UNIT 4

SALES TAX AND

CORPORATE TAX PLANNING

CORPORATE TAX PLANNING: TAX PLANNING Defined as an arrangement of ones financial and economic affairs by taking complete legitimate benefit of all deductions, exemptions, allowance and rebates so that tax liability reduces to minimum.
i.

Taking advantage of the legitimate concessions and exemptions provided in the tax

law and liability

ii.

thus

reducing

tax

Arranging business operations such that tax liability is reduced, i.e., when two method are possible to achieve an objective, select any one method which results in lower tax liability.

TAX EVASION: Means avoiding tax by illegal means, eg: by suppressing facts, not maintaining correct records, by falsifying facts, by false statements and would be punished in normal course. NEED FOR CORPORATE TAX PLANNING: Every transaction entered into by a businessman will have direct and immediate impact on the tax

liability of a person, carrying on the business from the angle of Income tax, as well as sales tax, exercise duty and custom duty. Exercise Duty Levied on exports & imports. Customs Duty Levied on production of commodities.

i.

ii.

Objectives of Tax Planning

a.

Increase in Disposable Income: Tax planning ensures the taxpayer to reduce tax liability by availing all deductions, exemptions, relief, and rebates permissible under the law, such that he has

greater share of income at his disposal. b. Shield Against High Taxation: There are several artificial disallowances and ceilings on expenses, denying the tax benefit even in case of genuine expenditure/ investment. c. Inequity in Tax Burden: Enables taxpayer to escape from inequities in the distribution of tax burden. In case of individuals the tax rates rise as the income rises and hence tax planning save from inequities. d. Maximum Deductions allowed to

minimal to Others. e. Avoidance of Litigation: It seeks to reduce the tax incidence by claiming deductions, exemptions, reliefs and rebates permissible. Through the knowledge of tax laws, makes one to minimize the tax liability as per the law and hence avoid litigations. f. Curb (control) on tax evasion : By getting all permissible benefits under the law, tax planning can curb the tax evasion.

Business Persons,

Income tax: Income Tax is one of the major sources of revenue for the Government. The responsibility for collection of income-tax vests with the Central Government. This tax is livable and collected under Income Tax Act, 1961. Income Tax is the levy of tax on all items of income which are not specifically exempted from tax. Income Tax is charged annually on the total income of every person for the previous year and

at the rates fixed by the relevant Finance Act.

Elements of tax management

Planning and execution of tax related matters, such as maintenance of books of account, compliance with audit requirements. Deduction of tax at source where necessary. Payment of installments of advance tax on time, Filing of tax returns on or before the due date,

Getting the assessment done.

Difference between TM and TP:

Tax Management
* It means planning of tax related matters, such as maintenance of books of accounts, getting them

Tax Planning
It is a wider term and includes tax management.

audited, filling of returns, appeals etc. * It is compulsory in case of every taxpayer. It is optional for the taxpayer.

* It has focus It essentially on the past, concerns itself present and the with the future. future. Distinguish between evasion and Tax planning. Tax

Evasion

Tax Tax Planning

Its means systematic

It means willful and

deliberate(Done consciously and intentionally) under-statement of income, overstatement of expenses/losses and underpayment of tax

arrangement s of affairs, with a view to minimize incidence of tax, in conformity with provisions of law.

It is It is an offence under the law, permissible liable to under law if it penalty/prosecutio is not by way n. of colorable device to short-circuit legal provisions.

It indicates bravado(boldness intended to impress) and devil-may-care attitude on the part of evader(escaper).

It indicates creative thinking and analytical ability on the part of planner. It leads to feel satisfaction .

It often leads to feel of guilty, fear of punishment and infamy. It results generation of unaccounted income/ wealth, often used for ostentatious

It results in economic development on desired lines.

living, smuggling, bribery.

DIRECT TAXES:Personal IT:- Levied on income of individual, HUF, unregistered firms and other associate of people. Income Tax act 1961:- It is the source of revenue for the govt. The responsibilities for collection of I.T vest with the central govt. It is leviable and collected under IT act 1961
i.

Corporate Tax:- Levied on the income the registered companies and corporations. Law gives exemptions so as to encourage the investment activity, particularly in certain socially productive directions.

ii.

Wealth Tax: - Minor source of revenue. Tax is levied on excess of net worth. Gift Tax: - Tax is charged in respect of gifts made by a person.

iii.

Gift includes: Any movable (or) immovable property, i. It should not contain any money (or) money with.
ii.

w.e.f 1-04-1987 a uniform rate at 30% on that value of all taxable gifts is charged. Customs Duty It is levied on both import and export. It is collected as a % of the price of the commodity.

INDIRECT TAXES:
i.

ii.

Exercise duty Levied on production of commodities.

On alcoholic liquors & narcotics Exercise duties are levied by the central govt & the revenue proceedings are shared by both state and central govt.
iii.

Value added tax :- It is levied on sale of services / goods with in the govt. On every transaction into different categories for deciding the rate of tax. Immovable properties are not covered under it. Sales Tax:- Only Levied on good.

iv.

CENTRAL SALES TAX ACT 1956:

Amended in 1956 - applicable and extended to whole of India.

i.

When CST is paid:It is paid when the movement of the goods from one state to another (or) in case of InterState trade.

ii. It is effected by the transfer of the document of title to the goods during their movement from one state to another. (Or)

iii.Payable on the sale of the goods by the dealer or Registered dealer.

Registration of dealers: Sec(007):a. Are required in the prescribed manner, before the end of the year, under the CST Act. For the purpose of registration, state govt is a authorized one by the central government. Back ground of CST:a. Sale tax is one of the most important indirect tax for the purpose of taxation by the govt.

b.

b. Revenues from CST goes to state from which movement of goods commences.
c.

CST is providing to be a hindrance in introducing the VAT

Reforms in indirect tax system:1.

Central Exercise:o MOD VAT (Ist April 1986)

o

CEN VAT (Central VAT Ist April 2000)

2.

State taxes:- (most of the state taxes) Some of the states notably, kerala, Karnataka and T.N has a multisystem of taxation, covering certain limited commodities.

The 2 reasons that gives raise to state taxes:i. Multiplicity of rates

ii.

Gives rise to state taxes

Numerous exemptions for commodities

3. Recent changes:

1/3/2006 An appeal to CST appellate Authority. 18/4/2006 LPG(Liquid petroleum gas) for domestic use is added to list of declared goods u/s 14 of CST Act to maintain CST Act to maintain tax rates at reasonable level. 1/4/2007 CST rate reduced to 3%. - Tobacco goods removed from list of declared goods.

1/6/2008 CST rate reduced to 2%.

Draw backs in existing system of sales tax: DRAWBACK OF CST:

1)

Cascading of taxes double taxation Rendering export uncompetitive(because of hidden tax system) Lack of transparency no proper system of taxation, no intensive control Narrow base- (due to the fact that under the single point tax system, the first seller constitute the base of taxation. The system fails to capture, the value addition at subsequent stages.)

2)

3)

4)

5) Multiplicity of rates interstate competition. (Includes entry tax, turnover tax, sales tax, exercise duty and other duty.)

6)

Numerous exemptions(on specified goods) Poor compliance Tenders to do what others want. (absence of any sort to avoid trials and over dependence on field work.)

7)

VALUE ADDED TAX :

It is replaced by sales tax. Multipoint tax systems were the value is added to a product (or) goods. (01/04/05) Concept: Tax is levied on the value added at each stage of production and distribution.
a)

Input tax paid by reg. dealers. Output tax changed by reg. dealers. Input tax Cr input tax paid on goods exported or eligible for refund, which in turn-over it will Cr for the customer.

b)

c)

VAT rate structure 1% on gold, silver, precious metal, gems, precious stones. 4% on essential goods and primary raw material 12.5% on goods not covered in any schedule.

NOTE: Naturally available products and unprocessed products are exempted from VAT. Methodology of VAT Primary producer Farmer Sale of wheat (A) - Rs.100 VAT payable @ 10% Rs.10(A) (B) Secondary producer Miller Input Rs.100 Value added Rs.200 Sale to baker Rs.300 VAT @ 10% Rs.30

Secondary producer (C) Baker Input Rs.300 Value added Rs.600

Sale to customer Rs. 900 VAT @ 10% State government collect VAT from A+B+C= (10+20+30) =90 Customer gross value Of purchase Rs.900 (+) VAT @ 10% Rs.90 Total purchase price Rs. 990 TOTAL purchaser price = = =

THE END