CTP Assignment

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Amity Campus Uttar Pradesh India 201303

ASSIGNMENTS PROGRAM: MFC

SEMESTER-II

Subject Name: CORPORATE TAX PLANNING

Study COUNTRY: SOMALIA

Roll Number (Reg. No.): MFC001512014-2016091

Student Name: MOHAMED ABDULLAHI KHALAF

INSTRUCTIONS

Q: 1). Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARKS

Assignment A Five Subjective Questions 10

Assignment B Three Subjective Questions + Case Study 10

Assignment C Objective or one line Questions 10

Q: 2). Total weight-age given to these assignments is 30%. OR 30 Marks Q: 3). All assignments are to be completed as typed in word/pdf. Q: 4). All questions are required to be attempted. Q: 5). All the three assignments are to be completed by due dates and need to be submitted for evaluation by Amity University. Q: 6). The students have to attach a scanned signature in the form.

Signature : _________________________

Date: 06, June, 2015

( √ ) Tick mark in front of the assignments submitted

Assignment A’ Assignment ‘B’ Assignment ‘C’

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CORPORATE TAX PLANNING

ASSIGNMENT: A (10 MARKS)

Q: 1). Distinguish between tax avoidance and tax evasion? (2 Marks)

Answer:

Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce

the amount of tax that is payable by means that are within the law.

The United States Supreme Court has stated that "The legal right of an individual to

decrease the amount of what would otherwise be his taxes or altogether avoid them, by

means which the law permits, cannot be doubted."

Tax avoidance is reducing or negating tax liability in legally permissible ways and has legal

sanction Essential features of tax avoidance are as under –

Legitimate arrangement affairs in such a way so as to minimize tax liability.

Avoidance of tax is not tax evasion and carries not public disgrace with it.

An act valid in law cannot be treated as fictitious merely on the basis of some

underlying motive supposedly resulting in lower payment of tax to authorities.

There is not element of mala fide motive involved in tax avoidance.

By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other

entities to evade taxes by illegal means.

Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state

of their affairs to the tax authorities to reduce their tax liability, and includes, in particular,

dishonest tax reporting (such as declaring less income, profits or gains than actually earned;

or overstating deductions).

Tax evasion all methods by which tax liability is illegally avoided are termed as tax evasion.

An assessee guilty of tax evasion may be punished under the relevant laws.

Tax evasion is an illegal practice where a person, organization or corporation intentionally avoids paying his/her/it’s true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties.

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There is a difference between tax minimization/avoidance and tax evasion. All citizens have the right to reduce the amount of taxes they pay as long as it is by legal means.

The following are the broad areas of distinction the two:

Tax avoidance Tax evasion

1) Any planning of tax which aims at

reducing or negating tax liability in legally

recognized permissible ways can be

termed as an instance of tax avoidance.

2) Tax avoidance takes into account the

loop holes of law.

3) Tax avoidance is tax hedging within the

framework of law.

4) Tax avoidance has legal sanction

5) Tax avoidance is intentional tax planning

before the actual tax liability arises.

1) All methods by which tax liability is

illegally avoided is termed as tax evasion.

2) Tax evasion is an attempt to evade tax

liability with the help of unfair

means/method.

3) Tax evasion is tax omission

4) Tax evasion is unlawful and an assessee

guilty of tax evasion may be punisher

under the relevant laws.

5) Tax evasion is international attempt to

avoid payment of tax after the liability to

tax has arisen.

Q: 2). What do you understand by Control and Management of A Company?

(2 Marks)

Answer:

Control and Management of A Company is a management function aimed at achieving

defined goals within an established timetable, and usually understood to have three

components: (1) setting standards, (2) measuring actual performance, and (3) taking

corrective action.

A typical process for management control includes the following steps: (1) actual

performance is compared with planned performance, (2) the difference between the two is

measured, (3) causes contributing to the difference are identified, and (4) corrective action is

taken to eliminate or minimize the difference.

So the Control and Management of A Company is an internal control performed by one or

more managers and it is a system designed to promote efficiency and assure the

implementation of a policy or safeguard assets or avoid fraud and error etc.

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In determining residential status of a company, the following broad propositions should be

kept in view:

Meaning of "control and management" – The term "control and management" refers

to "head and brain" which directs affairs of policy, finance, disposal of profits and

vital things concerning the management of a company.

The place of incorporation of the company may not be the place where control lies.

Control is not necessarily situated in the country in which the company is registered.

A company may be resident in more than one country- Under the tax laws a company

may have more than one residence. The mere fact that a company is also resident in a

foreign country would not necessarily displace its residence in India.

Central control and management lies where meetings of board of directors are held-

Usually control and management of a company's affairs is situated at the place where

meetings of board of directors are held. Moreover, control and management referred

to in section 6 is central control and management and not the carrying on of day to

day business of servants, employees or agents.

Place of doing business may be different from place of control of business- The

whole of business may be done outside India and yet the control and management of

that business may be wholly within India. In order to determine the residence of a

company, the real test to be applied is where the controlling does and directing power

function, or where its head and brain is.

"Control" is different from share holding control- "Control" does not mean share

holding control. In the case of a subsidiary company managed by its local board of

directors, it is difficult to establish that control and management of its affairs vests at

the place where the parent company resides.

A non-Indian company‘s de facto control must be in India for residential India-In

order to hold that a non-Indian company is resident in India during any previous

year, it must be established that such company‘s de facto is in India. Although central

management and control has sometimes been stated in the form "head, seat and

directing power" the question depends on the facts of the management and not on

the physical situation of the thing that is managed. A company is managed by the

board of directors and if the meetings of the board of directors are held within India,

it may be said that the control and management is situated here.

Partial control from outside India - "control and management" does not mean

carrying of a day to day business. Even a partial control outside India is sufficient to

hold a foreign company as a non-resident.

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Q: 3). What is VAT? (2 Marks)

Answer:

Value Added Tax (VAT) is an indirect tax on the domestic consumption of goods and

services, except those that are zero-rated (such as food and essential drugs) or are otherwise

exempt (such as exports). It is levied at each stage in the chain of production and

distribution from raw materials to the final sale based on the value (price) added at each

stage. It is not a cost to the producer or the distribution chain members, and whereas its full

brunt is borne by the end consumer, it avoids the double taxation (tax on tax) of a direct

sales tax.

VAT is introduced by the European Economic Community (now the European Union) in

the 1970.

A Value-Added Tax (VAT) is a type of consumption tax that is placed on a product

whenever value is added at a stage of production and at final sale. From the perspective of

the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on

the value added to a product, material, or service, from an accounting point of view, by this

stage of its manufacture or distribution. The manufacturer remits to the government the

difference between these two amounts, and retains the rest for themselves to offset the taxes

they had previously paid on the inputs.

The purpose of VAT is to generate tax revenues to the government similar to the corporate

income tax or the personal income tax.

The value added to a product by or with a business is the sale price charged to its customer,

minus the cost of materials and other taxable inputs.

A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the

sales tax in that, with the latter, the tax is collected and remitted to the government only

once, at the point of purchase by the end consumer. With the VAT, collections, remittances

to the government, and credits for taxes already paid occur each time a business in the

supply chain purchases products.

VAT in India is classified under the following tax slabs:-

• 0% for the essential commodities

• 1% on gold ingots as well as expensive stones

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• 4% on capital merchandise, industrial inputs, and commodities of mass consumption

• 12.5% on all other items

Basis for VATs

By the method of collection, VAT can be accounts-based or invoice-based. Under the

invoice method of collection, each seller charges VAT rate on his output and passes the

buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to

VAT on their own sales (output tax), consider the tax on the purchase invoices as input tax

and can deduct the sum from their own VAT liability. The difference between output tax

and input tax is paid to the government (or a refund is claimed, in the case of negative

liability). Under the accounts based method, no such specific invoices are used. Instead, the

tax is calculated on the value added, measured as a difference between revenues and

allowable purchases. Most countries today use the invoice method, the only exception being

Japan, which uses the accounts method.

By the timing of collection, VAT (as well as accounting in general) can be either accrual or

cash based. Cash basis accounting is a very simple form of accounting. When a payment is

received for the sale of goods or services, a deposit is made, and the revenue is recorded as

of the date of the receipt of funds — no matter when the sale had been made. Cheques are

written when funds are available to pay bills, and the expense is recorded as of the cheque

date — regardless of when the expense had been incurred. The primary focus is on the

amount of cash in the bank, and the secondary focus is on making sure all bills are paid.

Little effort is made to match revenues to the time period in which they are earned, or to

match expenses to the time period in which they are incurred.

Accrual basis accounting matches revenues to the time period in which they are earned and

matches expenses to the time period in which they are incurred. While it is more complex

than cash basis accounting, it provides much more information about your business. The

accrual basis allows you to track receivables (amounts due from customers on credit sales)

and payables (amounts due to vendors on credit purchases). The accrual basis allows you to

match revenues to the expenses incurred in earning them, giving you more meaningful

financial reports.

Method of Collection of VAT

There are two methods for collection of VAT in India. In the first method, tax is charged

separately on the basis of the tax which is paid on purchase, and the tax that is payable on

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the sale (shown separately in the invoice). Therefore, the difference between the tax paid on

purchase and the tax payable on sale as per the invoice is the VAT.

In the second method, tax is collected and charged on the aggregate value of the tax payable

on sale and purchase, by applying the rate of tax applicable to the goods.

Therefore, the difference between the sale price and purchase price would be VAT. It means

VAT is the tax which consumers ultimately face, which is collected at each stage.

Advantages of VAT

The following are the advantages of Value Added Tax

Coverage:

If the tax is considered on a retail level, it offers all the economic advantages of a tax of the

entire retail price within its scope. The direct payment of tax spreads out over a large number

of firms instead of being concentrated only on particular groups, such as wholesalers &

retailers.

Revenue Security:

Under VAT only buyers at the final stage have an interest in undervaluing their purchases, as

the deduction system ensures that buyers at earlier stages are refunded the taxes on their

purchases. Therefore, tax losses due to undervaluation will be limited to the value added at

the last stage.

Secondly, under VAT, if the payment of tax is avoided at one stage nothing will be lost if it

is picked up at later stage. Even if it is not picked up later, the government will at least have

collected the VAT paid at previous stages. Where as if evasion takes place at the final/last

stage the state will lose only tax on the value added at that particular point.

Selectivity:

VAT is selectively applied to specific goods & business entities. In addition, VAT does not

burden capital goods because of the consumption-type. VAT gives full credit for tax

included on purchases of capital goods.

Co-ordination of VAT with direct taxation:

Most taxpayers cheat on sales not to evade VAT but to evade their personal and corporate

income taxes. Operation of VAT resembles that of the income tax and an effective VAT

greatly helps in income tax administration and revenue collection.

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Disadvantages of VAT

• VAT is regressive

• VAT is difficult to operate from position of both administration and business

• VAT is inflationary

• VAT favors capital intensive firms

Q: 4). What is the concept of avoidance of double taxation? (2 Marks)

Answer:

Double taxation is the imposition of two or more taxes on the same income (in the case of

income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales

taxes). It refers to two distinct situations:

Taxation of dividend income without relief or credit for taxes paid by the company

paying the dividend on the income from which the dividend is paid. This arises in the

so-called "classical" system of corporate taxation, used in the United States.

Taxation by two or more countries of the same income, asset or transaction, for

example income paid by an entity of one country to a resident of a different country.

The double liability is often mitigated by tax treaties between countries.

In Today’s modern world of advanced globalization, business is not restricted to a single

geographical territory & crosses all borders of the countries. This had emerged a complex

world of business along with complex world of Accounting & Taxation.

The country has a right to tax on the profits earned in its land by anyone and also to tax the

global income of its residence. This leads to taxation of same income more than once in

different countries.

To avoid this double taxation of same income, countries are entering into Double tax

avoidance agreement (DTAA) with each other. There is generally bi-lateral agreement which

is entered between two countries. However, there are also Multi –lateral agreements which

are entered between more than two countries.

The Meaning of Tax Treaty (DTAA) means a tax treaty is a formally concluded and ratified

agreement between two independents nations (bilateral treaty) or more than two nations

(multilateral treaty) on matters concerning taxation normally in written form.

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There are two kinds of DTAA. Comprehensive Agreements & Limited Agreements,

Comprehensive Agreements scope is to addressing all sources of income whereas Limited

Agreements scope to cover only

(a) Income from Operation of Aircrafts & Ships

(b) Estates

(c) Inheritance &

(d) Gifts

The League of Nations first commenced work in this behalf in 1921 and produced in 1928

the first Model Bilateral Convention.

Q: 5). What is “Gross Total Income”? (2 Marks)

Answer:

A person’s Gross Total Income is his/her taxable income from all sources. As per section

14, income of a person is computed under the following five heads:

1) Income from Salaries.

2) Income from house property.

3) Income from Profits and gains of business or profession.

4) Income from Capital gains.

5) Income from other sources.

The aggregate income under these heads before making any deduction under section 80 C to 80 U is termed as “Gross Total Income”

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Assignment: B (10 Marks)

Q: 1). How the incidence of tax depends upon Residential Status of an

assessee? (3 Marks)

Answer:

The incidence of tax on any assessee depends upon his/her residential status under the Act.

Therefore, after determining whether a particular amount is capital or revenue in nature, if

the receipt is of a revenue nature and chargeable to tax, it has to be seen whether the

assessee is liable to tax in respect of that income. The taxability of a particular receipt would

thus depend upon not only the nature of the income and the place of its accrual or receipt

but also upon the assesee’s residential status.

For all purposes of income-tax, taxpayers are classified into three broad categories on the

basis of their residential status. Vis:

1) Resident and Ordinary Resident

2) Resident but not Ordinary Resident

3) Non-Resident

The residential status of an assessee must be ascertained with reference to each previous

year. A person who is resident and ordinarily resident in one year may become non-resident

or resident but not ordinarily resident in another year or vice versa. The provisions for

determining the residential status of assessees are:

1) Residential status of Individuals: Under section 6(1), an individual is said to be

resident in India in any previous year, if he satisfies any one of the following

conditions:

(ii) He has been in India during the previous year for a total period of 182 days or

more, or

(iii) He has been in India during the 4 years immediately preceding the previous

year for a total period of 365 days or more and has been in India for at least

60 days in the previous year.

If the individual satisfies any one of the conditions mentioned above, he is a resident. If both

the above conditions are not satisfied, the individual is a non-resident.

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Note:

a) The term “stay in India” includes stay in the territorial waters of India (i.e. 12 nautical

miles into the sea from the Indian coastline). Even the stay in a ship or boat moored

in the territorial waters of India would be sufficient to make the individual resident in

India.

b) It is not necessary that the period of stay must be continuous or active nor is it

essential that the stay should be at the usual place of residence, business or

employment of the individual.

c) For the purpose of counting the number of days stayed in India, both the date of

departure as well as the date of arrival are considered to be in India.

d) The residence of an individual for income-tax purpose has nothing to do with

citizenship, place of birth or domicile. An individual can, therefore, be resident in

more countries than one even though he can have only one domicile.

Exceptions: The following categories of individuals will be treated as residents only if the

period of their stay during the relevant previous year amounts to 182 days. In other words

even if such persons were in India for 365 days during the 4 preceding years and 60 days in

the relevant previous year, they will not be treated as resident.

1) Indian citizens, who leave India in any previous year as a member of the crew of an

Indian ship or for purposes of employment outside India, or

2) Indian citizen or person of Indian origin engaged outside India in an employment or

a business or profession or in any other vocation, who comes on a visit to India in

any previous year

A person is said to be of Indian origin if he or either of his parents or either of his

grandparents were born in undivided India.

Not-ordinarily resident - Only individuals and HUF can be resident but not ordinarily

resident in India. All other classes of assessees can be either a resident or non-resident. A

not-ordinarily resident person is one who satisfies any one of the conditions specified under

section 6(6).

i) If such individual has been non-resident in India in any 9 out of the 10 previous years

preceding the relevant previous year, or

ii) If such individual has during the 7 previous years preceding the relevant previous year

been in India for a period of 729 days or less.

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Note: In simpler terms, an individual is said to be a resident and ordinarily resident if he

satisfies both the following conditions:

i) He is a resident in any 2 out of the last 10 years preceding the relevant previous year,

and

ii) His total stay in India in the last 7 years preceding the relevant previous year is 730

days or more.

If the individual satisfies both the conditions mentioned above, he is a resident and

ordinarily resident but if only one or none of the conditions are satisfied, the individual is a

resident but not ordinarily resident.

2) Residential status of HUF: A HUF would be resident in India if the control and

management of its affairs is situated wholly or partly in India. If the control and

management of the affairs is situated wholly outside India it would become a non-

resident.

The expression “control and management” referred to under section 6 refers to the central

control and management and not to the carrying on of day-to-day business by servants,

employees or agents. The business may be done from outside India and yet its control and

management may be wholly within India. Therefore, control and management of a business

is said to be situated at a place where the head and brain of the adventure is situated. The

place of control may be different from the usual place of running the business and

sometimes even the registered office of the assessee. This is because the control and

management of a business need not necessarily be done from the place of business or from

the registered office of the assessee. But control and management do imply the functioning

of the controlling and directing power at a particular place with some degree of permanence.

If the HUF is resident, then the status of the Karta determines whether it is resident and

ordinarily resident or resident but not ordinarily resident. If the Karta is resident and

ordinarily resident, then the HUF is resident and ordinarily resident and if the Karta is

resident but not ordinarily resident, then HUF is resident but not ordinarily resident.

3) Residential status of firms and association of persons: A firm and an AOP would

be resident in India if the control and management of its affairs is situated wholly or

partly in India. Where the control and management of the affairs is situated wholly

outside India, the firm would become a non-resident.

4) Residential status of companies: A company is said to be resident in India if –

(i) It is an Indian company as defined under section 2(26), or

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(ii) Its control and management is situated wholly in India during the accounting

year.

Thus, every Indian company is resident in India irrespective of the fact whether the control

and management of its affairs is exercised from India or outside. But a company, other than

an Indian company, would become resident in India only if the entire control and

management of its affairs is in India.

The control and management of the affairs of company are said to be exercised from the

place where the director’s meetings (not shareholders. meetings) are held, decisions taken

and directions issued.

5) Residential Status of Local Authorities and Artificial Juridical Persons: Local

authorities and artificial juridical persons would be resident in India if the control and

management of its affairs is situated wholly or partly in India. Where the control and

management of the affairs is situated wholly outside India, they would become non-

resident.

Note: In simpler terms, an individual is said to be resident and ordinarily resident if he

satisfies both the following conditions:

i) He is resident in any 2 out of the last 10 years preceding the relevant previous

year, and

ii) His total stay in India in the last 7 years preceding the relevant previous year is

730 days or more.

If the individual satisfies both the conditions mentioned above, he is a resident and

ordinarily resident but if only one or none of the conditions are satisfied, the individual is a

resident but not ordinarily resident.

SCOPE OF TOTAL INCOME

Section 5 provides the scope of total income in terms of the residential status of the assessee

because the incidence of tax on any person depends upon his residential status. The scope of

total income of an assessee depends upon the following three important considerations:

(i) The residential status of the assessee (as discussed earlier);

(ii) The place of accrual or receipt of income, whether actual or deemed; and

(iii) The point of time at which the income had accrued to or was received by or on

behalf of the assessee.

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The ambit of total income of the three classes of assessees would be as follows:

1) Resident and ordinarily resident - The total income of a resident assessee would,

under section 5(1), consists of:

(i) Income received or deemed to be received in India during the previous year;

(ii) Income which accrues or arises or is deemed to accrue or arise in India during the

previous year; and

(iii) Income which accrues or arises outside India even if it is not received or brought

into India during the previous year.

In simpler terms, a resident and ordinarily resident has to pay tax on the total income

accrued or deemed to accrue, received or deemed to be received in or outside India.

2) Resident but not ordinarily resident – Under section 5(1), the computation of total

income of resident but not ordinarily resident is the same as in the case of resident

and ordinarily resident stated above except for the fact that the income accruing or

arising to him outside India is not to be included in his total income. However, where

such income is derived from a business controlled from or profession set up in India,

then it must be included in his total income even though it accrues or arises outside

India.

3) Non-resident - A non-resident’s total income under section 5(2) includes:

(i) Income received or deemed to be received in India in the previous year; and

(ii) Income which accrues or arises or is deemed to accrue or arise in India during

the previous year.

Note: All assessees, whether resident or not, are chargeable to tax in respect of their income

accrued, arisen, received or deemed to accrue, arise or to be received in India whereas

residents alone are chargeable to tax in respect of income which accrues or arises outside

India.

Resident And

Ordinarily Resident

Resident But

Not Ordinarily Resident

Non-Resident

Income

received/deemed to

be received/ accrued

or arisen/deemed to

accrue or arise in or

outside India.

Income which received/deemed to be

received/ accrued or arisen/deemed to

accrue or arise in India.

AND

Income which accrues or arises outside India

being derived from business controlled from

or profession set up in India.

Income received/

deemed to be

received/ accrued or

arisen/ deemed to

accrue or arise in

India.

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Q: 2). How the tax planning with reference to new business is to be done? (3

Marks)

Answer:

Tex Planning is defined as an arrangement of one’s financial and economic affairs by taking

complete legitimate benefit of all deductions, exemptions, allowances and rebates so that tax

liability reduces to minimum.

While setting up a new business, one has to consider the location of the business and the

nature of the business. A number of factors have to be taken into consideration in deciding

about the location and nature of the business.

Tax Holidays and Deductions under Income tax are the main tax planning tools which are

considered while setting up a new business. Tax factor also plays an important role in taking

such decision. A tax holiday is a temporary reduction or elimination of a tax.

Governments usually create tax holidays as incentives for business investments. The taxes

that are most commonly reduced by national and local governments are sales taxes. In

developing countries, governments sometimes reduce or eliminate corporate taxes for the

purpose of attracting Foreign Direct Investment or stimulating growth in selected industries.

Tax holiday is given in respect of particular activities, and sometimes also only in particular

areas with a view to develop that area of business.

When a person decided to start a business there are number of factors to be considered,

namely: Location, Nature & Size of business, Form of business Capital structure and Setting

up and commencement of business.

1) Location, Nature & Size of business

Tax benefits on the basis of location, nature and size:

a) Agri: income (sec: 10(1))

b) Newly established unit in SEZ (sec:10AA)

c) Infra: Devt: Undertaking (sec: 80IA)

d) Undertaking engaged in devt: of SEZ(sec: 80IAB)

e) Certain undertakings in certain special category sates (sec: 80IC)

f) Hotels and convention centers in specified areas (sec: 80 ID)

g) Undertakings in North Eastern states (sec: 801E)

h) Assesses engaged in the collection and processing of bio-degradable

waste.(sec: 80JJA)

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2) Form of business

Forms of business include: Individual / Sole Proprietorship, Hindu Undivided Family HUF,

Firm and Company.

(i) Individual / Sole Proprietorship: An individual can pay tax on Total Income at

prescribed slab rate. He is not entitled to get deduction in respect of remuneration,

interest on capital while computing income from his business.

General Deductions to individuals

Sec: 80C - contribution to life insurance premium, PPF, NSC, housing loan,etc.

Sec: 80CCC – contribution to Pension Fund.

Sec: 80D – Health Insurance.

Sec: 80DD – medical treatment for handicapped.

Sec: 80DDB – expense on medical treatment of specified deceases.

Sec: 80E – interest on loan for higher studies.

Sec: 80EE – interest on loan for acquisition of residential house.

Sec: 80GG – House Rent

Sec: 80U – Income of Disabled persons

Sec: 80TTA - interest on saving bank account

(ii) Hindu Undivided Family (HUF): HUF pays tax same as like an individual. The

family can pay reasonable remuneration to Karta and other family members allowed

to deducting in computing business income. Interest on capital cannot be allowable

for deduction.

Deductions to HUF

Deduction entitled from its Gross Total Income u/s 80C, 80D, 80DD, 80DDB, 80TTA.

(iii) Firm: Firm pay tax at the rate of 30.9%. Firm cannot initial exemptions and entire

income will taxable. The share of income of a firm in the hand of partner is fully

exempted u/s 10(2A)

Deductions to Firm

Interest on capital or loan given a rate mentioned in partnership deed, but not

exceeding 12%

Remuneration to working partners as mentioned in Deed. But limits up to prescribed

u/s 40(b)

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(iv) Company: A domestic company is liable to pay tax at the rate of 30% with surcharge

and Edu: cess.

Deduction to company

Whole amount of interest paid to the loan taken for business purposes.

Remuneration paid to MD, Directors and other staffs.

Amount of dividend on its share capital is not deductable.

Tax Planning – Tips

(i) Where deduction from GTI is allowed for prescribed number of years it is better to

commence the business from the beginning of the year.

(ii) For availing deductions u/s 80IA, 80IAB, etc the conditions laid down for the

deduction must be complied.

(iii) The tax rate of HUF and Individual is the same so each case requires careful analysis.

(iv) Keeping in view exemption nil in the case of firm, it is better to dissolve and start

individual business.

(v) The firm should pay interest and remuneration to partners to the extent u/s 40(b) to

reduce the incidence of tax.

(vi) Take care of MAT.

Q: 3). Telco Ltd., a company incorporated and managed in South Africa and

engaged in telecommunication services, is going to invest in China. Its

Chinese operations will be both manufacturing and providing services. Telco

intends to penetrate the Chinese market for telecommunication and according

to some market research carried out before; the operations will be highly

profitable within a couple of years.

How to structure Telco's investment in a tax effective manner? (4 Marks)

Answer:

Dividends paid by the Chinese subsidiary to the South African parent will not trigger

Chinese withholding tax if the South African investor qualifies as a "foreign investment

enterprise" under Chinese law. This is the case, among others, if the Chinese company is

wholly foreign-owned. Upon receipt of the dividends by the parent in South Africa,

additional South African corporate tax may be due.

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The channeling of the dividends to a group holding company, and subsequently to the South

African investor in such a way that South African tax due on the dividend received, could be

an interesting solution.

This could be achieved by structuring the investment through a Seychelles1 group holding

company established as a CSL (special license company) under Seychelles law. The dividends

received by this company are only subject to 1.5% tax in the Seychelles.

Due to special provision in the treaty between the Seychelles and South Africa, no further

tax is payable in South Africa upon redistribution of the dividends to the parent, if any.

Therefore, the maximum tax burden is limited to 1.5%.

If this would be preferred, the dividends received in the Seychelles can, of course, also be

accumulated in the Seychelles.

1) Here and further Austria could also play a role of offshore country, in this example according to the actual double taxation regulation the

dividends received by the company are subject to 5% in Austria. In other examples there are quite dubious schemes to say for sure if they are

permitted by other countries. In any case to find a practical solution the tax advisers from all the countries, mentioned in the scheme should

decide whether this would be permitted or not.

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Assignment: C (10 Marks)

Each question given below carry equal marks of 0.25 (i.e 0.25*40 = 10 Marks)

Q: 1). A domestic company is always a company in which the public are

substantially interested –

(a) True

(b) False (√)

(c) None of the above

(d) True in some cases.

Q: 2). A private limited company can never be a company in which the public

are substantially interested –

(a) True (√)

(b) False

(c) True in some cases

(d) None of the above

Q: 3). A company registered in the UK and makes arrangement for payment

of dividend in India is not a domestic company –

(a) True

(b) False (√)



Q: 4). A company is said to be resident of a particular company if –

(a) Control and management of the affairs of a company is situated wholly

in that particular country (√)

(b) Control and management of the affairs of a company is situated outside that

particular country.

(c) Control and management of the affairs of a company is situated partly in that

particular country and partly outside that particular country.

(d) All of the above

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Q: 5). X Ltd. a foreign company manages its affairs partly from India and

partly outside India. X Ltd. is said to be –

(a) Resident in India

(b) Non-Resident in India

(c) Resident and Ordinary Resident in India,

(d) Resident but not ordinary Resident in India (√)

Q: 6). A company owning the following hotels can claim deduction under

section 80-ID –

(a) A 5 star hotel in X (a place) (√)

(b) A 4 star hotel in Y (a place).

(c) A 3 star hotel in Z (a place)

(d) All of the above.

Q: 7). A company is qualified to claim deduction under section 80-IB. By mistake

the deduction was not claimed in the return of income. However, the company

claims that before the Assessing Officer at the time of assessment under section

143(3)

(a) Deduction will be allowed by the assessing officer.

(b) Deduction will not be allowed by the assessing officer.

(c) Deduction will be allowed by the assessing officer, if the Commissioner

of Income-tax permits (√)

(d) Deduction will be allowed by the assessing officer, if it is permitted by the

Chief Commissioner.

Q: 8). A Government company cannot claim any deduction under section 10A,

10AA and 10B –

(a) True

(b) False (√)

(c) None of the above

(d) True in some cases.

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Q: 9). A limited liability partnership owns an infrastructure facility. It can

claim deduction under section 80-IA –

(a) True (√)

(b) False



Q: 10). Only a company (not a limited liability partnership) can claim

deduction under section 10A, 10AA, and 10B –

(a) True

(b) False (√)



Q: 11). Deduction under section 80JJJA is available in the following cases –

(a) Indian Company (√)

(b) Foreign Company

(c) Limited Liability Partnership.


Q: 12). Tonnage tax scheme is applicable in the following cases –

(a) Foreign Shipping Company,

(b) Indian Shipping Company (√)

(c) Limited liability partnership in shipping industry.


Q: 13). A company will pay dividend tax if –

(a) Bonus shares are allotted to equity shareholder.

(b) Bonus shares are allotted to preference shareholders,

(c) Shares are allotted to debenture holders free of cost.

(d) Shares are allotted to employees as ESOP shares free of cost (√)

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Q: 14). Corporate taxation does not play any significance role in determining

the choice between different sources of finance –

(a) True

(b) False (√)

Q: 15). A Company want to purchase a plant (cost: Rs. 80 crore). It can out

rightly purchase it. Alternatively, it can take the plant on lease. The following

factors are taken into consideration to find out which one is better –

(a) Corporate tax rate;

(b) Corporate rate and depreciation rate;

(c) Corporate tax rate, depreciation rate, lease rent, cost of capital and

useful life of plant (√)

(d) None of the above.

Q: 16). If corporate tax rate is reduced the tax saving on account of

depreciation will increase -

(a) True (√)

(b) False



Q: 17). If rate of depreciation is reduced the tax saving on account of

depreciation will increase -

(a) True

(b) False (√)



Q: 18). If borrowed funds are used for purchase of a plant and tax rates are

reduced, the tax saving will increase -

(a) True (√)

(b) False



Page | 24

Q: 19). Depreciation is not available in the case of machine acquired under

higher purchase –

(a) True (√)

(b) False



Q: 20). X Limited is considering a proposal to manufacture a component itself

or purchase from market. No fresh investment in plant and machinery will be

required if it decides to manufacture the component within its factory. Total

Variable Cost of manufacturing is $ 74 per unit of component. Net fixed cost

of use of plant and machinery comes to $ 20 per unit of component. The

component is available in market at $ 79 per unit of component. It is better to

purchase the component from market-

(a) True (√)

(b) False



Q: 21). Y Limited has an option to purchase a machine out of own funds or

alternatively a bank can finance it. At the current rate of corporate tax, the tax

saving in the later option is higher. If the corporate tax rate is reduced, the

second option will become less attractive-

(a) True

(b) False (√)



Q: 22). In case of demerger, accumulated loss and unabsorbed depreciation of

the demerged company will be-

(a) Carried forward in the hands of demerged companies.

(b) Carried forward and set off in hands of resulting companies (√)

(c) Set off in the hands of demerged companies.

(d) None of these.

Page | 25

Q: 23). Amalgamation and demerger are considered as-

(a) Same terms always.

(b) Distinct terms always

(c) Same terms in certain cases.

(d) Distinct terms in certain cases (√)

Q: 24). Net wealth is calculated as-

(a) Assets chargeable to wealth tax less the exempted assets

(b) Assets chargeable to wealth tax less debt owned (√)

(c) Assets less debt owned

(d) Assets less exempted assets

Q: 25). Wealth tax is chargeable

(a) @ 2% of the net wealth exceeding Rs. 30 Lakhs

(b) @ 1% of the net wealth exceeding Rs. 30 lakhs (√)

(c) @ 1% of the entire net wealth provided it exceeds Rs. 30,00,000.

(d) @ 2% of the entire net wealth provided it exceeds Rs. 30,00,000.

Q: 26). Wealth tax is payable if the net wealth of the assesee

(a) Exceeds Rs. 250,000

(b) Is Rs. 30,00,000 or more

(c) Exceeds Rs. 30,00,000 (√)


Q: 27). A firm is

(a) Not liable to wealth tax (√)

(b) Liable to wealth tax

(c) Not liable to wealth tax but partners share in the value of the assets of the firm

shall be included in the net wealth of the partner


Q: 28). Asset held by a minor child is included in the net wealth of the

(a) Father

(b) Mother

(c) Father or mother whose net wealth before clubbing is greater (√)

(d) Father or mother whose net wealth before clubbing is lesser.

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Q: 29). An assessee is one who pays the wealth tax, an assessee belongs to

which of the following category?

(a) A company

(b) HUF

(c) A dead person’s legal representative, the executor or administrator

(d) All of the above (√)

Q: 30). A house is not treated as an asset if

(a) It is meant exclusively for residential purposes

(b) House held as stock-in-trade

(c) House used for own business or profession

(d) All of the above (√)

Q: 31). Vat Was First Introduced As A Tax In The Year:-

(a) 1919

(b) 1921

(c) 1948

(d) 1954

Q: 32). Vat Was First Introduced By The:-

(a) FRANCE

(b) GERMANY

(c) USA

(d) UK

Q: 33). Which Is Most Common Variant Of Vat Used World Wide:-

(a) Gross Profit Variant

(b) Consumption Variant (√)

(c) Gross Product Variant

(d) Gross Income Variant

Q: 34). TIN MEANS:-

(a) Tax Information Number

(b) Tax India Number

(c) Tax Identification Number (√)

(d) Tax Introduction Number

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Q: 35). Vat Introduction Will Certainly:-

(a) Make the revenue collection worst.

(b) Make the revenue collection better (√)

(c) The revenue collection are the same

(d) Revenue volume has nothing to do with introduction of vat

Q: 36). The Accounting Under The Vat Will Be:-

(a) Regular and cheap.

(b) Regular and expensive (√)

(c) Irregular and cheap.

(d) Irregular and expensive

Q: 37). To Claim The Input Credit Of Tax Paid What Is Most Important

Document:-

(a) Permission of the sales tax authority.

(b) Proper vat invoice (Proper Tax Invoice) (√)

(c) Cash book

(d) Ledger

Q: 38). Which Is Most Common Variant Of Vat Used World Wide:-

(a) Gross Profit Variant

(b) Consumption Variant (√)

(c) Gross Product Variant

(d) Gross Income Variant

Q: 39). Due To Introduction Of Vat:-

(a) Tax evasion is restricted (√)

(b) Tax evasion is increased.

(c) Vat has nothing to do with evasion of tax.

(d) Tax evasion has become easy.

Q: 40). The Accounting Under The Vat Will Be:-

(a) Regular and cheap.

(b) Regular and expensive (√)

(c) Irregular and cheap.

(d) Irregular and expensive

CTP Assignment

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