.e., the previous year 2010-11 and ending with the previous year 2018-19 (The amount deductible each year being Rs 2 lakh)

SITUATION 3.The entire payment is made in three installments.

Deduction under section 35ABB is available as under-First installment Second

installmentThird

installmentTotal

Date of payment April 30, 2010 April 30, 2010 April 30, 2011

Period during which deduction is available

10 years(2010-11 to 2018-

19)

9 years(2010-11 to 2018-

19)

8 years(2011-12 to 2018-

19)Amount of payment RS. 6 lakh Rs. 6 lakh Rs. 6 lakh

Amount deductible in previous year

RS. RS. RS. RS.

2009-10 60,000 - - 60,000

2010-11 60,000 66,667 - 1,26,667

2011-12 to 2018-19 60,000 66,667 75,000 2,01,667

EXPENDITURE ON SPECIFIED BUSINESS [SEC. 35AD]

Section 35AD has been inserted (with effect from the assessment year 2010-11) to provide for investment- linked tax incentive.

______________________________________________________________________________

______________________________________________________________________________

The following conditions should be satisfied to avail of the benefit of deduction under section 35ADSpecified business Who should own the

businessApproval (if any) Date of

commencement of business

Cold chain facility Any person Not required On or after April 1, 2009

Warehousing facility for storage of agricultural produce

Any person Not required On or after April 1, 2009

Natural gas or crude or petroleum oil pipeline network for distribution, including storage

An Indian companies or an authority/board/corporation established under ay central or state Act.

Should be approved by petroleum and natural gas regulatory board and notified by the central government

1.On or after April 1, 2007, in the case of laying and operating a cross- country natural gas pipeline network for distribution or storage2. in other cases, on or after April 1, 2009.

Hotel of 2 star or above category

Any person Not required On or after April 1, 2010

Hospital with 100 beds for patients

Any person Not required On after April 1, 2010

Developing and building a housing project

Any person Under scheme for slum redevelopment

On or after April 1, 2010

More conditions

• The specified business should not be set up by splitting up, or the reconstruction, of a business already in existence. Moreover, it should not be set up by the transfer of old plant and machinery.

• 20% old machinery is permitted – if the value of the transferred assets does not exceed 20% of the total value of the machinery or plant used in the business, this condition is deemed to satisfied

Cont…

• Second hand imported machinery is treated as new – any machinery or plant which was used outside India by any person shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled-– Such machinery or plant was not, at any time previous to the

date of the installation by the assesses, used in India– Such machinery or plant is imported into India from any

country outside India.– No deduction on account of depreciation in respect of such

machinery or plant has been allowed or is allowable under the act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assesses.

Cont…• Book of account of the assesses should be audited.• 100% of capital expenditure incurred wholly and exclusively for the purpose of

specified business carried on by an assesses is deductible in the previous year in which the expenditure is incurred. However, this is subject to the following propositions-– Expenditure incurred on the acquisition of any land or goodwill or financial

instrument is not eligible for any deduction under section 35AD– Expenditure incurred prior to the commencement of operation, wholly and

exclusively, for the purpose of any specified business, shall be allowed as deduction during the previous year in which the assesses commences the operation of his specified business, if the amount is capitalized in the books of account of the assesses on the date of commencement of operation.

– If operation of the business of laying and operating a cross-country natural gas distribution network is commenced during April 1, 2007 and march 31, 2009, the capital expenditure incurred before April 1,2009 will be allowed as additional deduction under section 35AD for the assessment year 2010-11.

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Section 80JJAA

This section provide deduction in respect of employment of New workmen.


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The following conditions should be satisfied to avail deduction under section 80JJAA

Condition 1 The taxpayer is an Indian company.Condition 2 Income of the taxpayer includes any profits and

gains derived from any industrial undertaking engaged in the manufacture or production of article or thing.

Condition 3 The industrial undertaking is not formed by splitting up or reconstruction of an existing undertaking or amalgamation with another industrial undertaking.

Condition 4 The assesse furnishes along with the return of income the report of a chartered accountant in Form No.10DA


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• The amount of deduction is equal to 30 percent of “additional wages” paid to the new "regular workmen” employed by the assessee in the previous year.

• The deduction is available for three assessment years including the assessment year relevant for the previous year in which such employment is provided.


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Meaning of workman

• Workman means any person employed in an industry to do an manual, unskilled, technical, clerical or supervisory work but does not include the following,

a) a person who is in air force, Military or Navy, or who is in Police service; or b) a person who is employed in managerial or administrative capacity; or c) a person who is employed in a supervisory capacity and draws wages exceeding Rs. 1600 per month.


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Meaning of regular workman

• Regular workman does not include the following

a) a casual workman; or b) workman employed for contract labour; or c) any other workman employed for a period of less than 300 days during the previous year.


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Meaning of “additional wages”New undertaking Existing undertaking

It means the wages paid to new “regular workmen” in excess of 100 ”workmen” employed during the year.

It means the wages paid to new “regular workmen” in excess of 100 workmen employed during the year

Additional wages shall be nil if he increase in number of “regular workmen” employed during the year is less than 10per cent of the existing number of “workmen” employed in the undertaking as on the last day of the preceding year.

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The following points should be noted• Deduction under section 80JJAA is available for three

assessment years only. For the first time it is available in the year in which new regular workmen are employed and then it is available in the next two assessment years. Deduction is, however, available only if the relevant conditions are satisfied.

• Deduction is available under section 80JJAA on the basis of number of workmen and regular workmen. Hereinafter all employees in an undertaking are grouped in categories (categories has been done only for the purpose of discussing the impact of section 80JJAA)


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CategoriesCategory Nature of employment

A Employees employed in managerial of administrative capacity. It also include employees employed in supervisory capacity and drawing salary exceeding Rs.1,600 per month

B It include casual workmen and workmen employed through contract labour(but not coming under category A)

C Other workmen (not coming under categories A and B) if employed for less than 300 days during he previous year.

D Other workmen (not coming under categories A and B) if employed for 300 days or more than 300 days during the previous year.


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• “Regular workmen” are those employees who come under category D. Employees under categories B,C and D are “workmen”. In other words, categories B and C employees are “workmen” but they are not “regular workmen”.


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Deduction under section 80JJAA in the case of new undertaking is available as follows_

1. First find out whether number of “workmen” (category B+C+D) employed during the previous year is more than 100.

2. If yes, then find out wages paid to new regular workmen in excess of 100 workmen employed during the year.

3. 30 per cent of the wages determined, is the amount of deduction under section 80JJAA


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Deduction under section 80JJAA in the case of an existing undertaking is available as follows_

1. First find out whether number of “workmen” (category B+C+D) employed during the previous year is more than 100.2. If yes, then find out number of regular workmen(category D) newly employed during the year and whether it is equal to or more than 10 per cent of the existing number of workmen (category B+C+D) employed in the undertaking on the last day of the preceding year.3. If yes, then find out wages paid to new “regular workmen” in excess of 100 workmen employed during the year.4. 30 per cent of the wages determined, is the amount of deduction under section 80JJAA.


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Case

X Ltd. Is an Indian company. It owns an industrial undertaking which starts production on April 1, 2009. On the same day, it appoints 94 casual workmen. On may 1, 2009, it appoints 10 regular workmen (salary being Rs. 3000 per month). Find out the amount of deduction under section 80JJAA for the assessment year 2010-2011.


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• No deduction is admissible under section 80JJAA in respect of employment of initial 100 workmen (casual and /or regular coming under category B,C and D).

• 30 per cent of wages payable to new regular workmen in excess of initial 100 workmen would be the amount of deduction under section 80JJAA.


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Calculation of deduction

Rs.3,000*11 months*4 regular workmen=Rs.132000= 30% of Rs.1,32,000=Rs.39,600 The amount deductible is Rs.39,600.

94 casual workmen appointed on April 1, 2009

No deduction under section 80JJAA

6 regular workmen appoint on May 1, 2009

No deduction under section 80JJAA

4 regular workmen appoint on May 1, 2009

Deduction would be available under section 80JJAA


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Tonnage Tax Scheme (Section 115V)

• It is a scheme of presumptive taxation whereby the notional income arising from the operation of a ship is determined based on the tonnage of the ship.

• The notional income is taxed at the normal corporate rate applicable for the year.

• Tax is payable even if there is a loss in an year.• A company may opt for the scheme and once such

option is exercised, there is a lock-in-period of 10 years. If a company opts out, it is debarred from re-entry for ten years.


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The salient features of the scheme

• A company owning at least one qualifying ship may join. A qualifying ship is one with a minimum tonnage of 15 tons and having a valid certificate.

• The company has to opt for the scheme within 3 months.(any time between October 1, 2004 to December 31,2004)by making an application in the prescribed form to the concerned joint commissioner who may pass an appropriate order.


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• A new company can make application within three months of the date of its incorporation or the date on which it became a qualifying company.

• Certain type of ships like fishing vessels, pleasure crafts, harbour and river ferries, etc., are excluded in terms of section 115VD which gives details of as to what ships will qualify for the scheme.


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Section 115VG gives the manner of computation of the daily tonnage income as follows.

Qualifying ship having net tonnage Amount of daily tonnage income

Up to 1,000 Rs. 46 for each 100 tons

Exceeding 1,000 but not more than 10,000

Rs. 460 plus Rs. 35 for each 100 tons exceeding 1000 tons.

Exceeding 10,000 but not more than 25,000

Rs. 3,610 plus Rs.28 for each 100 tons exceeding 10,000 tons.

Exceeding 25,000 Rs. 7,810 plus Rs.19 for each 100 tons exceeding 25,000 tons.

The daily tonnage income shall be multiplied by the number of days the ship operated.

The resulting amount would be the annual tonnage income from the ship


TAX PLANNING WITH REFERENCE TO NEW BUSINESS – FORM OF

ORGANISATION


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• Among other considerations (like requirement of finance, resources, personal liability of owner, level of operation, quantum of profit, specified requirement of technical expertise), tax incentives play important role while selecting a suitable form of organization for a new business. One can take a decision while comparing tax liability under different organization forms.


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• Aggregate amount of tax liability on firm and partners is generally higher than that of the case when the same amount of income is generated through sole proprietorship. One should, therefore, consider the possibility of converting firms into sole proprietorships. The same is evident from the case studies given below:


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If there is a partnership firm then computation of tax is:

Particular Case 1 Case 2

Number of partners 3 4

Profit-sharing ratio Equal Equal

Total capital contribution of partners (each contributing identical amount)

10,00,000 15,00,000

Profit of the previous year 2010-11 6,00,000 12,00,000

Other income of each partner 60,000 50,000

Life insurance premium paid by each partner

80,000 50,000

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Tax on firm

Income of firm 6,00,000 12,00,000

Less: salary

Rs. 10,500 per month 3,78,000

Rs. 14,625 per month 7,02,000

Interest 1,20,000 1,80,000

Net income 1,02,000 3,18,000

Tax on firm @ 30.9% 31,518 98,262

Tax liability of each partner (a) 10,506 24,566

Tax on partners

Salary 1,26,000 1,75,500

Interest 40,000 45,000

Income from other sources 60,000 50,000

Net income ( after section 80C deduction) 1,46,000 2,20,500

Tax on net income (b) Nil 6,232

Total liability of each partners [a+b] 10,506 30,798

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Tax Liability when the same income is earned as a SOLE PROPRIETOR

Case 1 Case 2Total income of the firm

6,00,000 12,00,000

Number of partners 3 4Income earned by Individual

2,00,000 3,00,000

Income from other sources

60,000 50,000

Net Income (after section 80C deduction)

1,80,000 3,00,000

Tax on each individual

2,060 14,420

Tax Saving when income is earned as a sole proprietor

8,446 16,378

To avoid high tax incidence on firms, firms may be converted into sole proprietorship.

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Partnership firm

The following basic assumptions have been madea. There are two partners X and Y with an equal share

of profit.b. They want to draw the maximum permissible

amount as salary. Both the partners will draw equal salary.

c. Income is from business (not from profession)d. They are entitled to simple interest at the rate of 12

per cent on the capital contribution of RS.10,00,000.e. Partners do not have any income.


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Taxable income before deduction of salary and interest

Interest on capital to partners

Salary payable to X and Y

Taxable income of firm after salary and interest

Tax liability of the firm

Tax liability of the partners

Total tax as percentage of income (5+6) as % of (1)

(1) Rs.

(2) Rs.

(3) Rs.

(4) Rs.

(5) Rs.

(6) Rs.

(7)

5,00,000 1,20,000 3,18,000 62,000 19,158 12,154 6.26%

10,00,000 1,20,000 6,18,000 2,62,000 80,958 43,054 12.40%

15,00,000 1,20,000 9,18,000 4,62,000 1,42,758 77,868 14.71%

20,00,000 1,20,000 12,18,000 6,62,000 2,04,558 1,39,668 17.21%

25,00,000 1,20,000 15,18,000 8,62,000 2,66,358 2,05,382 18.87%

30,00,000 1,20,000 18,18,000 10,62,000 3,28,158 2,98,082 20.87%

Tax incidence in Firm and Partners

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Private limited company

• On the same data tax incidence is computed in the case of private limited company, the following assumptions have been made:

1. X and Y will be the two shareholder and directors of the company.

2. they will draw salary, as there is no maximum limit under the income tax act. They will draw salary @ 90% of profit up to Rs. 3,00,000 of profit and 60% of balance it is assumed that provision of section 40A(2) are not attracted.


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Taxable income before payment of salary to directors

Salary to directors X and Y

Taxable income of the company

Tax liability of the company

Taxable income of X

Tax liability of X

Total tax of the company X and Y

(7) as% of (1)

(1) Rs.

(2) Rs.

(3) Rs.

(4) Rs.

(5) Rs.

(6) Rs.

(7)Rs.

(8)

5,00,000 3,90,000 1,10,000 33,990 1,95,000 3,605 41,200 8.24%

10,00,000 6,90,000 3,10,000 95,790 3,45,000 19,055 1,33,900 13.39%

15,00,000 9,90,000 5,10,000 1,57,590 4,95,000 34,505 2,26,600 15.11%

20,00,000 12,90,000 7,10,000 2,19,190 6,45,000 64,890 3,49,170 17.46%

25,00,000 15,90,000 9,10,000 2,81,190 7,95,000 95,790 4,72,770 18.91%

30,00,000 18,90,000 11,10,000 3,42,990 9,45,000 1,41,625 6,26,240 20.87%

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firm Private limited companyPartners are increased to five Directors are increased to fiveTotal salary payable to partner remains the same (maximum permissible)

Total salary payable to directors is increased to 90 per cent of total income of the company. (there is no maximum limit on remuneration payable to directors)


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Tax incidence on Firm and PartnersTaxable income before deduction of salary and interest

Interest on capital to partners

Salary payable to 5 Partners

Taxable income of firm after salary and interest

Tax liability of the firm

Tax liability of the partners

Total tax as percentage of income (5+6) as % of (1)

(1) Rs. (2) Rs. (3) Rs. (4) Rs. (5) Rs. (6) Rs. (7) Rs.

5,00,000 1,20,000 3,18,000 62,000 19,158 Nil 3.83%

10,00,000 1,20,000 6,18,000 2,62,000 80,958 Nil 8.10%

15,00,000 1,20,000 9,18,000 4,62,000 1,42,758 24,518 11.1%5

20,00,000 1,20,000 12,18,000 6,62,000 2,04,558 55,414 13%

25,00,000 1,20,000 15,18,000 8,62,000 2,66,358 86,314 14.11%

30,00,000 1,20,000 18,18,000 10,62,000 3,28,158 1,17,214 14.85%

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Tax incidence on company and five directors Taxable income before payment of salary to directors

Salary to five directors

Taxable income of the company

Taxable liability of the company

Taxable income of one directors

Tax of one directors

Total tax of the company and five directors

(7) as% of (1)

(1) Rs. (2) Rs. (3) Rs. (4) Rs. (5) Rs. (6) Rs. (7) Rs. (8) Rs.

5,00,000 4,50,000 50,000 15,450 90,000 Nil 15,450 3.09%

10,00,000 9,00,000 1,00,000 30,900 1,80,000 2,060 41,200 4.12%

15,00,000 13,50,000 1,50,000 46,350 2,70,000 11,330 1,03,000 6.87%

20,00,000 18,00,000 2,00,000 61,800 3,60,000 20,600 1,64,800 8.24%

25,00,000 22,50,000 2,50,000 77,250 4,50,000 29,870 2,26,600 9.06%

30,00,000 27,00,000 3,00,000 92,700 5,40,000 43,260 3,09,000 10.3%

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The aforesaid proposition is examined in the following case study:

Firm Privet Company

Number of partners : 4 Number of partners : 4

Taxable income before interest\remuneration: Rs. 14,00,000

Taxable income before interest\remuneration: Rs. 14,00,000

Interest on capital to partners on total capital contribution of Rs. 15,00,000 @ 12% : Rs. 1,80,000

Remuneration payable to directors : Rs.12,00,000 salary to each being Rs. 3,00,000 payable in cash.

Remuneration payable to partners at the maximum level : Rs. 8,22,000 (salary to each partner being Rs.2,02,500 payable in cash )

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Basic pay 1,20,000

Education allowance 2,400

Free residential house at Delhi ( rent paid by employer is Rs. 1,68,000) 168,000

Transport allowance 9,600

Firm income 14,00,000

Less: Interest on capital 1,80,000

book profit 12,20,000

Less : remuneration to partners 8,22,000

Net income of firm 3,98,000

Tax liability of firm (rounded off) 1,22,980

Partner salary 2,05,500

Interest 45,000

Net income 2,50,500

Tax (rounded off) 9,320

Tax liability of firm and four partners 1,60,260

Tax incidence as percentage of income 11.45%

85

Private Limited CompanyIncome 14,00,000

Less: salary and perquisites to four directors 12,00,000

Net Income 2,00,000

Tax @ 30.9% (rounded off) 61,800

Director

Basic salary 1,20,000

Education allowance (not taxable under section 10 (14) NIL

Valuation of rent free house at Delhi (as per rule 3) 18,000

Gross salary 1,38,000

Less: Standard deduction Nil

Salaries 1,38,000

Net income 1,38,000

Tax on net income Nil

Tax Liability of company and four directors 61,800

Tax incidence as percentage of income 4.41%

86

Firm LLP Company

Tax rates 30.9% for the A.Y. 2011-12

30.9% for the A.Y. 2011-12

30.9% , if income does not exceed Rs. 1 crore or 33.2175%, if income exceed Rs. 1 crore for A.Y. 2011-12

Applicability of surcharge

Not applicable for the A.Y. 2011-12

Not applicable for the A.Y. 2011-12

Applicable for the A.Y. 2011-12, if net income exceeds Rs. 1 crore

Minimum alternate tax

Not applicable Not applicable Applicable if normal tax liability is lower then 18.54% (19.9305% book profit exceeds Rs. 1 crore) of book profit

Dividend tax Not applicable Not applicable Dividend declared, distributed or paid is liable for dividend tax at the rate of 16.60875%. However, deemed dividend under section 2(22)(e) is an exception.

87

firm LLP Company

Tax treatment in the hands of shareholders or partners

Share of profit in firm is not taxable in the hands of partners.

Share of profit in firm is not taxable in the hands of partners.

Dividend in the hands of shareholders is not taxable. However, deemed dividend under section 2(22)(e) is an exception

Interest on capital to partners or shareholders

Deductible if permitted by the partnership deed and rate of interest does not exceed 12% conditions of section 184 should be satisfied.

Deductible if permitted by the partnership deed and rate of interest does not exceed 12% conditions of section 184 should be satisfied.

Shareholder cannot be paid interest on share capital. Shareholders get dividend on shares, dividend payment is not a deductible expenditure.

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Firm LLP Company

Remuneration to partners or shareholders

Deductible if conditions of sections 40(b) and 184 are satisfied. Aggregate amount deductible cannot, however, exceed 90% of first Rs. 3 lakh of book profit and 60% of the balance.

Deductible if conditions of sections 40(b) and 184 are satisfied. Aggregate amount deductible cannot, however, exceed 90% of first Rs. 3 lakh of book profit and 60% of the balance.

Shareholders can join the company as employees. Remuneration can be paid. There is no maximum ceiling . However, section 40A(2) is applicable.

Applicability of sections 78 and 79 in case there is a change in constitution of the firm or change in the list of shareholders of a company

Section 78 is applicable

Section 78 is applicable

Section 79 is applicable, if the company is a company in which the public are not substantially interested

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firm LLP company

Loan to partners/ shareholders

Not taxable as income

Not taxable as income

Treated as deemed dividend in the hands of shareholders under section 2(22)(e), if a few conditions are satisfied and the company is a company in which the public are not substantially interested.

Applicability of presumptive tax schemes under section 44AD, 44AE and 44AF up to the A.Y. 2010-11

Applicable Applicable Applicable

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Firm LLP Company

Applicability of presumptive tax scheme under section 44AD from the A.Y. 2010-11

Applicable Not applicable Not applicable

Whether expenditure for family planning for the benefit of employees is deductible under section 36(1)(iX)

Cannot be claimed as deduction under section 36(1)(ix). However, deduction can be claimed under section 32 and 37

Cannot be claimed as deduction under section 36(1)(ix). However, deduction can be claimed under section 32 and 37

Can be claimed as deduction under section 36(1)(ix).

Whether weighted deduction under section 35(2AB) is available

Not applicable Not applicable Applicable

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