INTRODUCTION OF TAX PLANNING

Transcription

1 INTRODUCTION OF TAX PLANNING UNIT 1 STRUCTURE OF THE CHAPTER 1.1 Introduction 1.2 Meaning of Planning 1.3 Meaning of Management 1.4 Meaning of Evasion 1.5 Meaning of Avoidance 1.6 Basics 1.7 Summary 1.8 Exercise 1.1 INTRODUCTION This lesion discusses the concept of tax planning, tax evasion, tax avoidance and tax management. It also discusses the common provisions applicable in other lessons. 1.2 MEANING OF TAX PLANNING planning can be 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. 1.3 MEANING OF TAX MANAGEMENT management relates to past (i.e., assessment proceedings, rectification, revision, appeals etc.), present (filing of return of income on time on the basis of updated records) and future (corrective action). 1.4 MEANING OF TAX EVASION All methods by which tax liability is illegally avoided are termed as tax evasion. evasion may involve an untrue statement knowingly, submitting misleading documents, suppression of facts, not maintaining proper accounts of income earned (if required under law), omission of material facts on assessment. 1.5 MEANING OF TAX AVOIDANCE avoidance is reducing or negating tax liability in legally permissible ways and has legal sanction. avoidance is sound law and certainly not bad morality for anybody to so arrange his affairs in such a way that the brunt of taxation is the minimum. This can be done within the legal framework even by taking help of loopholes in the law. 1

2 1.6 BASICS Buoyancy It is defined as the percentage change in tax revenues divided by the percentage change in GDP. Rounding off of income [Sec. 288A] The taxable income shall be rounded off to the nearest multiple of ten rupees and for this purpose any part of a rupee consisting of paise shall be ignored and thereafter, if such amount is not a multiple of ten, then, if the last figure in that amount is five or more, the amount shall be increased to the next higher amount which is a multiple of ten and if the last figure is less than five, the amount shall be reduced to the next lower amount which is a multiple of ten. For example, if net taxable income comes to Rs. 6,45,545, it will become Rs. 6,45,550 after rounded off. Rounding off of tax [Sec. 288B] The amount payable by the assessee and the amount of refund due, under the provisions of the Act shall be rounded off to the nearest multiple of ten rupees and for this purpose any part of a rupee consisting of paise shall be ignored and thereafter, if such amount is not a multiple of ten, then, if the last figure in that amount is five or more, the amount shall be increased to the next higher amount which is a multiple of ten and if the last figure is less than five, the amount shall be reduced to the next lower amount which is a multiple of ten. For example, if net taxable income comes to Rs. 5,545, it will become Rs. 5,550 after rounded off. Computation of Net able Income of an assessee Computation of net taxable income of an assessee for the assessment year (or assessment year ): Particulars Amount (Rs.) Income under the head Salaries Income under the head House Property Income under the head Profits and gains of business or profession Income under the head Capital Gains Income under the head Income from other sources Gross total income Less: Deductions under chapter VIA Net taxable income or Total income X Computation of Net Liability of an assessee Computation of tax liability of an assessee for the assessment year (or assessment year ): Particulars Income-tax on net taxable income Less: Rebate under section 87A (a) Add: Surcharge [% of tax (a)] Total (b) Add: Education Cess 2% on (b) Add: Secondary and Higher Education Cess 1% on (b) Amount (Rs.) 2

3 Total Less: Relief under section 86, 89, 90, 90A or 91 liability Add: Interest/ Penalty etc. Less: Pre-paid taxes [i.e., advance tax, self-assessment tax, TDS, TCS, MAT credit] Payable X rates for Year [Individual, HUF, AOP, BOI and Artificial juridical person] Situation 1: For a resident senior citizen (who is 60 years or more at any time during the relevant previous year but less than 80 years on the last day of the relevant previous year i.e., born during April 1, 1936 and March 31, 1956): Up to Rs. 3,00,000 Rs. 3,00,001 Rs. 5,00,000 10% of income exceeding Rs. 3,00,000 Rs. 5,00,001 Rs. Rs. 20, % of income exceeding Rs. 5,00,000 Rs. 1,20, % of income exceeding Rs. Situation 2: For a resident super senior citizen (who is 80 years or more at any time during the relevant previous year i.e., born before April 1, 1936): Up to Rs. 5,00,000 Rs. 5,00,001 Rs. 20% of income exceeding Rs. 5,00,000 Rs. 1,00, % of income exceeding Rs. Situation 3: For any other resident individual (who is born on or after April 1, 1956), any nonresident individual, every HUF/ AOP/ BOI/ artificial juridical person: Up to Rs. 2,50,000 Rs. 2,50,001 Rs. 5,00,000 10% of income exceeding Rs. 2,50,000 Rs. 5,00,001 Rs. Rs. 25, % of income exceeding Rs. 5,00,000 Rs. 1,25, % of income exceeding Rs. rates for Year [Individual, HUF, AOP, BOI and Artificial juridical person] Situation 1: For a resident senior citizen (who is 60 years or more at any time during the relevant previous year but less than 80 years on the last day of the relevant previous year i.e., born during April 1, 1937 and March 31, 1957): 3

4 Up to Rs. 3,00,000 Rs. 3,00,001 Rs. 5,00,000 10% of income exceeding Rs. 3,00,000 Rs. 5,00,001 Rs. Rs. 20, % of income exceeding Rs. 5,00,000 Rs. 1,20, % of income exceeding Rs. Situation 2: For a resident super senior citizen (who is 80 years or more at any time during the relevant previous year i.e., born before April 1, 1937): Up to Rs. 5,00,000 Rs. 5,00,001 Rs. 20% of income exceeding Rs. 5,00,000 Rs. 1,00, % of income exceeding Rs. Situation 3: For any other resident individual (who is born on or after April 1, 1957), any nonresident individual, every HUF/ AOP/ BOI/ artificial juridical person: Up to Rs. 2,50,000 Rs. 2,50,001 Rs. 5,00,000 10% of income exceeding Rs. 2,50,000 Rs. 5,00,001 Rs. Rs. 25, % of income exceeding Rs. 5,00,000 Rs. 1,25, % of income exceeding Rs. Common provisions for assessment year and rates for Individual, HUF, AOP, BOI and Artificial juridical person: For individual, HUF, AOP, BOI and artificial juridical person, tax rates are same in assessment year and The only difference is in checking date of birth of assessees to compute the age of assessees. 2. Maximum marginal rate of tax [Sec. 2(29C)]: It is defined as the rate of income-tax (including surcharge) applicable in relation to the highest slab of income in the case of an individual as specified by the relevant Finance Act. For instance, for the assessment year , the maximum marginal rate of tax for an individual assessee is % (tax 30% + 12% + 3%) and for the assessment year , the maximum marginal rate of tax for an individual assessee is % (tax 30% + 15% + 3%). 3. Rebate under section 87A: This rebate is given to provide tax relief to individual taxpayers who are in lower income bracket. Any resident individual whose net taxable income (i.e., GTI minus deductions under section 80C to 80U) is Rs. 5 lakhs or less is entitled to claim rebate under section 87A. This rebate is available from income tax (before adding surcharge and cess). Rebate year year Amount of Rebate 100% of income tax payable on total income or Rs. 2,000, whichever is less 100% of income tax payable on total income or Rs. 5,000, whichever is less 4

5 4. Exemption limit (or exempted slab): The amount of the first slab of income which is taxable at rate is known as exemption limit (or exempted slab). For the assessment year and assessment year , the amount of exemption limit is as follows for different assessees: Person Individuals: - Resident senior citizen - Resident super senior citizen Amount (Rs.) 3,00,000 5,00,000 2,50,000 - Any other individual Hindu undivided family 2,50,000 Firm Company Association of persons or body of individuals 2,50,000 Local authority Artificial juridical person 2,50,000 The above limit is not applicable in cases where special tax rates are applicable. 5. Firms: A firm is taxable at the rate of 30% for assessment year as well as Companies: The following rates of income-tax are applicable: Company In the case of a domestic company: - where its total turnover (or gross receipts) during the previous year does not exceed Rs. 5 crore - any other domestic company In the case of a foreign company: - Royalty received from Government or an Indian concern in pursuance of an agreement made by it with the Indian concern after March 31, 1961, but before April 1, 1976, or fees for rendering technical services in pursuance of an agreement made by it after February 29, 1964 but before April 1, 1976 and where such agreement has, in either case, been approved by the Central Government - Other income year % 30% 50% 40% year % 30% 50% 40% 7. Surcharge: Surcharge is applicable as a percentage of income-tax. Assessee year year Any assessee: - If net taxable income does not exceed Rs. 1 crore Individual, HUF, AOP, BOI and Artificial juridical person: 5

6 - If net taxable income exceeds Rs. 1 crore 12% 15% Firm: - If net taxable income exceeds Rs. 1 crore 12% 12% Domestic company: - If net taxable income exceeds Rs. 1 crore but does not exceed Rs. 10 crore - If net taxable income exceeds Rs. 10 crore Foreign company: - If net taxable income exceeds Rs. 1 crore but does not exceed Rs. 10 crore - If net taxable income exceeds Rs. 10 crore 7% 12% 7% 12% Surcharge is subject to marginal relief. In the case of an assessee having a net income exceeding Rs. 1 crore, the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore. Similarly, in the case of a company having a net income exceeding Rs. 10 crore, the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore. 8. Education cess [EC]: Education cess is 2% [of income-tax calculated after adding surcharge (if any)] irrespective of any income. 9. Secondary and Higher Education cess [SHEC]: Secondary and higher education cess is 1% [of income-tax calculated after adding surcharge (if any)] irrespective of any income. 1.7 SUMMARY This lesson discussed relevant provisions of Income-tax Act, 1961 which are used to compute the assessment of assessment year and Also the lesson discusses tax planning, tax evasion, tax avoidance and tax management. 1.8 EXERCISE Case planning is an act within the four corners of the Act and it is not a colorable device to avoid tax. Discuss in brief. Though tax planning within the preview of the Act organises one s income in a said manner following all legal considerations with the sole objective of minimising the tax liability, still it is not a colourable devise to avoid tax. Colourable devise basically means the process of planning your investment empirically showing alliance to the legal provisions but basically making use of these provisions to shadow the illegal ways adopted to reduce tax liability or avoid it completely. Case 2% 5% 2% 5% 6

7 Specify whether the following acts can be considered as an act of (i) tax management; or (ii) tax planning; or (iii) tax evasion: a. B Ltd. maintains register of tax deduction effected by it to enable timely compliance. b. C deposits Rs. 70,000 in P.P.F. account so as to reduce tax payable. c. XYZ Ltd. installed an air conditioner costing Rs. 50,000 at the residence of the director but treats it as fitted in quality control section in the factory. This is with the object to treat it as plant for the purpose of computing depreciation. [Hint: management, planning, evasion] 7