UNIT – 2: TAX PLANNING

Tax Planning is the arrangement of one’s financial affairs in such a manner that the tax planner
may either reduce the incidence of tax wholly or reduce it to the maximum possible extent as
may be permissible with the framework of the taxation area. It does not amount to evasion of tax
nor tax avoidance. It is an act of prudence and farsightedness on the part of the tax payer who is
entitled to reduce the burden of his tax liability to the maximum possible extent. Tax planning
implies keeping the incidence of tax at lowest possible point in a legal manner. Tax planning
minimizes incidence of tax in a legal framework by taking full advantages or complete legitimate
benefit of all exemptions, deductions, allowances, rebate, relief so that, tax liability reduces to
minimum.

Tax planning may 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. Tax planning is a significant component of a financial plan.
Reducing tax liability and increasing the ability to make contributions towards retirement plans
are critical for success.

Tax planning plays an important role in the financial growth story of every individual as tax
payments are compulsory for all individuals who fall under the IT bracket. With tax planning,
one will be able to streamline his/her tax payments such that he or she will receive considerable
returns over a specific period of time involving minimum risk. Also, effective tax planning will
help in reducing a person's tax liability.

In simple, tax planning means reduction of tax liability by the way of exemptions, deductions,
rebates and benefits.

Features of tax planning

a) Reduction in tax liability – One of the most important features of tax planning is to reduce
tax liability. Every individual or company would do their financial plan in order to reduce the
tax amount and save for their future plans.
b) Advance planning – One has to arrange his tax plans at the beginning of the financial year
because no one can plan to reduce his tax liability a day before filing an income tax return.

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c) Investment in the right direction – With the help of tax planning assesses can invest their
money in the right direction by choosing the right policy or investment type. Investment in
any assets or products can help in saving money from taxes; provided the investment is done
in the right sense.
d) Dynamic in nature – Tax planning has to be done every year because of the new
implementation of policies introduced by the government. One has to modify his tax plans at
the beginning of every financial year.
e) Adhering to tax compliance – Tax planning is an arrangement of financial resources to
reduce the incidence of tax by fully complying with the framework of income tax rules and
regulations. It is not an act of tax avoidance or tax evasion. Thus, there is no intention to
deceit the legal spirit of tax law.

Objectives of Tax Planning

1) Reduction of Tax Liability: An assesse can save the maximum amount of tax, by properly
arranging his/her operations as per the requirements of the law, within the framework of the
statute.
2) Minimization of Litigation: There is a war-like situation between the taxpayers and tax
collectors (or authorities). The taxpayers want the tax liability to be at its minimum while the
tax collectors attempt to extract the maximum. So, proper tax planning aims at conforming to
the provisions of the tax law, in such a way that incidence of litigation is minimized.
3) Productive Investment: One of the major objectives of tax planning is the channelization of
taxable income to different investment plans. It aims at the optimum utilization of resources
for productive causes and relieving the assesse from tax liability.
4) Healthy Growth of Economy: The growth and development of the economy greatly depend
on the growth of its citizens. Tax planning measures involve generating white money that
flows freely and results in the sound progress of the economy.
5) Economic Stability: Proper tax planning brings economic stability by various techniques
such as mobilizing resources for national projects or availing ways for investments which are
productive in nature.
6) Source for working capital: Tax planning can be a source of working capital cash inflow.
This is achieved by minimizing on tax liability and money available for expenses.

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Scope of Tax Planning

The scope of tax planning would be considering many factors for corporate in doing business
whereby tax payer attempts to reduce the maximum tax liability by making use of all available
deductions, allowances, exclusions, etc. feasible under law. The scope may include:

1. Location of the business

Many factors affect location of a business. They may be located in free trade zones or special
economic zones. They can take advantage of sections 10A/10AA/10B as permitted by IT laws in
deductions or exemptions. Companies can claim deductions u/s 80-IB in case of newly set up
industrial undertakings in an industrially backward state or district. Profits from industrial
undertaking located in specified States (Jammu & Kashmir, Himachal Pradesh, Uttaranchal and
North Eastern States) deduction of 100% of such profit is allowed u/s 80-IC. Similarly
deductions are allowed u/s 80-IE in respect of certain undertakings in North Eastern States.

2. Nature and size of business

Tax planning is also relevant while deciding upon the nature of business. There are certain
businesses which are granted special tax treatment. Some of them are as follows:
a) Newly established units in special economic zones [Section 10AA].
b) Newly established 100% export oriented undertakings (EOU) [Section 10B].
c) Specified business eligible for deduction of Capital Expenditure [Section 35AD].
d) Amortization of certain preliminary expenses [Section 35D].
e) Special provisions in the case of business of plying, hiring or leasing goods carriages
[Section 44AE].
f) Profit and gains of industrial undertakings or enterprises engaged in infrastructure
development. etc. [Section 80-IA].
g) Profits and gains of an undertaking or an enterprise engaged in development of Special
Economic Zone. [Section 80-IAB].
h) Profits and gains from certain industrial undertaking other than infrastructure development
undertaking [Section 80-IB].
i) Special provisions in respect of certain undertakings or enterprises in certain special
category States [Section 80-IC].

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j) Deduction in respect of profits and gains from business of hotels and convention centers in
specified area or a hotel at world heritage site. [Section 80-ID].
k) Special provisions in respect of certain undertakings in North Eastern States. [Section 80-
IE].
l) Profits and gains from the business of collecting and processing of bio-degradable waste
[Section 80JJA].

3. Forms of business organization and pattern of its ownership

The choice of the appropriate form of business organisation will have to be thought of and
decided by the person who intends to carry on business or profession at the beginning itself,
because a change in the form of business organisation after the commencement of the business,
may attract liability to tax. A new business can be organized in the form of Sole proprietorship,
Hindu undivided family, Body of Individuals, Partnership firm, Company etc.

Under sole proprietorship, the entire income of a business unit gets assessed in the hands of the
same person along with other income, while the entire loss and other allowances shall be
available for set off in his hands against other income. Income Tax at a flat rate of 30% is
levied on Partnership Firms. Computation of taxes as per Income Tax Slab Rates is not
allowed as the benefit of Slab Rates is only available to Individuals. Health and Education
Cess @ 4% would also be required to be paid. Moreover, if income of the partnership firm is
more than Rs. 1 Crore in any financial year, Surcharge @ 12% would also be payable.
However, companies will have altogether different tax slab pattern like 15% or 22% or 25%
or 30% along with surcharge of 7% or 12% depending on revenue and depending on the
nature of business different deductions and exemptions are available which is more wider in
scope than any other forms of business organization. Corporate also enjoy tax holiday for a
certain number o years under different sections like 80-IA or 80-IB etc.

For any large company requiring substantial investment and recourse to borrowed funds from
banks and institutions, a limited company type will be better suited. Within the company form of
organisation, again alternatives exist. On the basis of the ownership and control, a company can
either be organized as a widely held company, i.e. a company in which the public are
substantially interested or it can be organized as a closely held company, i.e. a company having
limited number of shareholders (or private ltd. companies).

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4. Specific management decisions like make or buy, own or lease, capital structure, renew or
replace, etc.
Assets may be purchased or taken on lease. Apart from tax angle other factors also are important
in taking lease or buy decisions like rate of change in technology. Lease Rental can be claimed as
deduction as revenue expenditure. However Depreciation cannot be claimed since assets are not
owned by the assesse. Depreciation on specified assets can be claimed as deduction u/s 32, the
Assets may be purchased outright or may be taken on loan. Where the asset is taken on loan
interest amount can either be claimed as revenue expenditure or can be capitalized. Also, the
repayment of loan can be spread over to a certain number of years as installments.

For a make or buy decision, it is quite natural every components or part of an item (like
automobiles) cannot be manufactured by one company. The parts or components manufacture
involves cost, time, energy, and different kinds of technology and expertise. Therefore, in such
cases company purchases parts from outside agencies. But where the cost involved in purchasing
from outside market is high, then the company might go in for in house production. If ‘Make or
Buy’ decision is taken for exporting goods then tax incentives are available u/s 80HHC
depending on whether goods are manufactured by taxpayer himself are exported or goods
manufactured by others are exported by the taxpayers.

The main tax consideration which has to be keep in mind is whether expenditure on repair,
replacement or renewal is deductible as revenue expenditure u/s 30, 31, or 37(1). If the
expenditure is deductible as revenue expenditure under these sections, then cost of financing
such expenditure is reduced to the extent of tax save. On the other hand if such expenditure is not
allowed as deduction u/s 30, 31 or 37(1) then it may be capitalized and on amount so capitalized
depreciation can be availed.

Capital structure decision is arriving at Optimum Capital Structure. An optimum capital structure
is a mix of equity capital and debt funds. Their composition depends upon factors like cost of
Capital and also expenditure incurred in raising of such capital, expectation of shareholders by
way of dividend, Taxation policy, and Rate of return on investment (Equity + Debt funds). As a
tax planning criteria, if the return on investment is > rate of interest, maximum debt funds may
be used, since it shall increase equity returns, and if rate of return on investment is < rate of
interest, minimum debt funds should be used.

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5. Amalgamation/Merger of Companies
The terms “Mergers and Acquisitions” are often used interchangeably. However, there are
differences. While, mergers means unification of two entities into one. Acquisition involves one
entity buying out another and absorbing the same. According to section 2(1B) of the Income Tax
Act, 1961, the term ‘amalgamation’ means: When one or more companies merge with another
existing company or two or more companies merge to form a new company, it is known as
amalgamation. If an amalgamation takes place within the meaning of section 2(1B) of the
Income Tax Act, 1961, the following tax reliefs and benefits shall available:-

A. Tax Relief to Amalgamating Company:

i) Exemption From Capital Gains Tax [Sec. 47(vi)]: Under section 47(vi) of the Income-tax Act,
capital gain arising from the transfer of assets by the amalgamating companies to the Indian
Amalgamated Company is exempt from tax as such transfer will not be regarded as a transfer for
the purpose of Capital Gain. However, two conditions must be satisfied; a). the scheme of
amalgamation satisfies the conditions of Section 2(1B) ; and b). the amalgamated company is an
Indian Company.

ii) Allotment of Shares in Amalgamated Company to Shareholders of Amalgamating Company

[SECTION 47(Vii)& 49(2)]:
Any transfer by a shareholder in a scheme of amalgamation of shares held by him in the
amalgamating company shall not be regarded as transfer if – a). transfer is made in consideration
of allotment to him of shares in the amalgamated company; and b). amalgamated company is an
Indian company. Section 49(2)-provides that in above case the Cost of Shares of the
amalgamating company shall be Cost of Shares to the amalgamated company.

B. Tax Relief to Shareholders of an Amalgamating Company:

Exemption from Capital Gains Tax [Sec 47(vii)] Under section 47(vii) of the Income-tax Act,
capital gains arising from the transfer of shares by a shareholder of the amalgamating companies
are exempt from tax as such transactions will not be regarded as a transfer for capital gain
purpose, if: a). The transfer is made in consideration of the allotment to him of shares in the
amalgamated company; and b). Amalgamated company is an Indian company.

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C. Tax Relief to Amalgamated Company:
a) Carry Forward and Set Off of Accumulated loss and unabsorbed depreciation of the
amalgamating company [Sec. 72A]: Section 72A of the Income Tax Act, 1961 deals with the
mergers of the sick companies with healthy companies and to take advantage of the carry
forward of accumulated losses and unabsorbed depreciation of the amalgamating company. But
the benefits under this section with respect to unabsorbed depreciation and carry forward losses
are available only if the followings conditions are fulfilled:-
There should be an amalgamation of – (a) a company owning an industrial undertaking or
ship or a hotel with another company, or (b) a banking company referred in section 5(c) of
the Banking Regulation Act, 1949 with a specified bank, or (c) one or more public sector
company or companies engaged in the business of operation of aircraft with one or more
public sector company or companies engaged in similar business.
b) The amalgamated company should be an Indian Company. c) The amalgamating company
should be engaged in the business, in which the accumulated loss occurred or depreciation
remains unabsorbed, for 3 years or more. d) The amalgamating company should hold
continuously as on the date of amalgamation at least three-fourth of the book value of the fixed
assets held by it two years prior to the date of amalgamation. e) The amalgamated company
holds continuously for a minimum period of five years from the date of amalgamation at least
three-fourths in the book value of fixed assets of the amalgamating company acquired in a
scheme of amalgamation f) The amalgamated company continues the business of the
amalgamating company for a minimum period of five years from the date of amalgamation. g)
The amalgamated company fulfils such other conditions as may be prescribed to ensure the
revival of the business of the amalgamating company or to ensure that the amalgamation is for
genuine business purpose. h) The amalgamated company, which has acquired an industrial
undertaking of the amalgamating company by way of amalgamation, shall achieve the level of
production of at least 50% of the installed capacity of the said undertaking before end of four
years from the date of amalgamation and continue to maintain the said minimum level of
production till the end of five years from the date of amalgamation. The Central Government
may relax above condition in desired situations.

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6. Double Taxation relief
The Double Tax Avoidance Agreement (DTAA) is essentially a bilateral agreement entered into
between two countries. The basic objective is to promote and foster economic trade and
investment between two Countries by avoiding double taxation.

The need for Agreement for Double Tax Avoidance arises because of conflicting rules in two
different countries regarding chargeability of income based on receipt and accrual, residential
status etc. As there is no clear definition of income and taxability thereof, which is accepted
internationally, an income may become liable to tax in two countries. In such a case, the two
countries have an Agreement for Double Tax Avoidance, in which case the possibilities are:
a. The income is taxed only in one country.
b. The income is exempt in both countries.
c. The income is taxed in both countries, but credit for tax paid in one country is given
against tax payable in the other country.

In India, The Central Government, acting under section 90 of the Income Tax Act, has been
authorized to enter into double tax avoidance agreements (hereinafter referred to as tax treaties)
with other countries. The Provisions of DTAA override the general provisions of taxing statute
of a particular country. It is now well settled that in India the provisions of the DTAA override
the provisions of the domestic statute.

7. Advance Rulings
The scheme of advance rulings was introduced by the Finance Act, 1993. Chapter XIX-B of the
Income-tax Act, which deals with advance rulings, came into force with effect from 1-6-1993.
Under the scheme the power of giving advance rulings has been entrusted to an independent
adjudicatory body. Accordingly, a high level body headed by a retired judge of the Supreme
Court has been set-up. This is empowered to issue rulings, which are binding both on the
Income-tax Department and the applicant. The procedure prescribed is simple, inexpensive,
expeditious and authoritative.

Advance Ruling means written opinion or authoritative decision by an Authority empowered to

render it with regard to the tax consequences of a transaction or proposed transaction or an
assessment in regard thereto. It has been defined in section 245N(a) of the Income-tax Act, 1961

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as amended from time-to-time. The broad objective for setting up such an authority is to provide
certainty in tax liability in advance in relation to an activity proposed to be undertaken.

An application (in quadruplicate) for advance ruling shall be made by a resident applicant, for
determination of his tax liability arising out of one or more transactions valuing Rs. 100 crore or
more in total which has been undertaken or is proposed to be undertaken by him in Form No.
34DA.

Types of Tax Planning

a) Permissive Tax Planning: This is one of the most common types of tax planning since it is
made exactly as per the provision of the Income Tax Act. It is by taking the advantage of
various deductions, rebates etc. that are allowed. For example: Exemptions u/s 10,
Deductions u/s 80C / CCD, 80D etc.
b) Purposive Tax Planning: When a taxpayer wants to plan taxes with a particular financial goal
in mind, it is known as purposive tax planning. For example: Retirement purpose,
replacement of asset etc.
c) Short-range/Long-range Tax Planning: If a taxpayer plans investments and savings based on
the exemptions, benefits, allowances and deductions laid out in the tax laws, with a short-
range or long-range goal in mind, it is known as short-range or long-range tax planning. In
India tax-saving investments are available with a multi-year lock-in period during which
redemption is not allowed. Currently ELSS (equity linked savings schemes) has the shortest
lock-in period of 3 years.

Tax Management
Tax Management deals with the proper maintenance of financial records, audit of accounts,
timely filing of the return, payment of taxes and appearing before the appellate authority,
whenever required. Tax Management is an art of handling the financial affairs, while complying
with the tax provisions, so as to avoid the payment of interest and penalties.

Tax Avoidance
Tax avoidance is the use of legal methods to minimize the amount of income tax owed by an
individual or a business. This is generally accomplished by claiming as many deductions and

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credits as is allowable. It may also be achieved by prioritizing investments that have tax
advantages, such as buying government/municipal bonds.

Tax avoidance is the legitimate minimizing of taxes and maximizes after-tax income. Businesses
avoid taxes by taking all legitimate deductions and tax credits and by sheltering income from
taxes by setting up employee retirement plans and other means, all legal. Here, one makes use of
shortcomings and loopholes in the law unfairly for personal benefit. Common examples of tax
avoidance include contributing to a retirement plan, PPF, charitable contributions etc.

Tax Evasion

Tax evasion, on the other hand, is using illegal means to avoid paying taxes. Tax evasion
involves breaking the law, not paying one’s taxes where the law clearly states that they must be
paid. Usually, tax evasion involves hiding or misrepresenting income. This might be under-
reporting income, inflating deductions without proof, hiding or not reporting cash transactions,
or hiding money in offshore accounts.

Tax evasion is part of an overall definition of tax fraud, which is illegal intentional non-payment
of taxes. Fraud can be said as "an act of deceiving or misrepresenting," and that's what the
taxpayers by evading taxes do. Tax evasion is illegal and heavy penalty is levied if caught.

Examples of Tax Evasion/Tax Fraud Practices:

 Under-reporting income (claiming less income than actually received from a specific
source, particularly cash income.
 Not reporting an income source.
 Providing false information about business income or expenses
 Overstating the amount of deductions.
 Keeping two sets of books.
 Making false entries in books and records.
 Claiming personal expenses as business expenses.
 Claiming false deductions without having documents to support them.

The methods for tax savings scheme are the Tax Planning, Tax Avoidance and Tax Evasion.

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Difference between tax planning and tax avoidance

a) Nature: On a fundamental level, both tax planning and tax avoidance are two techniques of
minimizing your tax liability. Both methods are legal but that’s where the similarities end.
b) Legality: Yes, tax avoidance can be legal. However, while tax planning is the moral thing to
do, tax avoidance is unethical.
c) Objective: The objective of tax planning is to decrease your tax liability by using the existing
provisions of the law. On the other hand, the aim of tax avoidance is to dodge your tax
payments by taking advantage of loopholes in the law.
d) Benefits: The benefits of tax planning generally emerge in the long term. For example, the
government has introduced tax benefits on various investment avenues like mutual funds and
provident funds. This encourages people to invest money for the long term and reap the
benefits. But the benefits of tax avoidance are generally in the short term. If the government
addresses the loopholes and amends the tax law, you may no longer benefit from them
legally.

Difference between Tax Planning and Tax Management

Tax Planning Tax Management
(i) The Objective of Tax Planning is to The objective of Tax Management is to comply
minimize the tax liability with the provisions of Income Tax Law and its
allied rules.
(ii) Tax Planning also includes Tax Tax Management deals with filing of Return in
Management time, getting the accounts audited, deducting
tax at source etc.
(iii) Tax Planning relates to future Tax Management relates to Past, Present, and
Future.
Past – Assessment Proceedings, Appeals,
Revisions etc.
Present – Filing of Return, payment of advance
tax etc.
Future – To take corrective action
(iv) Tax Planning helps in minimizing Tax Tax Management helps in avoiding payment
Liability in Short-Term and in Long Term. of interest, penalty, prosecution etc.
(v) Tax Planning is optional. Tax Management is essential for every assesse.

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Difference between tax avoidance and tax evasion

Tax Avoidance Tax Evasion

(i) Where the payment of tax is avoided Where the payment of tax is avoided
though by complying with the provisions of through illegal means or fraud is termed as
law but defeating the intention of the law is tax evasion.
known as tax Avoidance.
(ii) Tax Avoidance is undertaken by taking Tax evasion is undertaken by employing
advantage of loop holes in law unfair means
(iii) Tax Avoidance is done through not Tax Evasion is an unlawful way of paying
malafied intention but complying the provision tax and defaulter may be punished.
of law.
(iv) Tax Avoidance looks like a tax planning Tax evasion is blatant fraud and is done
and is done before the tax liability arises. after the tax liability has arisen.

Promotion of a business

Promotion is the stage of getting an idea of forming a company to do a business and working on
that idea. The person involved in this task is termed as promoter. The promoter may work up the
idea with the help of his own resources or competence or may, take the help of technical and
legal expert to bring company into existence. Tax planning to promote new business involves
several considerations to be taken note of, like:

Startup expense – professional charges paid for incorporation, drafting of MOA and AOA,
Printing cost of documents, fees paid to ROC, stamp duty etc.

Salary to director – For example, Let us say XYZ private limited company is making a profit of
5 lacks which is to be shared among the founder/director in equal ratio. So instead of showing
2.5 lakhs as profit-sharing; one can show salary of Rs. 2.5 lakhs to each director. The result of
the same will be that taxation on XYZ Pvt Ltd will be nil as there is no profit left and also no
taxation on salary also as there is no tax up to income of Rs. 2.5 lakhs for an individual.

Sitting fees to director– The rules notified under section 197 of companies act 2013 says, “a
company may pay sitting fee to a director for attending meetings of board or committee thereof.
Such sums as may be decided by the BOD thereof which shall not be exceed 1 lakh per meeting
of the board or committee thereof.” As per section 194J of income tax act, 1961, TDS on any
remuneration or fees or commission shall be liable to be deducted @ 10%.

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Rent Expense – It is wise to make a rent agreement in name of owner, then transfer rent and to
show rent as expense in company’s book which eventually has impact on profits and reduction in
tax liability.

Capitalization – When equipment for office like laptop, printer, furniture etc. is purchased, the
same should be shown as fixed asset in books which gives tax benefits over the years.

Entertainment Expense – Rebates are allowed on such expenses (entertaining clients/customers)

where bills are charged to accounts maintained and thus saving in tax.

Family member’s salary– Whenever you start a business, you usually look for assistance and
guidance from your family members and friends. In fact some family member usually help you
in your business throughout your struggle and they are not doing it for any monetary benefits.

Filing return on time – It is allowed to carry forward business income losses for a consecutive
period of 8 years, and it can be set off against the income earned in the coming years if it cannot
be adjusted in the current year. This benefit is available only when tax returns are filed on or
before the tax filing due date.

Tax Planning with reference to new business

Tax Planning is significant for purposes of reduction in tax liability, reduction in costs and for
entrepreneurship development. Opportunities in the form of various tax incentives, concessions,
rebates and reliefs have been provided by Income Tax Act 1961 to the prospective entrepreneurs,
investors and people to set –up new business undertakings. When a person wants to set-up a new
business undertaking, he has to update his knowledge with regard to location, nature and size of
business, form of business organisation and capital structure to avail the maximum tax benefits.
With reference to tax planning for new business, there are various tax incentives, concessions,
exceptions and reliefs available under the provisions of Income Tax Act 1961, such as:

1. New Business Undertakings in Special Economic Zones (Section 10 AA): An entrepreneur

who has started a new business undertakings in Special Economic Zone to manufacture or
produce articles or things or provide service on or after 1-4-2006 for the purpose of exporting to
other countries, shall be allowed deduction from his total income provided he must fulfill all the
essential conditions as specified under this section 10AA. Deduction under this section is

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available to all categories of assesses being entrepreneurs viz., individuals, firms, companies, etc.
who derive any profits or gains from such undertakings for a total period of 15 years. 100 percent
of the profits and gains derived from the export of such articles or things or from services for the
5 consecutive assessment years beginning with the assessment year relevant to the previous year
in which the units begins to manufacture such articles or things or provide services shall be
allowed as deduction. 50 percent of profits or gains of such undertaking for the next 5
consecutive years shall be allowed as deduction. 50 percent of profit of such undertaking for the
next 5 consecutive years shall be allowed as deduction provided the conditions mentioned in
section 10AA (2) are satisfied.

2. New Undertaking or Enterprise engaged in Infrastructure Development (Section 80 IA): A

new undertaking, owned by a company or consortium of companies registered in India., or by an
authority or a board or a corporation or any other body established or constituted under any
Central or State Act , starts operating and maintaining the infrastructure facility on or after 1st
April, 1995 but before 01.04.2017, shall be allowed deduction from its total income provided it
must fulfill all essential conditions as specified under this section 80IA. Infrastructure facility
means (a) a road including toll road, bridge or a rail system., (b) a highway project including
housing or other activities being an integral part of the highway project., (c) a water supply
project, water treatment system, irrigation project, sanitation and sewerage system or solid waste
management system., (d) a port, airport, inland water ways or inland port or navigation channel
in the sea. 100 percent of the profits from such undertaking is eligible for deduction for a period
of 10 consecutive assessment years from initial assessment year in which it begins to operate.
The deduction will be available for any ten consecutive assessment years out of 20 years
beginning with the year in which the undertaking begins to operate. It will be available for any
ten consecutive assessment years out of 15 years instead of 20 years beginning with the year in
which undertaking begins to operate and develop port, airport, inland waterways or inland port.

3. New Undertaking engaged in business of Generation or Generation and Distribution of Power

(Section 80 IA(4)(iv)): A new undertaking will be eligible for deduction under this section 80-
IA(4)(iv) if it: (a) begins to generate and distribute power on 1-4-1993 but before 1-4-2017 in
any part of India; (b) starts transmission or distribution by laying a network of new transmission
or distribution lines at any time during period beginning on 1-4-1999 and ending on 31-3-2017;

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(c) undertakes substantial renovation and modernization of existing transmission or distribution
lines at any time during period of 1-4-2004 to 31-3-2017. 100 percent of the profits from such
undertaking for a period of 10 consecutive assessment years out of 15 years beginning with the
year in which the undertaking generates power or commences transmission or distribution of
power provided it must fulfill all the essential conditions as specified under this section 80-IA(4)
(iv).

4. New Undertaking engaged in the business of Hotel (Section 80 ID): A new undertaking
engaged in the business of hotel (two-star, three star or four-star category) has started or starts
functioning in the specified district having a World Heritage Site on or after 01-04-2008 but
before 31-3-2013, shall be allowed deduction from its total income provided it must fulfill all the
essential conditions as specified under this section 80 ID. 100 percent of the profits and gains
from such business for five consecutive assessment years from the initial assessment year in
which it begins to operate.

5. New Undertakings in North Eastern States (Section 80- IE): New undertakings carry on
eligible business will be eligible for deduction under this section 80-IE if it: (i) begin to
manufacture or produce any eligible articles or thing; (ii) to undertake substantial expansion to
manufacture or produce any eligible articles or thing in North Eastern States during the period
beginning on 1-4-2007 and ending before 1-4-2017 provided certain essential conditions under
this section 80-IE might have been fulfilled. 100 percent of the profits derived from such
business for 10 consecutive years commencing with the initial assessment year. Eligible business
under this section means (a) Hotel (not blow two star); (b) adventure and leisure sports including
ropeways; (c) providing medical and health services in the nature of nursing home with a
minimum capacity of twenty-five beds;(d) old-age home; (e) operating vocational training
institute for hotel management, catering and food craft entrepreneurship development, nursing
and Para-medical, civil aviation related training ,fashion designing and industrial training;(f)
running information technology related training centre; (g) manufacturing of information
technology hardware and (h) bio-technology.

It is therefore clear that Govt. of India is encouraging starting of new export business in SEZ,
engaging in infrastructure development, engaging in business of power generation and

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distribution, world heritage sites, emergence and promotion of new undertakings carry on
eligible business in North Eastern States and backward districts by providing tax deductions.

Tax Planning for industrial undertakings in infrastructural development

Tax holiday under section 80-IA, 80-IB, 80-IC, 80-ID and 80-IE are available to assesses who
are engaged in providing infrastructure development facility and other activities. The details are
available in chapter-1 from page No.50.

Double Taxation Treaties

To finance the welfare and the administrative expenditure, governments around the world
impose certain taxes on their tax payers. In global economy, where international economic
activity is carried out, it is important to identify and justify the appropriate jurisdiction of tax
authorities. In order to avoid the hardships of multiple jurisdictions, the Governments enter into
bilateral arrangements, which are commonly denoted as “Double Taxation Avoidance
Agreements” (DTAA).

Double taxation is the levying of tax by two or more jurisdictions on the same declared income
(in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the
case of sales taxes). This double liability is often mitigated by tax treaties between countries.

Double Taxation Avoidance Agreements

DTAA refers to an accord between two countries, aiming at elimination of double taxation.
These are bilateral economic agreements wherein the countries concerned assess the sacrifices
and advantages which the treaty brings for each contracting nation. It would promote exchange
of goods, persons, services and investment of capital among such countries. Indian Government
is actively pushing DTAA negotiations with several countries to help its residents in
understanding their tax jurisdictions and accountability towards the appropriate authorities. The
nature of DTAA entered by India is greatly diverse in their nature and contents.

Section 90 is for taxpayers who have paid the tax to a country with which India has signed
DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which
India has not signed a DTAA. Thus, India gives relief to both kinds of taxpayers.
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Objectives

DTAA treaties must help in avoiding and alleviating the burden of double taxation prevailing in
the international arena. The tax treaties must clarify the taxpayer to know with certainty of
his potential tax liability in the country, where he is carrying on economic activities. Tax Treaties
must ensure that there is no prejudice between foreign tax payers who has permanent enterprise
in the source countries and domestic tax payers of such countries. Treaties are made with the aim
of allocation of taxes between treaty nations and the prevention of tax avoidance. The treaties
must also ensure that equal and fair treatment of tax payers having different residential status,
resolving differences in taxing the income and exchange of information and other details among
treaty partners.

Fringe Benefit Tax

Fringe Benefits Tax (FBT) is the taxation of most, but not all fringe benefits, which are generally
non-cash employee benefits. The taxation of perquisites or fringe benefits - provided by an
employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax.
Any benefits - or perks – that employees (current or past) get as a result of their employment are
to be taxed, but in this case in the hands of the employer. This includes employee compensation
other than the wages, tips, health insurance, life insurance and pension plans.

Fringe benefits as outlined in section 115WB of the Finance Bill mean any privilege, service,
facility or amenity directly or indirectly provided by an employer to his employees (including
former employees) by reason of their employment. They also include reimbursements, made by
the employer either directly or indirectly to the employees for any purpose, contributions by the
employer to an approved superannuation fund as well as any free or concessional tickets
provided by the employer for private journeys undertaken by the employees or their family
members.

What are these fringe benefits that will be taxed?

As per the Finance Bill, fringe benefits shall be deemed to have been provided if the employer
has incurred any expense or made any payment for the purposes of:

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(a) Entertainment (b) festival celebrations (c) gifts (d) use of club facilities;(e) Provision of
hospitality of every kind to any person whether by way of food and beverage or in any other
manner, excluding food or beverages provided to the employees in the office or factory (f)
maintenance of guest house (g) conference (h) employee welfare (i) use of health club, sports
and similar facilities (j) sales promotion, including publicity (k) conveyance, tour and travel,
including foreign travel expenses (l) hotel boarding and lodging (m) repair, running and
maintenance of motor cars (n) repair, running and maintenance of aircraft (o) consumption of
fuel other than industrial fuel (p) use of telephone (q) scholarship to the children of the
employees.

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