1 Financial Management Decisions

Financial Management is concerned with the acquisition and utilization of

capital funds in meeting the financial needs and overall objectives of a
business enterprise. Thus the primary function of finance is to acquire capital
funds and put them for proper utilization, with which the firm’s objectives are
fulfilled. The firm should be able to procure sufficient funds on reasonable
terms and conditions and should exercise proper control in applying them in
order to earn a good rate of return, which in turn allows the firm to reward
the sources of funds reasonably, and leaves the firm with good surplus to
grow further. These activities viz. financing, investing and dividend payment
are not sequential they are performed simultaneously and continuously.

Three Major Decisions in Financial Management

The Financial Management can be broken down in to three major decisions
or functions of finance. They are: (i) the investment decision, (ii) the
financing decision and (iii) the dividend policy decision.

1. Investment Decisions

The investment decision relates to the selection of assets in which funds will
be invested by a firm. The assets as per their duration of benefits, can be
categorized into two groups.

2. Finance Decisions

The second major decision involved in financial management is the financing

decision, which is concerned with the financing — mix or capital
structure of leverage. The term capital structure refers to the combination of
debt (fixed interest sources of financing) and equity capital (variable —
dividend securities/source of funds). The financing decision of a firm relates
to the choice of the proportion of these sources to finance the investment
requirements. A higher proportion of debt implies a higher return to the
shareholders and also the higher financial risk and vice versa. A proper
balance between debt and equity is a must to ensure a trade—off between
risk and return to the shareholders. A capital structure with a reasonable
proportion of debt and equity capital is called the optimum capital structure.

3. Dividend Policy Decisions

The third major decision of financial management is relating to dividend

policy. The firm has two alternatives with regard to management of profits of
a firm. They can be either distributed to the shareholder in the form of
dividends or they can be retained in the business or even distribute some
portion and retain the remaining. The course of action to be followed is a
significant element in the dividend decision.

2. Tax Planning with respect to Managerial decisions

The survival of a organization depends up on the efficiency of its management. Whatever decisions
taken by the management directly or indirectly affects all activities of an Organization. Therefore,
through this article, wants to simplify implications of Income Tax provisions on managerial decisions
The general considerations which area applicable in the case of Managerial decisions are
a. Expenses allowed as deduction
b. Year in which it is allowable
c. To what extend it is allowed
d. To what extend it can be carried forward

Following are the special cases

I. Shut down or continue operations Sometime business is forced to shut down due to the
following reasons–
a. Fall in demand
b. financial problems
c. Change in technology
d. High rate of taxation
e. Mismanagement
f. Pressure of commercial banks
Tax provisions
Following are the important points which are to be considered by an assesse while taking Shut
down and continue decisions
1. Treatment of losses and unabsorbed depreciation A. Business Loss. If the business or profession
has been discontinued loss, can be carried forward and set-off against profits and gains of business
or profession. B. Unabsorbed depreciation i. It can be set off against income under any head ii. Can
be carried forward and off for indefinite period, whether business is carried on or discontinued.
2. If a part of a business is discontinued in the previous year, it cannot be regarded as
discontinuation of business in the previous year.
3. The loss can be set-off by the same person who has suffered the loss. a. The assesse is entitled
to the set-off of his loss carried forward from the previous year against the income of wife and minor
child included in his income b. loss by amalgamating companies cannot be se-off by the
amalgamated company except as per Sec 72 A c. loss suffered by the HUF in its business cannot
be set-off by the members after partition of the family d. When a partner dies or retires,his share of
loss cannot be set-off and carried forward by the reconstituted firm
4. Withdrawal of certain deductions. The following deductions will be withdrawn and liable to tax in
the year in which business is discontinued a. Deduction under Section 33AB—-Tea Development
Account /Coffee Development Account. b. Deduction under Section 115VT—Reserve for Shipping
Business.
5. Deemed Income If the assets used for scientific research and Family Planning are sold, the selling
price to the extent of deduction claimed shall be deemed as profits of the previous year in which
such assets are sold.
6. Sale of depreciable assets At the time of sale, there may be short –term capital gain or Short-term
capital loss If Net Consideration >W.D.V, Then short –term capital gain. Otherwise Short-term capital
loss. Short –term capital gain is taxable. Short-term capital loss can be set –off against capital gains
only
7. Sale of other assets In the case of other assets , there may be long-term capital gain or short –
term capital gain or long-term capital loss or short –term capital loss .
3 Double taxation
Double taxation is a tax principle referring to income taxes paid twice on the
same source of income. It can occur when income is taxed at both the
corporate level and personal level. Double taxation also occurs in
international trade or investment when the same income is taxed in two
different countries. It can happen with 401k loans.
How Double Taxation Works
Double taxation often occurs because corporations are considered separate
legal entities from their shareholders. As such, corporations pay taxes on
their annual earnings, just like individuals. When corporations pay out
dividends to shareholders, those dividend payments incur income-tax
liabilities for the shareholders who receive them, even though
the earnings that provided the cash to pay the dividends were already taxed
at the corporate level.1
Double taxation is often an unintended consequence of tax legislation. It is
generally seen as a negative element of a tax system, and tax authorities
attempt to avoid it whenever possible.
Most tax systems attempt, through the use of varying tax rates and tax
credits, to have an integrated system where income earned by a corporation
and paid out as dividends and income earned directly by an individual is, in
the end, taxed at the same rate. For example, in the U.S. dividends meeting
certain criteria can be classified as "qualified" and as such, subject to
advantaged tax treatment: a tax rate of 0%, 15% or 20%, depending on the
individual's tax bracket. The corporate tax rate is 21%, as of 2022.
 Double taxation refers to income tax being paid twice on the same
source of income.
 Double taxation occurs when income is taxed at both the corporate
level and personal level, as in the case of stock dividends.
 Double taxation also refers to the same income being taxed by two
different countries.
 While critics argue that dividend double taxation is unfair, advocates
say that without it, wealthy stockholders could virtually avoid paying any
income tax.
4. Special tax provison
Special tax provisions refer to provisions drafted in any branch of law to
facilitate smooth functioning of a beneficial tax provision. From time to time, the
Central and State Governments come up with certain schemes for the promotion
of trade, commerce and welfare. In order to ensure a smooth tax functioning of
such schemes, they draft special tax provisions.

For example, under Income Tax Act special tax provisions w.r.t. SEZ, Export
Oriented Units etc. have been framed. Under the Central Excise Act, Indian
Customs Act, rules have been framed w.r.t. export benefits, export duty
concessions.

In relation to tax benefits for exporters some of the following beneficial

provisions have been drafted. Under Central Excise Rules, 2002 Rule 18 and
Rule 19 has been framed to provide rebate on duty paid on goods and inputs
respectively. Further under Indian Customs Act, Duty Drawback u/s 72 has been
framed on goods and inputs used for export of goods have been framed. Also,
tax benefits have been also framed in the Foreign Trade Policy under the
Director General of Foreign Trade.