Discover tax planning strategies for managerial decisions with insights on Finance Act 2023 changes. Learn simplified versions of tax implications on managerial choices, covering shutdown decisions, asset management, and business expansion or contraction. Explore key tax incentives and considerations for amalgamation, demerger, and more. Stay informed to optimize your organization’s tax position in light of the latest amendments.
Simplified Version of Tax Planning with respect to Managerial decisions (By incorporating changes as per the Finance Act 2023)
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. In this connection the following points are worth noting:
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 .
Sec 79.(1) of the income Tax Act is to be considered here.
Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place during the previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, unless on the last day of the previous year, the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred:
Providedthat even if the said condition is not satisfied in case of an eligible start-up as referred to insection 80-IAC, the loss incurred in any year prior to the previous year shall be allowed to be carried forward and set off against the income of the previous year if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of ten years( as per Finance Act 2023)beginning from the year in which such company is incorporated
II. Retain, Replacement ,Renewal of Asset
Replacement expenditure is capital expenditure—- .It is not deductible
Repair and replacement of false ceiling in cinema building is revenue expenditure.
Expenditure in repairs to car damaged during riots is deductible.
Renewal
Sometimes capital expenditure and sometimes revenue expenditure.
Capital expenditure—-when capacity is increased due to renewal.
Revenue expenditure –capacity is not increased .Expenses incurred to get capacity of asset back.
Deduction of Expenses Incurred on Repairs
Routine Repair or current repair expenses are allowed as deduction. Deductions under the following two sections are allowed as per the Income Tax Act 1961.
a. Rent, rates, taxes, repairs and insurance for buildings (sec 30)
b. Repairs and insurance of machinery, plant and furniture (Sec 31)
III. Own or lease.
Following calculations are to be made.
Calculation of present value of post -tax cash outflows in case of borrowing
A. Cash out flows =loan repayment+ interest on loan.
B. Since both depreciation and interest on loan are tax deductible while calculating business income, therefore there will be tax savings in payment of income tax
Tax savings= (interest+ depreciation) × Tax rate applicable to buyer
c. Post tax cash out flows A-B
d. Post Tax Cash flows ×Present value factor
e. Find total present value of cash outflows
f. From total present value of cash outflows deduct P.V. of cash inflow (asset sold).
g. Net Cash outflow.
II. Calculation of present value of post -tax cash outflows in case of lease
A. Cash outflows =Annual lease rent +other charges
B. Tax savings=A× Tax rate applicable to Lessee.
C. Post Tax Cash flows=A-B
D. Post Tax Cash flows ×Present value factor
Should select the option which shows lesser present value of cash outflows
IV. Tax Planning With respect to make or buy.
Following are the important points you have to be considered with this respect.
You have to consider many costing considerations. You may decide it on the basis of marginal cost.
Basically, the decision to make or buy is a costing decision and is influenced by many factors are as follows.
I. Availability of factors
II. Investment required in fixed assets
III. Availability of skilled and unskilled labour.
IV. Availability of suppliers
V. Existence of idle capacity in organization
With due considerations to above factors ,marginal costing and differential costing techniques of cost accounting help a lot in reaching at any conclusion
Tax considerations
Buy decision in a surplus capacity condition forced to sell an asset and attract capital gain tax.
If a new industrial undertaking is established to make the product, the following deductions are to be considered.
a. Tax holiday-sec 10AA
b. Deductions U/S
I.80 IAC
II. 80IBA
III. 80ID
IV. 80IA
V. 80IB
VII80IC
VII. 80IE
If the product is a consumable one, raw material is required to replace a worn out part at the time of repair, its cost will be treated as revenue expense and deductible in computing the income.
V. Sale of Assets used for Scientific Research
Following are the important points related with Sale of Assets used for Scientific Research
1. Selling the asset without using it for business purposes
There may be Two Incomes
a. Business Income—Cost of asset or Selling Price whichever is less is deemed business income u/s 41(3)
b. Long-term Capital gain/loss=Selling Price—-Indexed cost of acquisition or Shot term capital gain or loss (Sec 50 A is relevant here)
2. Selling the asset after using it for business purposes
Then there will be no deemed business income u/s 41(3).Then The entire selling price less W.D.V of the block of asset should be the short-term capital gain. But the selling price is deducted from the W.D.V of the block of asset to find out the depreciation .This will reduce the tax liability for that year and more cash will be in hand. However the tax liability will increase in future.
VI. Tax planning with respect to expand or contract of business
A. Expansion without business Restructuring mechanism
Following are the tax incentives available to the business /business house
I. Additional depreciation of new plant and machinery
II. Deduction for preliminary expenses u/s sec 35 D
III. Deduction in respect of employment of new workmen u/s 80JJAA
IV. Section 80 I Deductions (Sec 80IA, Sec 80IAB,Sec IAC. Sec 80IB,Sec 80IBA,Sec 80IC,Sec 80ID,Sec 80IE)
B. Expansion through business Restructuring mechanism
These business restructuring practices can be discussed under the following headings
B1. Amalgamation of Companies
B2. Corporatisation of an existing non corporate business
B1.Tax issues relating to Amalgamation of Companies
CONDITIONS
If the following conditions are satisfied, then we may call it as Amalgamation of Companies as per Sec 2(IB) OF Income Tax Act 1961
1. All the properties of the Amalgamating Company become the properties of the Amalgamated Company
2. All the liabilities of the Amalgamating Company become the liabilities of the Amalgamated Company
3. 3/4 of the Shareholders of the Amalgamating Company become the shareholders of the Amalgamated Company
From the point of view of Amalgamating Company
1. Proportionate depreciation can be claimed on transferred assets
2. No capital Gain Tax on transfer of Capital Assets to Indian Company
3. No capital Gain Tax on transfer of shares held in Indian Company by the amalgamating Foreign Company to a foreign amalgamated Company
From the point of view of Shareholders of Amalgamating Company
1. Surrender of shares of Amalgamating Company against the receipt of shares of amalgamated Company does not attract capital gain tax. On Subsequent sales of these shares definitely attract capital gain tax.
Following terms are to be understood at this juncture
1. Cost of Acquistion of shares of Amalgamating Company Will be the Cost of Acquistion of shares of amalgamated Company
2. Holding period is to be calculated by taking into consideration the date of acquisition of shares of Amalgamating Company
From the point of view of Amalgamated Company
1. Proportionate depreciation can be claimed on transferred assets
2. Brought forward business loss and unabsorbed depreciation of amalgamating can be enjoyed by the amalgamated company subject to conditions u/s 72A.
72A of the Income Tax Act
(1) Where there has been an amalgamation of—
(a) a company owning an industrial undertaking or a ship or a hotel with another company; or
(b) a banking company referred to in clause (c) ofsection-5of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or
(c) one or more public sector company or companies with one or more public sector company or companies
(d) an erstwhile public sector company with one or more company or companies, if the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation of the said public sector company and the amalgamation is carried out within five years from the end of the previous year in which the restriction on amalgamation in the share purchase agreement ends.
then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
Amendment as per Finance Act 2023.
In section 72A of the Income-tax Act, in sub-section (1), in clause (d), in the Explanation, for clause (iii), the following clause shall be substituted, namely:—
‘(iii) “strategic disinvestment” means sale of shareholding by the Central Government or any State Government or a public sector company, in a public sector company or in a company, which results in—
(a) reduction of its shareholding to below fifty-one per cent.; and (
b) transfer of control to the buyer: Provided that the condition laid down in sub-clause (a) shall apply only in a case where shareholding of the Central Government or the State Government or the public sector company was above fifty-one per cent. before such sale of shareholding:
Provided further that requirement of transfer of control referred to in sub-clause (b) may be carried out by the Central Government or the State Government or the public sector company or any two of them or all of them.
Condition u/s 72A.
A. The amalgamating company has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed for last three years or more
B. The amalgamating Company has held continuously as on the date of amalgamation at least 3/4 of the book value of fixed assets held by it two years prior to the date of amalgamation
C. The amalgamated company continues the business of the amalgamating company for at least five years etc
3. Unabsorbed Scientific Research Expenditure as per Sec 35– Can be carried forward.
4. Unamortized Capital expenditure on Tele Communication Licence can be written off by the Amalgamated Company—- (Sec 35 ABB)
5. The deduction under section 35 AD shall continue to be available to the Amalgamated Company for remaining number of years.
6. Amortization of expenditure in case of amalgamation is allowed for 20 percent per annum for next five years (Sec 35DD)
7. Sec 35 DDA —-amortization of VRS Expenditure –The remaining period can be enjoyed by the amalgamated company
8. Sec 35E Amortization of expenditure on prospecting etc for development of certain minerals – The remaining period can be enjoyed by the amalgamated company
9. Sec 36(1) (ix) —Capital Expenditure on Family Planning – The remaining period can be enjoyed by the amalgamated company
10. Where a unit in Special Economic Zone is transferred to another unit in a scheme of amalgamation, the exemption shall be allowed to the other unit for the unexpired period(sec 10 AA(5).
11. Sec 80 I Deductions— The remaining period can be enjoyed by the amalgamated company if the amalgamated company fulfils those conditions related with those deductions.
Tax planning for contraction of business
A. Contraction of business without business restructuring mechanism
No tax incentives is available
B. Contraction through business restructuring mechanism
I. DEMERGER
II. Slump sale
Demerger
It means,in relation to the companies ,means the transfer ,pursuant to a scheme of arrangement under the companies act ,by a demerged company of its one or more undertakings to any resultant company
TAX INCENTIVES
From the point of view of demerged company
1. Benefit of deduction u/s 32 AD shall not be withdrawn
2. No capital Gain Tax on transfer of Capital Assets to Indian Company
3. No capital Gain Tax on transfer of shares held in Indian Company by the demerged Foreign Company to the resulting foreign Company.
From the point of view of Shareholders of Demerged Company
1. Beneficial provision regarding counting of period of holding of new shares
2. Calculation of cost of shares of the resulting company (Sec 49(2) C).
The cost of acquisition of shares of resulting company as a result of demerger shall be:
Cost of acquisition of shares held by the assesse in the demerged Company×
Net Book value of assets transferred÷ Net worth of demerged company before demerger
3. Calculation of cost of shares held in demerged company(Sec 49(2D)
The cost of acquisition of original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under sec 49(2C)
From the point of view of Resultant Company
1. Proportionate depreciation can be claimed on transferred assets
2. Brought forward business loss and unabsorbed depreciation directly relatable to the undertaking transferred by the demerged company to the resulting company shall be allowed to be carried forward and set-off in the hands of resulting company
3. Unamortized Capital expenditure on Tele Communication Licence can be written off by the resulting company—- (Sec 35 ABB)
4. Amortization of expenditure in case of Demerger is allowed for 20 percent per annum for next five years (Sec 35DD)
5. Sec 35 DDA amortization of VRS Expenditure –The remaining period can be enjoyed by the resultant company
6. Sec 35E Amortization of expenditure on prospecting etc for development of certain minerals – The remaining period can be enjoyed by the resultant company
7. Sec36 (1) (ix) Capital Expenditure on Family Planning – The remaining period can be enjoyed by the resultant company
8. Sec 80 I Deductions— The remaining period can be enjoyed by the resulting company if the amalgamated company fulfils those conditions related with those deductions.
9. Where a unit in Special Economic Zone is transferred to another unit in a scheme of demerger, the exemption shall be allowed to the other unit for the unexpired period.(sec 10 AA(5)).
(Republished with amendments)
