MBA - Unit-III

Unit-III Meaning and scope of tax planning, difference between tax planning tax evasion and tax avoidance, tax incidence of a company; computation of corporate tax liability. Meaning and scope of tax planning :- Tax planning means reducing tax burden legally by using tax-saving opportunities provided by the government. Scope of Tax Planning 1. Investment Planning 2. Income Planning 3. Business Planning 4. Capital Structure Planning 5. Retirement Planning 6. Tax Management 7. Corporate Tax Planning 8. Estate Planning 9. International Tax Planning 10. Capital Gain Planning 11. Depreciation Planning 12. Employee Compensation Planning 1. Investment Planning Investment planning means choosing investments that reduce tax and increase savings. It helps people save money legally through government-approved schemes. Proper investment planning also provides future financial security and better returns. Examples:     PPF LIC Premium ELSS Mutual Funds National Savings Certificate (NSC) 2. Income Planning Income planning means arranging income sources properly to reduce tax liability legally. It helps taxpayers divide and manage income smartly so that less tax is payable and financial stability improves. Examples:     Salary restructuring House Rent Allowance (HRA) Family income distribution Agricultural income planning 3. Business Planning Business planning under tax planning means organizing business activities in a tax-efficient way. Businesses choose suitable methods, locations, and structures to reduce tax burden and increase profits legally. Examples:     Choosing partnership or company form Setting business in tax benefit areas Claiming business expenses Using startup tax benefits 4. Capital Structure Planning Capital structure planning means deciding the proper mix of debt and equity in business finance. Companies use this planning because interest on loans is deductible and reduces taxable income. Examples:     Bank loans Debentures Equity shares Borrowed capital financing 5. Retirement Planning Retirement planning means saving money for old age while getting tax benefits. It helps individuals build a secure future and reduce present tax liability through long-term investments. Examples:     Pension schemes NPS (National Pension System) Provident Fund Retirement insurance plans 6. Tax Management Tax management means properly handling tax-related activities like filing returns and paying taxes on time. It ensures compliance with tax laws and avoids penalties and legal problems. Examples:     Filing income tax returns Maintaining accounts Paying advance tax Keeping tax records safely 7. Corporate Tax Planning Corporate tax planning means companies arrange their financial activities to reduce tax liability legally. It improves profitability and helps businesses use exemptions, deductions, and incentives effectively. Examples:     Claiming depreciation Tax-saving investments Research and development deductions Export incentives 8. Estate Planning Estate planning means managing and transferring property or wealth to heirs with minimum tax burden. It helps families avoid disputes and ensures smooth transfer of assets. Examples:     Writing a will Gifting property Family trust creation Wealth distribution planning 9. International Tax Planning International tax planning means managing taxes for businesses operating in different countries. It helps avoid double taxation and reduces overall global tax liability legally. Examples:     Double Taxation Avoidance Agreement (DTAA) Foreign tax credit International business setup Export-import tax planning 10. Capital Gain Planning Capital gain planning means reducing tax on profit earned from selling assets. Taxpayers use exemptions and reinvestment options to save tax legally. Examples:     Sale of property Investment in bonds Reinvestment in house property Sale of shares and securities 11. Depreciation Planning Depreciation planning means claiming depreciation on business assets to reduce taxable profits. It helps businesses lower tax liability and recover asset costs gradually. Examples:     Machinery depreciation Computer depreciation Vehicle depreciation Factory equipment depreciation 12. Employee Compensation Planning Employee compensation planning means designing salary structures to reduce employee tax burden legally. Companies include tax-saving allowances and benefits in salary packages. Examples:     House Rent Allowance (HRA) Medical allowance Leave Travel Allowance (LTA) Food coupons and reimbursements Tax Planning, Tax Avoidance and Tax Evasion 1. Tax Planning Tax planning means reducing tax liability legally by making proper use of deductions, exemptions, rebates, and allowances provided under tax laws. It is a lawful and ethical method of saving tax. Example :- Investing money in PPF, LIC, or ELSS under Section 80C to reduce taxable income. 2. Tax Avoidance Tax avoidance means reducing tax liability by using loopholes or gaps in tax laws. It is technically legal but considered unethical because it goes against the intention of law. Example :- Creating artificial transactions only to reduce tax liability. 3. Tax Evasion Tax evasion means illegally avoiding payment of tax by hiding income, giving false information, or manipulating accounts. It is a punishable offense under law. Example :- Not reporting business income to the Income Tax Department. Basis Tax Planning Tax Avoidance 1. Meaning Legal reduction liability 2. Nature Legal and ethical 3. Objective Proper tax saving 4. Method Used Using deductions exemptions 5. Compliance with Law Fully follows law 6. Government View Encouraged by government 7. Transparency 8. Risk Level Fully transparent Very low risk of Tax Evasion tax Avoiding tax through Illegal non-payment of tax loopholes Technically legal but Illegal and unethical unethical Reduce tax burden Escape from tax payment unfairly and Exploiting loopholes in law Hiding income or falsifying records Follows wording but not Violates tax laws spirit Discouraged government Less transparent Moderate legal risk by Strictly prohibited Completely hidden High legal risk Heavy penalty and 9. Penalty No penalty May attract scrutiny punishment 10.Impact on Reputation Improves goodwill May damage reputation Seriously harms reputation 11. Ethical Aspect Ethical practice Unethical practice Fraudulent practice Investment under Section Artificial tax-saving Concealing income from 12. Example 80C arrangements authorities Tax Incidence of a Company Meaning A company earns profit by selling goods and services. The government imposes tax on these profits, known as Corporate Tax or Company Tax. But an important question arises: Who actually bears the burden of this tax? This concept is called Tax Incidence of a Company. The company may pay tax directly to the government, but the real burden can be shifted to:     Consumers Employees Shareholders Suppliers Thus, tax incidence studies the final burden of taxation. Features of Tax Incidence of a Company 1. Final Burden of Tax - This feature explains who actually bears the tax burden after the company shifts it. Although the company pays tax to the government, the real burden may finally fall on consumers, workers, shareholders, or suppliers depending on business and market conditions. Example - A company increases product prices after tax increase, so consumers bear the burden. 2. Related to Tax Shifting - Tax incidence is closely connected with tax shifting because companies try to transfer tax burden to others. The burden may be shifted forward to consumers through higher prices or backward to employees and suppliers through lower payments. Example - A company raises mobile prices to recover corporate tax from customers. 3. Depends on Market Conditions - The incidence of company tax depends on demand, supply, and market competition. In highly competitive markets, tax shifting becomes difficult, while monopolistic companies can shift tax burden more easily through price increases. Example - A monopoly electricity company increases electricity charges after higher taxation. 4. Impacts Different Groups - Tax incidence affects many groups connected with the company such as consumers, employees, shareholders, suppliers, and owners. Different groups may share the burden of taxation according to the company’s policies and market conditions. Example - Higher taxes reduce employee bonuses and shareholder dividends simultaneously. 5. Influences Business Decisions - Corporate tax incidence influences important business decisions like pricing, investment, production, expansion, and employment. High taxes may force companies to reduce production or investment to maintain profits and financial stability. Example - A company postpones opening a new factory because of high taxes. 6. Affects Pricing Policy - Companies often change their pricing policies after tax increases. To maintain profits, they may increase the selling price of goods and services, transferring part of the tax burden to consumers in the market. Example - A car company increases vehicle prices after rise in corporate tax. 7. Reduces Company Profits - Corporate taxes reduce the net profits earned by companies. When taxes are high and cannot be shifted completely, companies have to bear the burden through lower retained earnings and reduced profitability. Example - A firm earns lower annual profit due to increased taxation. 8. Influences Consumer Demand - When companies increase prices because of taxes, consumers may reduce their demand for products. Thus, tax incidence can directly affect purchasing behavior and market demand for goods and services. Example - Higher prices of luxury goods reduce customer purchases. 9. Impacts Employment Opportunities - Heavy tax burden may force companies to reduce recruitment, salaries, or workforce size to control costs. Therefore, tax incidence can affect employment generation and worker welfare in the economy. Example- A company reduces hiring after facing higher tax liability. 10. Affects Investment Decisions - Tax incidence influences company investment decisions because high taxation reduces available funds for expansion and development. Companies may avoid investing in projects with lower after-tax returns. Example- A business cancels expansion plans due to excessive corporate taxes. 11. Depends on Nature of Product - Tax incidence varies according to the type of product sold by the company. Essential goods allow easier tax shifting because consumers continue buying them even at higher prices. Example - Petrol companies increase prices without major fall in demand. 12. Creates Economic Burden - Corporate taxation creates an economic burden on businesses and society. The burden may reduce purchasing power, profits, and production, affecting overall economic activities and industrial growth. Example - High taxes increase production costs for manufacturing companies. 13. Influences Production Level - Companies may reduce production when taxes increase production costs and lower profits. Lower production can affect market supply, employment, and economic growth in the long run. Example - A factory decreases production due to rising tax expenses. 14. Encourages Tax Planning - High tax incidence encourages companies to adopt tax planning methods to legally reduce tax burden through deductions, exemptions, and efficient financial management practices. Example - A company invests in tax-saving schemes to reduce tax liability. 15. Affects Shareholder Returns - Corporate taxes reduce distributable profits, which lowers dividends and returns received by shareholders. Investors may become less interested in companies with heavy tax burdens. Example - Shareholders receive smaller dividends after increase in company taxes. Computation of Corporate Tax Liability Computation of Corporate Tax Liability Introduction Every company earns income through business activities and is required to pay tax to the government on its profits. The process of calculating the amount of tax payable by a company is known as Computation of Corporate Tax Liability. It includes:      Calculation of total income Deduction of allowable expenses Addition of disallowed expenses Deduction of exemptions and deductions Application of tax rate The final amount obtained is called Corporate Tax Liability. Meaning of Corporate Tax Liability Definition Corporate tax liability means: “The total amount of tax payable by a company on its taxable income during a financial year.” It is calculated according to the provisions of income tax laws. Steps in Computation of Corporate Tax Liability Step 1: Calculate Gross Total Income Gross Total Income means total income earned from all sources. Sources of Income      Business income Capital gains Rental income Interest income Other income Formula Gross Total Income=Income from All Sources Gross Total Income=Income from All Sources Example Business Income = ₹15,00,000 Interest Income = ₹1,00,000 Gross Total Income = ₹16,00,000 Step 2: Deduct Allowable Business Expenses Companies can deduct expenses incurred for business purposes. Allowable Expenses      Salaries Rent Advertisement expenses Depreciation Office expenses Formula Net Profit=Gross Income−Allowable ExpensesNet Profit=Gross Income−Allowable Expenses Example Gross Income = ₹16,00,000 Expenses = ₹4,00,000 Net Profit = ₹12,00,000 Step 3: Add Disallowed Expenses Some expenses are not allowed under income tax law and must be added back. Examples    Personal expenses Penalties and fines Illegal expenses Example Disallowed Expenses = ₹50,000 Adjusted Profit = ₹12,50,000 Step 4: Deduct Allowable Deductions and Exemptions Companies can claim deductions under various tax provisions. Examples     Depreciation Donations Research expenses Export incentives Formula Taxable Income=Adjusted Profit−Allowable DeductionsTaxable Income=Adjusted Profit−Allowable Deducti ons Example Deductions = ₹2,50,000 Taxable Income = ₹10,00,000 Step 5: Apply Corporate Tax Rate Corporate tax rate is applied to taxable income. Formula Corporate Tax=Taxable Income×Tax Rate Corporate Tax=Taxable Income×Tax Rate Example Taxable Income = ₹10,00,000 Tax Rate = 25% Corporate Tax = ₹2,50,000 Step 6: Add Surcharge and Cess After basic tax calculation:   Surcharge is added on higher income Health and Education Cess is added Example Corporate Tax = ₹2,50,000 Cess @ 4% = ₹10,000 Total Tax Liability = ₹2,60,000 Format of Computation of Corporate Tax Liability Particulars Gross Total Income Less: Allowable Expenses Net Profit Add: Disallowed Expenses Adjusted Profit Less: Deductions Taxable Income Tax @ 25% Add: Cess @ 4% Total Tax Liability Amount (₹) 16,00,000 (4,00,000) 12,00,000 50,000 12,50,000 (2,50,000) 10,00,000 2,50,000 10,000 2,60,000