Tax Planning and Financial

Management Decisions
CA Aarti Patki
Tax planning relating to Capital Structure

• Capital Structure
• Before setting up a project a important decision to select
a capital structure has to be taken
• Entrepreneur has to keep in view some considerations
such as:
• Dividend policy
• Cost of Capital
• Chargeability of taxes
• Ploughing back profits
 Means of Financing
• Generally two means of financing are available
for a new project:
• Equity share capital
• Debentures/Loans and Borrowings
• A capital structure is said to be optimum when it
has a mix of debt and equity that will yield the
lowest weighted average cost of capital
• A capital structure should not have high debt
equity ratio
 Dividend Policy
• Under Section 2(22) the following payments or
distributions by a company to its shareholders are deemed
as dividends to the extent of accumulated profits
a. Any distribution entailing distribution of company’s assets
b. Any distribution of debenture, debenture stock, deposit
certificate and bonus to preference shareholders
c. Distribution on liquidation of company
d. Distribution on reduction of capital
e. Any payment by way of loan or advance by a closely-held
company to a shareholder holding substantial interest
provided the loan should not have been made in the
ordinary course of business and money-lending should
not be a substantial part of the company’s business
 Dividend Policy
• If dividend comes under points a to d then
the payer company will pay dividend tax
under Section 115-O and in the hands of
recipient shareholders by virtue of section
10(34), it is not chargeable to tax
• If dividend comes under point e then the
payer company will pay DDT under section
115-O at the rate of 30 % +SC+HEC
effective rate is 34.944%
 Dividend Policy
• The following shall not be treated as dividend:
• Any payment made by a company on
purchase of its own shares in accordance
with the provisions contained in section 77A
of the companies act
• Any distribution of dividend made in
accordance with the scheme of demerger by
the resulting company to the shareholders of
the demerged company
 Dividend Policy
• Dividend taxable under section 115BBDA.It is
applicable if following two conditions are satisfied:
• 1)The assessee (recipient) is a resident in India.
• 2)He is an individual/HUF/firm
• 3)Total Income of the assessee includes any
income in aggregate exceeding Rs.10 lakh by
way of dividend except dividend under section
2(22) (e)
• Then the dividend income is taxable @ 10% +SC
+HEC
 Inter –Company Dividends
• Section 115 –O (1A) provides a relief when
a holding company has received dividend
from its subsidiary company and in the
same financial year the holding company
declares dividends to its shareholders
 Inter –Company Dividends
• The aforesaid relief is available only in
situations below:
• Subsidiary company is a domestic company
and it has paid tax under section 115-O when
dividend is paid to the holding company
• A company shall be subsidiary of another
company if such other company holds more
than half in nominal value of the equity share
capital of the company
 Inter –Company Dividends
• When dividend is declared, distributed or
paid by the holding company to its
shareholders, dividend tax shall be
payable
Dividendon the following
declared ,distributedamount:
or paid XXXX
by the holding company to its
shareholders(a)
Less: Dividend received by holding XXXX
company from its subsidiary company
in the same financial year(b)
Balance (a-b) on which dividend tax is XXXX
payable by the holding company
 Tax Provisions relating to Infrastructure
Sector –Section 80IA
• Deduction in respect of Profit and Gains from Industrial
Undertaking or enterprises engaged in infrastructure
development etc-
• Conditions-
• Undertaking should provide infrastructure facility
• It should be owned by an Indian Company
• There should be an agreement with the Central
Government
• It should start operation on or after April 1,1995
• Deduction should be claimed in the return of income and
return of income should be on or before the due date of
submission of return of income
 Tax Provisions relating to Infrastructure
Sector –Section 80IA
• Meaning of Infrastructure Facility-means
• a road, including toll road, a bridge or a rail
system;
• a highway project including housing or other
activities being an integral part of the highway
project;
• a water supply project, water treatment system,
irrigation project, sanitation and sewerage system
or solid waste management system;
• a port, airport, inland waterway or inland port or
navigational channel in the sea.
 Tax Provisions relating to Infrastructure
Sector –Section 80IA
• Deduction Amount
• 100% of profits and gains derived from such
business are allowed as deduction for a
period of any 10 consecutive years out of 20
years from the year in which it starts its
operations except in case of port, airport,
inland waterway or inland port or navigational
channel in the sea where deduction allowed is
for any 10 consecutive years out of 15 years.
Tax Provisions for Backward areas
• All taxpayers setting-up an undertaking or
enterprise for production or manufacture of
any article or thing in any notified
backward area in the state of Andhra
Pradesh, Bihar, Telangana or West Bengal.
Tax Provisions for Backward areas
• Additional depreciation shall be allowed at 35% of actual cost
of new plant and machinery [other than ships, aircraft, office
appliances, second hand plant or machinery, etc.] (Subject to
certain conditions).
• However, if an asset is acquired and put to use for less than
180 days during the previous year, 50% of additional
depreciation shall be allowed in year of acquisition and
balance 50% would be allowed in the next year.
• Note:
• 1. Manufacturing unit should be set-up on or after April 1,
2015.
• 2. New plant and machinery should be acquired and installed
on or after April 1, 2015 but before April 1, 2020.
Tax deduction and Collection at Source

• The concept of TDS was introduced with

an aim to collect tax from the very source
of income.
• As per this concept, a person (deductor)
who is liable to make payment of specified
nature to any other person (deductee) shall
deduct tax at source and remit the same
into the account of the Central
Government.
 Consequences for default
• Where a person who is required to deduct tax
at source, does not deduct or does not pay or
after deducting fails to pay ,the whole or part
of tax as required by the act then such
person shall be deemed to assessee in
default in respect of such tax
• He will be liable for payment of tax, interest,
penalty and prosecution
• There will be disallowance of such payment
without deducting TDS
Payments on which TDS is applicable

• 1.Salaries-Section 192
• Any person responsible for paying any income
chargeable under the head salaries is required to
deduct tax at source on the amount payable.
• Tax is to be calculated at the rates prescribed for
the financial year in which the payment to
employees is made
• TDS certificate will be given in FORM NO 16
annually on or before May 31 after the end of the
financial year.
Payments on which TDS is applicable

• 2.Deduction of tax at source from interest other

than interest on securities-Section 194A
• Any person (not being an individual or HUF)who
is responsible for paying to a resident any
income by way of interest other than income
chargeable as interest on securities is required to
deduct income-tax @ 10% from the gross
interest.
• If the recipient does not have PAN then deductor
will deduct TDS @ 20%
• Tax will be deducted if interest exceeds Rs.5000
Payments on which TDS is applicable
• 3.Deduction of tax at source from payments to
contractors or sub-contractors-Section 194C
• Any person responsible for paying any sum to any
resident contractor for carrying out any work(including
supply of labour for carrying out any work)in pursuance
of a contract between a specified person and the
resident contractor is required to deduct tax at source.
• Tax is to be deducted at the time of credit of such sum
to the account of the payee or at the time of payment
thereon in cash by issue of cheque or by any other
mode, whichever is earlier
Payments on which TDS is applicable

• The expression, “work” in this section would include-

• a. Advertising
• b. Broadcasting and telecasting including production
of programs for such broadcasting or telecasting
• c. Carriage of goods and passengers by any mode
of transportation, other than railways
• d. Catering
• e. Manufacturing or supplying of a product according
to the requirement or specification of a customer by
using the materials purchased from such customer
Payments on which TDS is applicable

• A “sub-contractor” would mean any person:

a. Who enters into a contract with the contractor for
carrying out, or
b. For the supply of labor for carrying out the whole
or part of the work undertaken by the contractor
under a contract with any of the authorities or
c. For the supply of, whether wholly or partly, any
labor which the contractor has undertaken to
supply in terms of his contract with any of the
authorities mentioned under this section
Payments on which TDS is applicable

• a.  Where the payment is made by or on

behalf of the Government – On the same day.
• b.  Where the payment is made in any other
case than the government.
•  i.If the amount is credited in the month of
March – On or before April 30th
• ii. In Other months – Within 7 days from the
end of the month in which the deduction is
made.
Payments on which TDS is applicable

• Tax is not deductible under section 194C if the

following two conditions are satisfied:
• 1.the amount of any (single) sum credited or paid
(or likely) to be credited or paid) to the contractor
or sub-contractor does not exceed Rs.30,000
• 2.the aggregate amounts of such sums credited
or paid during the financial year does not exceed
Rs.1,00,000
• If the recipient is an individual/HUF TDS rate is
1%
• If the recipient is any other person TDS rate is 2%
Payments on which TDS is applicable

• In case of payments other than salary, TDS

certificates are to be issued on the
quarterly basis in Form No.16A. As per rule
31, every person responsible for deduction
of tax from payments other than salary has
to issue a quarterly TDS certificate in Form
No. 16A. The certificate is to be issued by
the following dates:
Payments on which TDS is applicable

Quarter Due date for Due date for

N o n - Government
G o v e r n m e n t deductor
deductor
April to June 30th July 15th August
July to 30th October 15th November
September
October to 30th January 15th February
December
January to 30th May 30th May
Payments on which TDS is applicable
• Section 194J – Fees for professional or technical
services
• The type of payments covered under this section are as
follows:
• 1. Professional fees
• 2. Fees for technical services
• 3. Remuneration paid to directors excluding salary (For e.g.,
sitting fees to attend board meetings)
• 4. Royalty
• 5.  Payments in the nature of non-compete fees (i.e., fees
paid to not carry on any business or profession for a specified
time and within certain geographical boundaries) or fees paid
to not share any technical knowledge or know-how.
 

Section 194J – Fees for professional or technical services


• Tax has to be deducted in case the

payment is greater than Rs. 30,000 during
the year. However, there is no such limit for
payments made to a director. The tax will
have to be deducted no matter how small
the amount.
 

Section 194J – Fees for professional or technical services


• Persons liable to deduct tax

• Every person, who is making a payment in the nature
of fees for professional or technical services is liable
to deduct tax at source with the following exceptions:
• 1. In case of an individual or HUF carrying on
business:  Where his turnover does not exceed  Rs.
1 crore during the previous financial year.
• 2. In case of an individual or HUF carrying on
profession:  Where his turnover does not
exceed  Rs. 50 lakh  during the  previous financial
year.
 

Section 194J – Fees for professional or technical services


• Rate of deduction of tax

• Any payment covered under this section
shall be subject to TDS at the rate of 10%.
• In case the payee does not furnish his PAN
then the rate of deduction would be 20%.
 

Section 194J – Fees for professional or technical services


• Time of deduction
• The tax should be deducted at the time of
passing such entry in the accounts or
making the actual payment of the expense,
whichever earlier.
 

Section 194J – Fees for professional or technical services


• Consequences of non-deduction or late deduction

• Not deducting the tax or late deduction of the tax has a two-fold
consequence:
• 1. Disallowance of a part of the expenditure: 30% of the expenditure
shall be disallowed in the year in which the expenditure is claimed (taken
to the profit and loss account) – however, the 30% disallowed shall be
re-allowed in the year in which the TDS is paid to the government.
• 2. Levy of interest until date of payment:  In case there is a delay in
the payment of tax, interest has to be paid along with the TDS to the
Government. The rate of interest is determined in the following manner:
• a. Where no deduction of tax has been made: Interest shall be payable
at  1%  per month/part of month from the date on which such tax was
required to be deducted up to the date of actual deduction.
• b.  Where tax has been  deducted but not paid  to the government:
Interest shall be payable at 1.5% per month/part of month from the date
on which such tax was deducted up to the date of payment to the
government.
 

Section 194J – Fees for professional or technical services


Non – Government
Government deductor
deductor
Payment made 7th day from the 7th day from the
before 1stMarch end of the month end of the month
Payment made in April 30th Payment of tax is
the month of made on the date
March of payment to the
payee but the
corresponding
challan is
deposited by the
7th day from the
 Tax collected at source (TCS)


• Tax collected at source (TCS) is the tax

payable by a seller which he collects from
the buyer at the time of sale. Section 206C
of the Income-tax act governs the goods
on which the seller has to collect tax from
the purchasers.
 

Goods covered under TCS provisions and rates applicable to
them


• When the below-mentioned goods are

utilized for the purpose of manufacturing,
processing, or producing things, the taxes
are not payable. If the same goods are
utilized for trading purposes then tax is
payable. The tax payable is collected by
the seller at the point of sale.
• The rate of TCS is different for goods
specified under different categories :
Type of Goods Rate

Liquor of alcoholic nature, 1%

made for consumption by
humans
Timber wood under a forest 2.5%
leased
Tendu leaves 5%

Timber wood by any other 2.5%

mode than forest leased

A forest produce other than 2.5%

Tendu leaves and timber

Scrap 1%

Minerals like lignite, coal and 1%

 

Classification of Sellers and Buyers for TCS


• There are some specific people or organizations who have

been classified as sellers for tax collected at source. No
other seller of goods can collect tax at source from the
buyers apart from the following list :
• 1. Central Government
• 2. State Government
• 3. Local Authority
• 4. Statutory Corporation or Authority
• 5. Company registered under Companies Act
• 6. Partnership firms
• 7. Co-operative Society
• 8. Any person or HUF who is subjected to an audit of
accounts under Income tax act for a particular financial year.
• only a few buyers are liable to pay the tax at
source to the sellers.
• Let us know who are those buyers:
• 1. Public sector companies
• 2. Central Government
• 3. State Government
• 4. Embassy of High commision
• 5. Consulate and other Trade Representation
of a Foreign Nation
• 6. Clubs such as sports clubs and social clubs
• TCS Exemptions
• Tax collection at source is exempted in the
following cases :
• 1. When the eligible goods are used for
personal consumption
• 2. The purchaser buys the goods for
manufacturing, processing or production and
not for the purpose of trading of those goods.
 Advance Payment of Tax
• It means paying a part of your tax in advance
• According to Section 208 of Income tax act, every
person whose estimated tax liability for the financial
year exceeds Rs.10,000 has to pay tax in advance.
• Salaried persons are not required to pay advance
tax, as the employer usually deducts tax at source
(TDS).
• However, if an employee has any other income other
than salary income for which tax has not been
deducted at source and the tax liability exceeds more
than Rs.10000, then advance tax must be paid.
 Advance Payment of Tax
• Professionals (self-employed),
businessmen and corporates will have to
pay taxes in advance as they typically
have taxable income that exceeds the
advance tax payment threshold.
 When to pay advance tax?


• The advance tax is to be paid in the following

 three instalments on the following dates:
• For Non-Corporate Assessee:
• On or before 15 September – not less than
30% of tax payable for the year.
• On or before 15 December – not less than
60% of tax payable for the year.
• On or before 15 March – not less than 100%
of tax payable for the year.
 

When to pay advance tax?


• For Corporate Assessee: 

• On or before 15 June – not less than 15%
of tax payable for the year.

On or before 15 September – not less than
45% of tax payable for the year.

On or before 15 December – not less than
75% of tax payable for the year.

On or before 15 March – not less than
100% of tax payable for the year.
 

Advance tax exemption


• Advance tax exemption

• According to Section 207 of the Act, a resident
senior citizen (an individual of age 60 years or
more) who does not have any income from
business or profession is not liable to pay
advance tax.
• For instance, a senior citizen may have various
sources of income such as rental income,
pension, interest from bank deposits, or
dividends.
 Advance tax exemption
• Senior citizens do not have to pay advance
tax, as these sources of income do not fall
under the income tax head of “income from
business or profession”.  
• Also, this exemption is provided
irrespective of the amount of income that a
senior citizen earns from a source other
than business or profession.
 Computation of Advance tax
• Step 1-Calculate the estimated total income
and tax payable thereon
• Step 2-Deduct TDS or TCS during the year
which is deducted or collected during the
year
• Step 3-The balance amount shall be the
amount the amount of advance tax payable
• Step 4 –In case of company it is payable in
four instalments
 Tax rates applicable for Domestic
Companies
• The following income tax rates are
applicable for domestic companies.
Turnover Details Tax Rate
Gross turnover upto 250 Cr. in the 25%
previous year
Gross turnover exceeding 250 Cr. in 30%
the previous year
 Tax rates applicable for Domestic
Companies
• Surcharge
• The income tax computed in accordance with
above rates, shall be increased by a surcharge.
• Taxable Income exceeding ₹ 1 Crore –  7%
of computed income tax.
• Taxable Income exceeding ₹ 10 Crores –
12% of computed income tax.
• Health & Education Cess
• Health and Education Cess is computed at 4%
of the total of Income Tax and Surcharge.
 

Due Date for Company Tax Return Filing


• All companies registered in India are

required to file income tax return on or
before the 30th of September. 
 Illustration
• Estimate the tax liability and Advance tax
liability for the FY 2018-19 for the following
company:
• The estimated Gross total Income is Rs.
45,70,000.
• TDS deducted during the FY 2018-19 is Rs.
60,000
• Assume gross turnover to be less than Rs.
250 cr