Q1. Explain the objectives of tax planning. Discuss the factors to be considered in tax planning.

Objectives of Tax Planning

The prime objectives of tax planning are:
a. Reduction of tax liability by utilising the benefits available in the tax laws.
b. Informed and pragmatic financial decisions: A person adds the dimension of tax incidence in his decision-making on
financial matters, and this helps him optimise his decisions.

c. Multi-dimensional investment decisions: In a democratic welfare state like India the government requires substantial
investment in infrastructure, education and healthcare. The tax laws give attractive benefits to investors in these areas;
and by taking up these investments one can contribute to nation-building and at the same time enjoy normal returns on
ones investment.
d. Discharging a citizens duty: No one likes to pay tax, and it is indeed a temptation to hide income earned and skip
paying income tax, or make purchases without bills and escape sales tax. But these are unlawful methods of reducing tax
liability and result in economic evils like black money. Tax planning provides the perfect avenue to remain a responsible
citizen while paying the least amount of tax.
e. Reducing pressure on the legal infrastructure: The long arm of the law invariably catches up with economic offenders,
but the process is tedious and puts an enormous burden on the legal system. This can be successfully prevented by
sensible tax planning.

1.5 Factors to be Considered in Tax Planning

The following factors are essential in effective tax planning.
1. Residential status and citizenship of the taxpayer: It is important for the taxpayer to know whether he is a resident or
a non-resident in a country in which he earns income. The number of days stay in the country is usually the deciding
factor for residential status. If a person resident in the US in a particular financial year earns income in India and pays tax
in India on such income, he can set it off against his tax liability in his tax return in the US. This kind of set off is subject to
Double Taxation Avoidance Agreement (DTAA) entered into by different countries with each other.
2. Heads of income/assets to be included in computing net income/wealth: Income Tax Act provides specific heads of
income under which income earned has to be declared; and Wealth Tax Act specifies the heads under which wealth has
to be declared. Knowledge of the items covered by each head of income/wealth is essential.
3. The tax laws: The basic Acts of law that stipulate taxes on income, wealth, products, etc. are the Income Tax Act, the
Wealth Tax Act and a set of indirect tax acts such as Sales Tax Act, Excise Act and Customs Act. These laws are amended
and improvised from time to time through notifications and circulars; and every year a Finance Act is passed during the
Central Budget and brings in significant changes. Knowledge of the relevant Acts and updates is essential.
4. Form v. Substance: The taxpayer should be focussed on the substance of a transaction, the real intent, and not only
with the form. He should at no time try to change the form for the only purpose of reducing or eliminating tax. It is often
seen that a transaction that in substance should result in a tax liability does not do so because it is structured in a
manner that allows it to escape the tax. For instance customs duty is payable on equipment being imported, but the
equipment is sought to be imported under an exempt chapter heading. Such actions are clearly illegal and to be
eschewed.

Question 2 . Explain the categories in Capital assets.

5.2.1 Categories of capital assets

For taxation purposes, the capital assets have been, divided into (a) short-term capital assets and (b) long-term capital
assets.
(a) Short-term capital assets: According to Section 2(42A), a short-term capital asset means a capital asset held by an
assessee for not more than:
a. 12 months before its transfer in case of company shares, (equity or preference), or any other security listed in a
recognized stock exchange, or units of UTI and mutual funds or a zero coupon bond, and
b. 36 months before its transfer in the case of any other asset
Capital gains arising from the transfer of short-term capital asset are called short-term capital gains.
(b) Long-term capital assets: Any capital asset other than a short-term capital asset is termed as a long-term capital
asset. Gains arising from the transfer of long-term capital assets are called long-term capital gains. Long-term capital
gains qualify for concessional tax treatment under the Income Tax Act.

Mr. C acquired a plot of land on 15th June, 1993 for 10,00,000 and sold it on 5th January, 2010 for 41,00,000. The
expenses of transfer were 1,00,000.
Mr. C made the following investments on 4th February, 2010 from the proceeds of the plot.
a) Bonds of Rural Electrification Corporation redeemable after a period of three years, 12,00,000
b) Deposits under Capital Gain Scheme for purchase of a residential house 8,00,000 (he does not own any house)
Compute the capital gain chargeable to tax for the AY2010-11.
Explanation of categories of capital assets
Calculation of indexed cost of acquisition
Calculation of long term capital gain
Calculation of taxable long term capital gain

Q3. Explanation of factors of capital structure planning

14.2.2 Major considerations in capital structure planning
Broadly, the following factors would be worth considering, while planning the capital structure.
1. Risk of two kinds, that is, financial risk and business risk: In the context of capital structure planning, financial risk is
more relevant. Financial risk is of two types:
(a) Risk of cash illiquidity: As a firm raises more debt, its risk of cash illiquidity increases. This is for two reasons. First,
higher proportion of debt in the capital structure increases the commitments of the company with regard to fixed

charges that is, interest on borrowed capital and instalments in which it has to be repaid. If the cash is not enough to
meet these commitments the company will be in a liquidity crunch.
(b) Risk of variation in the earnings to equity shareholders in relation to expectation: In case a firm has higher debt
content in capital structure, the risk of variations in expected earnings available to equity shareholders will be higher.
When there is a liquidity issue this will be adversely affected and the share prices of the company could take a beating.
2. Cost of capital: Cost of capital is an important consideration in capital structure decisions. It is obvious that a business
should be at least capable of earning enough revenue to meet its cost of capital and finance its growth.
3. Control: Along with cost and risk factors, the control aspect is also an important consideration in planning the capital
structure. When a company issues fresh equity, for example, it may dilute the controlling interest of the present owners.
4. Trading on equity: A company may raise funds either by issue of shares or by borrowing. Borrowings entail interest
cost, which is payable irrespective of whether there is profit or not. Returns to shareholders on the contrary arise only
when the company makes profits, but the return expected by them is much higher since they bring in risk capital. A
company is said to trade on equity when it brings in
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funds by borrowing at lower cost and thereby enhances the return to shareholders. This is also called Capital Gearing.
Capitalisation of a company is highly geared when the proportion of equity to total capitalisation is small and it is lowgeared when the equity capital dominates the capital structure.
5. Tax consideration: While dividend on shares is declared and paid out of profit after tax, interest paid on borrowed
capital is allowed as deduction for computing taxable income. Cost of raising finance through borrowing is deductible in
the year in which it is incurred. Thus, if interest is 12 per cent and the tax rate is 30 per cent, the companys effective
cost of interest is only 8.4 per cent (12%*[1-30%]). This important distinction between the tax treatments of the two
financing methods should play an important role in determining the sources of funds.
6. Government monetary and fiscal policy: The annual review by Reserve Bank of India, the nations central bank, gives
shape to the monetary policy for the subsequent 12 months, which takes into account issues such as inflation, economic
growth and sectoral aspects. This should be factoredinto a companys capital structure decisions. Similarly, rule changes
by the Securities and Exchange Board of India (SEBI) impact the share market and companies can take cues from these
changes on when to raise equity capital and when not to.
Explanation of dividend policy
14.3 Dividend Policy
Two approaches need to be considered simultaneously in dividend decisions:
1. Retention as a long-term financing decision: Payment of cash dividends reduces funds available to finance growth and
either restricts growth or forces the firm to find other financing sources. So a company might decide to retain earnings
if:
a) Profitable projects are available and need finance and
b) Capital structure needs infusion of equity funds, and a fresh issue of equity is not advisable.

With either of the guidelines, cash dividends are viewed as a remainder.

2. Dividend payment as an aid to maximisation of wealth: In this approach, a company recognises that favourable impact
of dividend payment on the market price of the share.
14.3.1 Factors affecting dividend decisions:
The two types of return from the purchase of common shares are:
1. Capital appreciation: The investor expects an increase in the market value of the common shares over time. For
example, if the stock is purchased at ` 40 and sold for ` 60, the investor realises a capital gain of ` 20.
2. Dividends: The investor expects at regular intervals distribution of the firms earnings.

Factors affecting dividend decisions

14.3.2 Key factors of dividend policy:

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The following tax considerations must be noted:
a) Meaning of dividend under Section 2 (22)
b) Tax treatment in the hands of shareholders
c) Tax deduction at source under Section 194
d) Tax on dividend
Dividends can be of three types:
a) Dividends declared by a domestic company
b) Dividends declared by a foreign company
c) Dividends or any other income distributed by Unit Trust of India.
Any amount declared, distributed or paid by a domestic company by way of dividends (interim or otherwise), out of
current or accumulated profits, is exempt in the hands of shareholders under Section 10 (33).
Deemed dividend: Dividend includes deemed dividend. Section 2 (22) defines the term dividend which includes the
following:
a) Any distribution of accumulated profits entailing the release of assets of the company.
b) Any distribution by a company of debentures, debenture stock, etc. to its shareholders and distribution of bonus
shares to preference shareholders to the extent of accumulated profits;

c) Any distribution made to the shareholders on a companys liquidation, to the extent of accumulated profit.
d) Any distribution to its shareholders on the reduction of capital to the extent of accumulated profits that arose after
31.3.1933, and
e) Any payment by a closely held company made by way of advance or loan to a shareholder with substantial interest
unless lending of money is a substantial part of the business of the company.
14.3.3 Tax aspects to be factored into dividend decision
The profile of a companys shareholders as taxpayers is an important factor in the dividend decision. In the case of a
widely-held company with a huge number of middle-class people as shareholders, it makes sense to pay good dividends
regularly as it may be a significant source of income for the shareholder. On the contrary, if the shareholders are
typically long-time investors at the top of the tax brackets they might favour plough-back of profit by the company and
consequent reduction in the cost of financing
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growth. If the shares are held by body corporates, payment of dividend gives rise to tax incidence and could be a
deterrent.
14.3.4 Types of dividend policies:
The firms dividend policy is formulated with two basic objectives in mind providing for sufficient financing and
maximising the wealth of the firms shareholders. Three of the more commonly adopted dividend policies are:
1. Constant payout ratio
2. Regular dividend rate
3. Low regular and extra dividend
Constant payout ratio: Payout ratio is the dividend per share divided by earnings per share. A constant payout ratio
means the company pays a constant percentage of net earnings as dividends. Dividends would therefore fluctuate with
earnings and could be volatile if the earnings vary widely.
Regular dividend rate: The regular dividend rate policy is based on the concept of a fixed rupee dividend in each period.
This policy provides the owners with positive information, thereby minimising the uncertainty. A variant of this policy is
to increase the dividend rate in steps, on achievement of threshold earnings.
Low regular and extra dividend policy: Some companies pay a regular, low dividend rate and an extra dividend when
earnings are higher than normal. This policy is especially common among companies that experience cyclical shifts in
earnings, as it distinguishes the two payments and the shareholder knows what to expect.

Question 4. X Ltd. has Unit C which is not functioning satisfactorily. The following are the details of its fixed assets:
Asset
Date of acquisition

Book value (` lakh)

Land
Goodwill (raised in books on 31st March, 2005)
Machinery
Plant
10th February, 2003
5th April, 1999
12th April, 2004
30
10
40
20
The written down value (WDV) is ` 25 lakh for the machinery, and 15 lakh for the plant. The liabilities on this Unit on 31st
March, 2011 are 35 lakh.
The following are two options as on 31st March, 2011:
Option 1: Slump sale to Y Ltd for a consideration of 85 lakh.
Option 2: Individual sale of assets as follows: Land ` 48 lakh, goodwill ` 20 lakh, machinery 32 lakh, Plant 17 lakh.
The other units derive taxable income and there is no carry forward of loss or depreciation for the company as a whole.
Unit C was started on 1st January, 2005. Which option would you choose, and why?
Computation of capital gain for both the options
Computation of tax liability for both the options
Conclusion

Question 5. Explanation of Service Tax Law in India

11.4 Service Tax
Service tax is a tax levied on services. There is no separate legislation for levy of service tax. The provisions of service tax
are contained in Chapter V of the Finance Act, 1994. Service tax is administered by the Central Excise department.

Service tax provisions are not applicable to the following:

Registration under service tax rules

Service tax registration is required if:
or financial
year 2012-13 the limit is Rs. 9 lakh).
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ay service tax being recipient of service under reverse charge.

Procedure for registration
The following steps must be performed in order to obtain a registration.
Step 1: Apply for registration in Form ST-1 to the Superintendent of Central Excise.
Step 2: Submit the required documents like PAN, Affidavit, Resident Proof, Partnership Deed in case of a firm,
Memorandum and Articles of Association in case of a company.
Step 3: The Superintendent of Central Excise will grant a certificate of registration in Form ST-2 within 7 days.
In case of providing multiple services, only one application is enough and it has to be mentioned in Form ST-1.
Taxable services
Service tax is levied on all services which are specified in the Finance Act, 1994 from time to time.
Service tax liability arises only after the service tax provider has registered himself/herself either compulsorily or
voluntarily. All persons who are registered under the service tax law are liable to pay service tax. Liability to pay service
tax may not arise even if the person is required by law to register.
Payment of service tax

quarter on or before 5th of the month following the quarter

ended June, September, and December every year; and for March, it has to be paid on or before 31st March.
f the following month and for
March they have to pay on 31st March.
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-13 is 12% plus 3% cess i.e. 12.36%.

-payment of service tax meaning payment online - is mandatory in case of all assessee who have paid ` 50 lakh or
more in the preceding or current financial year. Due date in case of e-payment for the month is 6th of the following
month and 31st March for the month of March. Service tax shall be paid through GAR-7 Challan.

Assessment and Returns

This process is known as self-assessment.

-yearly in Form ST-3. The half yearly due dates are:
o 25th October for the half year ending 30th September
o 25th April for the half year ending 31st March
the date of filing of original return.
Service tax is an important subject for everyone to understand, especially middle managers and senior managers in
Finance. We will therefore be tackling the concept of Tax in detail in unit 11.
Concept of Service Tax Credit
Service tax is also designed to avoid cascading effect of tax on tax. In other words the service tax paid by an assessee on
his/her input services can be set-off or deducted from the service tax to be collected and remitted by him/her on his/her
sales of services.
In case of business units who do not have service tax liability on the output services rendered by them for instance
export-oriented service companies the service tax paid on input services can be claimed back as refund. In the event, if
input service tax credit exceeds output service tax, the excess paid can be claimed in the subsequent period. This is akin
to the concept of carry-forward of tax credit in Income Tax.
Explanation of concept of negative list
12.3 The Concept of Negative List
A comprehensive and elaborate note from Tax Research Unit of the Ministry of Finance (Dept. of Revenue), issued on
16th March, 2012 sets the tone for a major paradigm shift in regard to service tax. To quote V. K. Garg (Joint Secretary),
budgetary changes relating to service tax this year are aimed at addressing a number of basic issues: simplicity and
certainty in tax processes, neutrality of business to tax by mitigating cascading, encouraging exports, optimizing
compliance. *DOF No. 334/1/2012-TRU]
A major change that has been effected from 1st June, 2012 is the concept of listing out the exclusions, instead of the
services to be taxed. Therefore any service that is not part of the exclusions automatically gets taxed.
The exclusions have been defined in two lists:
1. Negative list of services A list of 17 services that will be exempt from service tax, as per notification no. 19/2012-ST
dated 5/6/2012.

2. Exemptions under mega notification A list of 34 services have been notified for exclusion from service tax vide a
Mega notification N.12/2012 dated 17.03.2012 with effect from 1.7.2012.These are exemptions related to the kind of
services being provided. Apart from these, we have some other exemptions related to other aspects like scale and
geography. Select abatements are also provided for specified services.
Explanation of exemptions and rebates in Service Tax Law

12.6 Exemptions and Rebates in Service Tax Law

Exemptions (Section 93)
If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the
Official Gazette, or individual special order, exempt generally or subject to such conditions as may be specified, taxable
service of any specified description from the whole or any part of the service tax.
Rebate (Section 93A)
Where any goods or services are exported, the Central Government may grant rebate of service tax paid on taxable
services which are used as input services for the manufacturing or processing of such goods or for providing any taxable
services.
The rebate may be disallowed if the proceeds of export sales are not received within the time specified by Reserve Bank
of India.

Question 6
Meaning and explanation of customs duty
11.3 Customs Duty
Customs duty is the duty imposed on goods imported into the country. In the years before globalisation it was difficult
to import goods on account of stiff duty rates and procedures, especially for less developed and developing
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nations like India. Ajoke used to be that the word customs was said to come from Sanskrit kashtam meaning difficulty.
But the origin of the word is something else. Centuries ago, it was customary for a trader coming to sell his/her wares in
a particular kingdom to offer gifts to the king, and seek his approval to sell his/her goods in that kingdom. This
customary practice of gifts being collected by the Government has come to be called customs duty in the modern era.
The practice has now been extended to cover even exporters in the form of export duty.
Explanation of taxable events for imported, warehoused and exported goods
The Customs Act makes it clear that goods imported into or exported out of India create a taxable event in which
customs duty (import duty or export duty) becomes payable.

 The taxable event with respect to imports is the day of crossing of the customs
barrier and not the date on which goods land in India or enter its territorial waters.
The taxable event in case of warehoused goods is when goods are cleared from
customs-bonded warehouse by submitting sub-bill of entry.
Taxable event arises for exported goods when the proper officer makes an order
permitting clearance and loading of the goods for exportation under Section 51 of the Customs Act, 1962. It was
however held in India - UOI v. Rajindra Dyeing and Printing Mills (2005) 10 SCC 187 = 180 ELT 433 (SC) that taxable event
occurs when goods cross territorial waters of India.
Rate of duty and tariff valuation for imported goods:
Date for determining the rate of duty and tariff valuation of imported goods will depend upon the imported goods
cleared for home consumption and cleared for warehousing. The determination of appropriate rate of duty can be
explained with the help of the following example:
Imported goods
Clearance for home consumption
Clearance for warehousing
Clearance for home consumption:
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1) Bill of entry is presented before the entry inwards of the vessel or aircraft The rate of duty and tariff valuation
prevailing on the date on which entry inwards is granted or arrival of aircraft will be applicable.
2) Bill of entry is presented after the entry inwards of the vessel or aircraft The rate of duty and tariff valuation
prevailing on the date on which the bill of entry with respect to such clearance is presented will be applicable.
Clearance for warehousing:
The rate of duty and tariff valuation prevailing on the date on which a bill of entry for home consumption is presented
will be applicable.
Listing of duties in customs

Types of duties in customs:

ional customs duty

-dumping duty
Calculation of assessable value and customs duty.