Corporate Tax Planing

DEPARTMENT OF BUSINESS ADMINISTRATION TERM PAPER OF

CORPORATE TAX PLANNING On

CORPORATE TAX PLANNING FOR VARIOUS TYPE OF BUSSINESS ENTITIES

SUBMITTED TO SUBMITTED BY

MOHD.ANISH SIR

ABHINAV PANDEY MBA 3nd Sem(Fin.) PAGE No. 1

CONTENT TYPE PF BUSSINESS ENTITY SOLE PROPRITRSHIP ADVANTAGE DISADVANTAGE PARTNERSHIP BUSSINESS LIMITED LIABILITY PARTNERSHIP (LLP) IN INDIA PROCESS OF STARTING A LLP DIFERENCE BETWEEN PARTNERSHIP AND LLP HINDU UNDIVIDED FAMILY (HUF) KEY ASPECTS HUF AS PARTNER IN PARTNERSHIP FIRM POSITION OF BANKER IN EXTENDING CREDIT COMPANY LEGAL FORMATION ARTIFICIAL PERSON SEPARATE LEGAL ENTITY COMMON SEAL PAGE No. 2

CONTENT (Cont…) PERPITUAL EXITANCE LIMITED LIABILITY DEMOCRATIC MANAGEMENT SPECIAL CHARACTERISTIC OF PRIVATE LIMITED COMPANIES SPECIAL CHARACTERISTIC OF PUBLIC LIMITED COMPANIES

CORRPORATE TAX RATES IN INDIA PARTNERSHIP COMPANY AND LLP DOMESTIC COMPANY FPREIGN COMPANY DOMESTIC COMPANY AND LLP TAX RATES FOREIGN COMPANY AND INCOME TAX RATES WEALTH TAX COMPENSATION TAX SAVING BY HUF

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TYPE OF BUSSINESS ENTITIES Sole proprietorship A sole proprietorship also known as a sole trader, or simply proprietorship is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. All profits and all losses accrue to the owner (subject to taxation). All assets of the business are owned by the proprietor and all debts of the business are his debts and he must pay them from his personal resources. This means that the owner has unlimited liability. It is a “sole” proprietorship in the sense that the owner has no partners (partnership). A sole proprietor may do business with a trade name other than his or her legal name. This also allows the proprietor to open a business account with banking institutions. Advantages The main advantages of a sole proprietorship are that they are easy to start up, they are subject to fewer regulations relative to other types of businesses, the owner has full autonomy with regard to business decisions, and they are easy to discontinue. [1] Another advantage is that one takes all the profits of the business. This is the main reason that most businesses are of this type. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays self employment taxes on the profits made, making accounting much simpler. A sole proprietorship also does not have to be concerned with double taxation, as a corporate entity would. A sole proprietor usually has a quick decision process and doesn’t have any opposition when making a decision as he or she has total control of his business. All profits and losses accrue to the owner.

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Disadvantages A business organized as a sole trader will likely have a hard time raising capital since he has to make up for all the business’s funds. The owner of the business has unlimited liability as he is responsible for the business’s debts because he has control over the business. A disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a corporation, or, more recently, a Limited Liability Company.

PARTNERSHIP According to section 4 of the Indian Partnership Act of 1932, “Partnership is defined as the relation between two or more persons who have agreed to share the profits and losses according to their ratio of business run by all or any one of them acting for all”. This definition superseded the previous definition given in section 239 of Indian Contract Act 1872 as - “Partnership is the relation which subsists between persons who have agreed to combine their property, labour, skill in some business, and to share the profits thereof between them”. The 1932 definition added the concept of mutual agency.Partnerships in Pakistan are also conducted under the same act i.e. Partnership act of 1932, as Pakistan and India share the same constitutional heritage left by the British.

PARTNERS ARE MUTUAL AGENTS – The business of firm can be carried on by all or any of them for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the partners. Thus, each partner is ‘agent’ of all the remaining partners. Hence, partners are ‘mutual agents’.

ORAL OR WRITTEN AGREEMENT – As per normal provision of contract, a ‘partnership’ agreement can be either oral or written. - - Agreement in writing is necessary to get the firm registered. Similarly, written agreement is required, if the firm wants to be assessed as ‘partnership firm’ under Income Tax Act. A written agreement is advisable to establish existence of partnership PAGE No. 5

and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement. - - However, written agreement is not essential under Indian Partnership Act.

SHARING OF PROFIT NECESSARY – The partners must come together to share profits. Thus, if one member gets only fixed remuneration (irrespective of profits) or one who gets only interest and no profit share at all, is not a ‘partner’. - Similarly, sharing of receipts or collections (without any relation to profits earned) is not ‘sharing of profit’ and the association is not ‘partnership’. For example, agreement to share rents collected or percentage of tickets sold is not ‘partnership’, as sharing of profits is not involved. - - The share need not be in proportion to funds contributed by each partner. - - Interestingly, though sharing of profit is essential, sharing of losses is not an essential condition for partnership . - - Similarly, contribution of capital is not essential to become partner of a firm.

NUMBER OF PARTNERS – Since partnership is ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, section 11 of Companies Act prohibits partnership consisting of more than 20 members, unless it is registered as a company or formed in pursuance of some other law.

LIMITED LIABILITY PARTNERSHIP A corporate limited liability partnership “business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.” A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. It therefore PAGE No. 6

exhibits elements of partnerships and corporations. [1] In an LLP one partner is not responsible or liable for another partner’s misconduct or negligence. This is an important difference from that of a limited partnership. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.[2] In some countries, an LLP must also have at least one “general partner” with unlimited liability. Unlike corporate shareholders, the partners have the right to manage the business directly. As opposed to that, corporate shareholders have to elect a board of directors under the laws of various state charters. The board organizes itself (also under the laws of the various state charters) and hires corporate officers who then have as “corporate” individuals the legal responsibility to manage the corporation in the corporation’s best interest. An LLP also contains a different level of tax liability than a corporation. Limited liability partnerships are distinct from limited partnerships in some countries, which may allow all LLP partners to have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries the LLP is more suited for businesses where all investors wish to take an active role in management.

India The Limited Liability Parternship Act 2008 was published in the official Gazette of India on January 9, 2009 and has been notified with effect from 31 March 2009. However, the Act, has been notified with limited sections only.[4]. The rules have been notified in the official gazette on April 1, 2009. The Lok Sabha (Lower House) granted its assent to the Bill on December 12, 2008 which was earlier passed by the Rajya Sabha (Upper House) in October 2008. The first LLP was incorporated in the first week of April 2009. For Income Tax purposes, an LLP is treates as any other partnership firm. The salient features of the LLP Act, 2008 are as under:1. The LLP has an alternative corporate business vehicle that would give the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on an agreement.

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2. The LLP Act does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act. 3. While the LLP has a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct. 4. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners can not exceed 20, LLP Act makes a mandatory statement where one of the partner to the LLP should be an Indian. 5. Provisions have been made for corporate actions like mergers, amalgamations etc. 6. While enabling provisions in respect of winding up and dissolutions of LLPs have been made, detailed provisions in this regard would be provided by way of rules under the Act. 7. The Act also provides for conversion of existing partnership firm, private limited company and unlisted public company into a LLP by registering the same with the Registrar of Companies (ROC) 8. Nothing Contained in the Partnership Act 1932 shall effect an LLP. 9. The Registrar of Companies (Roc) shall register and control LLPs also. 10. The governance of LLPs shall be in electronic mode based on the successful model of the present Ministry of Corporate Affairs Portal. Visit LLP Portal to register a new LLP.

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Process to Start LLP

DIFERENCE OF PARTNERSHIP AND LLP Traditional Partnership

Limited Liability Partnership

Unlimited personal liability of each partner for dues of the partnership firm. Personal assets of each partner also liable.

Limited liability. No person - 9 -al liability of partner, except in case of fraud. LLP is incorporated under LLP Bill. Incorporation is mandatory.

Partnership is registered under partnership Act. Registration is not mandatory. Not a legal entity separate from its partners.

It is a legal entity separate from its partners. ‘Incorporation Document’ is

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required to be executed. LLP Partnership deed is executed. Minimum 2 and maximum 20 partners Documents are required to be filed with registrar of firms (of respective states)

Agreement is required in almost all cases, though it is not mandatory. Minimum 2 and no limit on maximum number of partners.

All partners are liable for statutory ROC is the administrating compliances. authority. Partner can not enter into business with firm.

Only Designated Partners are liable for statutory compliances.

Every partner of firm is agent of firm and also of otherpartners

Partner of LLP can enter into business with LLP. Every partner of LLP is only agent of firm.

Hindu undivided family (HUF) A Hindu Joint Family or Hindu undivided family (HUF) or a Joint Family is an extended family arrangement prevalent among Hindus of the Indian subcontinent, consisting of many generations living under the same roof. All the male members are blood relatives and all the women are either mothers, wives, unmarried daughters, or widowed relatives, all bound by the common sapinda relationship. The joint family status being the result of birth, possession of joint cord that knits the members of the family together is not property but the relationship. The family is headed by a patriarch, usually the oldest male, who makes decisions on economic and social matters on behalf of the entire family. The patriarch’s wife generally exerts control over the kitchen, child rearing and minor religious practices. All money goes to the common pool and all property is held jointly.

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There are several schools of Hindu Law, such Mitakshara, the Dayabhaga, the Murumakkattayam, the Aliyasanthana etc. Broadly, Mitakshara and Dayabhaga systems of laws are very common. Family ties are given more importance than marital ties. The arrangement provides a kind of social security in a familial atmosphere. Due to the development of Indian Legal System, of late, the female members are also given the right of share to the property in the HUF. In CIT vs Veerappa Chettiar, 76 ITR 467 (SC), Supreme Court had occasion to decide on an issue whether after the death of all the male members in a HUF, the HUF would still exist.

Six key aspects of Joint Family are:• all members live under one roof • share the same kitchen • three generations living together (though often two or more brothers live together, or father and son live together or all the descendants of male live together) • income and expenditure in a common pool- property held together. • a common place of worship • all decisions are made by the male head of the family- patrilineal, patriarchal. HUF as a partner in a partnership firm HUF is a joint family consists of all persons lineally descended from a common ancestor. Hence, HUF is a group of members of the same family. The “father”, or the “senior member” of the family called “Karta”, ordinarily manages the property belonging to Joint Family. Hence, the status of HUF cannot be termed as person. The partnership is a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Hence, to become a partner in a partnership firm, the partner should be a natural person or recognized as person by the law (Company - by virtue of Companies Act 1956). Since, HUF is not a “person”, but only group of

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persons belonging to the same family and carrying on the family business, HUF cannot be a partner in a partnership firm. The above view is supported by a catena of judgments The Supreme Court of India held (AIR-1930-PC-300 & AIR1956-SC-854) HUF is an association of persons is “not a person” within the meaning of expression in the Partnership Act. “… it is now well settled that HUF cannot enter into contract of partnership with another person or persons.” Position of a Banker in extending credit facilities A banker dealing with Hindu undivided families will have to be cautious while extending credit facilities to HUF because certain laws and customers relating to succession and transfer of rights among Hindus, put serious obstacles in the way of the Banker’s providing financial accommodation on the security of what is ordinarily considered to be normal and reliable bank security. HUF can be governed either by Mitakshara Laws or by Dayabhaga Laws. All the HUF to the exception of West Bengal are governed by Mitakshara Law. West Bengal follows the Dayabhaga system. Let us take an example of a HUF governed by the Mitakshara law wherein all the members acquire a right in the ancestral property by birth and the accrual of that right dates from conception of the child who by legal fiction becomes the member of HUF. So that there is always the danger of having transaction impugned by even a person who at the date of the transaction was not born. In order to charge a joint family estate, its is necessary that all the members of the family should join the execution of the deed, or should give their consent, or that the deed should be made by the head of the family in his capacity as karta or manager.

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The powers of the karta are, however, limited and charge created by him is binding on the family property, only if the loan for which the charge is created, is taken for a purpose necessary or beneficial to the family, or is in discharge of a lawful antecedent debt due from the family. This is also called as vyavaharika debt. [”Vyavahar” means conduct. In this context, it means good conduct]. In the event of a suit being filed by a HUF as a partner in a partnership firm HUF is a joint family consists of all persons lineally descended from a common ancestor. Hence, HUF is a group of members of the same family. The “father”, or the “senior member” of the family called “Karta”, ordinarily manages the property belonging to Joint Family. Hence, the status of HUF cannot be termed as person. The partnership is a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Hence, to become a partner in a partnership firm, the partner should be a natural person or recognized as person by the law (Company - by virtue of Companies Act 1956). Since, HUF is not a “person”, but only group of persons belonging to the same family and carrying on the family business, HUF cannot be a partner in a partnership firm. The above view is supported by a catena of judgments The Supreme Court of India held (AIR-1930-PC-300 & AIR1956-SC-854) HUF is an association of persons is “not a person” within the meaning of expression in the Partnership Act. “… it is now well settled that HUF cannot enter into contract of partnership with another person or persons.”

JOINT STOCK COMPANY Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the PAGE No. 13

potential of perpetual succession. The Companies Act, 1956, states that ‘company’ includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws. Section 2(17) of the act defines company. The term company includes: any Indian company any corporate incorporated by or under the laws of country outside India any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the 1922 Act or under the 1961 act any institution, association or body, whether incorporated or not and whether Indian or non Indian, which is declared by general or special order of the board to be a company only for such assessment year or assessment years The companies in India are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal. What this means is that, the company “is different” from the investors. The investors put in money and capital is raised. But the company is treated as a virtual person. The company is treated as a person who is different from it’s investors. The company has an identity of it’s own. If some one sues the company, he does not sue the investors, he sues the virtual person that is the company. To understand the concept of joint stock (private and public limited) companies, consider the following characteristics:

Legal formation: No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company can come into existence only when it has been registered after completion of all the legal formalities required by the Indian Companies Act, 1956.

Artificial person:

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Just like an individual takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as it’s birth, existence and death are regulated by law.

Separate legal entity: Being an artificial person, a joint stock company has its own separate existence independent of it’s investors. This means that a joint stock company can own property, enter into contracts and conduct any lawful business in it’s “own” name. It can sue and can be sued by others in the court of law. The shareholders are “not” the owners of the property owned by the company. Also, the shareholders cannot be held responsible for any of the acts of the company.

Common seal: A joint stock company has a “seal”, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the company’s seal is put and is duly signed by any official of the company, becomes binding on the company.

Perpetual existence: A joint stock company continues to exist as long as it fulfills the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of it’s investors. For example, in case of a private limited company having four members, if all of them die in an accident, the company will “not” be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the members.

Limited liability: In a joint stock company, the liability of a member is limited to the amount he has invested. While repaying debts, for example, if a person has invested only Rs.10,000 then only this amount that he has invested can be used for the payment of debts. That is, even if there is liquidation of the company, the

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personal property of the investor can not be used to pay the debts and he will lose his investment worth Rs.10,000.

Democratic management: Joint stock companies have democratic management and control. Since in joint stock companies there are thousands and thousands of investors, all of them cannot participate in the affairs of management of the company. Normally, the investors elect representatives from among themselves known as ‘Directors’ to manage the affairs of the company

Special charecerestics of Private Limited Comapnies These companies can be formed by at least two individuals having minimum paid-up capital of not less than Rupees 1 lakh. As per the Companies Act, 1956 the total membership of these companies cannot exceed 50. The shares allotted to it’s members are also not freely transferable between them. These companies are not allowed to raise money from the public through open invitation. They are required to use “Private Limited” after their names. The examples of such companies are Combined Marketing Services Private Limited, Indian Publishers and Distributors Private Limited etc.

Special charectersetics of Public Lmited Companies A minimum of seven members are required to form a public limited company. It must have minimum paid-up capital of Rs 5 lakhs. There is no restriction on maximum number of members. PAGE No. 16

The shares allotted to the members are freely transferable. These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits. These companies are required to write either ‘public limited’ or ‘limited’ after their names.

DOMESTIC COMPANY Domestic company means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income ;] 4

[(22AA) document includes an electronic record as defined in clause (t)5 of subsection (1) of section 2 of the Information Technology Act, 2000 (21 of 2000);

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Corporate Tax Rate in India PARTNERSHIP The partnership uses Schedule K-1 to report a partner’s share of the partnership’s income, deductions, credits, etc. The partner must only keep Schedule K-1 for his records, but not file it with his tax return. The partnership must file a copy of Schedule K-1 for each partner with the IRS. Although the partnership generally is not subject to income tax, every partner is liable for tax on his share of the partnership income, whether or not distributed.

Joint and several liability of partners for tax payable by firm. 188A. Every person who was, during the previous year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the assessment year to which such previous year is relevant, and all the provisions of this Act, so far as may be, shall apply to the assessment of such tax or imposition or levy of such penalty or other sum.]

COMPANIES AND LLP The corporate tax rate in India is at par with the tax rates of the other nations worldwide. The corporate tax rate in India depends on the origin of the company.

For the purpose of taxation, companies are broadly classified as:Domestic company [Section 2(22A)]:means an Indian company (i.e. a company formed and registered under the Companies Act,1956) or any other company which, in respect of its PAGE No. 18

income liable to tax, under the Income Tax Act, has made the prescribed arrangement for declaration and payments within India, of the dividends payable out of such income. A domestic company may be a public company or a private company. Foreign company [Section 2(23A)] : - means a company whose control and management are situated wholly

outside India, and which has not made the prescribed arrangements for declaration and payment of dividends within India. If the company is domicile to India, the tax rate is flat at 30%. But for a foreign company, the tax rate depends on a number of factors and considerations. The companies that are domicile to India are taxed on the global income whereas the foreign companies in India are taxed on their income within the Indian territory. The incomes that are taxable in case of foreign companies are interest gained, royalties, income from the capital assets in India, income from sale of equity shares of the company, dividends earned, etc. Domestic Corporate Income Taxes Rates: • For Domestic Corporations the effective tax rate is 30% and the tax rate with surcharge is 30% Attention must be given on the factor that if the taxable income is more than Rs. 1 million then a surcharge of 10% of the tax on income is levied Attention must also be given on the fact that all of the companies formed in India are regarded as Indian domestic companies, even in the case of ancillary units with mother companies in foreign countries Domestic Corporate & LLP Income Taxes Rates Tax Rate

Effective Tax Rate with surcharge & ed. cess

Domestic Corporations / Private Limited 30% Companies

33.99% 1

Domestic Corporations / Public Limited 30% Companies

33.99% 1

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Limited Liability Partnership (LLP’s)

30.9% 2

30%

1. A surcharge of 10% of the income tax is levied, if the taxable income exceeds Rs. 1 million. Educational cess is also added. 2. An Educational Cess is added to the basic tax rates. Surcharge is not applicable to LLP. Unlike LLP’s in the USA where they are pass-through entities for tax purposes, in case of LLP’s in India, they are partially pass-through entities for tax paurposes. In India tax an LLP is required to pay income tax on 40% of its income; since an LLP is allowed to pay the balance of 60% as renumerations to it partners. Partners of an LLP are required to pay tax on the amount paid to them. Besides, LLP’s are not required to pay dividend distribution tax or Minimum Alternate Tax (MAT). 3. All companies incorporated in India are deemed as domestic Indian companies for tax purposes, even if owned by foreign companies. Contact us for Incorporating in India Foreign Corporate Income Tax Rates

Withholding Tax Rate for non-treaty foreign companies

Withholding Tax Rates for the USA Companies Doing Business in India under the India USA Tax Treaty

Dividends

20%

15% 1

Interest Income

20%

15% 2

Royalties

30%

20% 2

Technical Services

30%

20% 2

Other income

55%

55%

1. Inter-corporate rates where there is minimum holding. There tax rates are applicable under the India USA Tax Treaty. For other countries the

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tax rates are different under the tax treaties between India and other countries. 2. 10% or 15% in some cases. 3. Withholding tax is charged on estimated income, as approved by the tax authorities. 4. There are other favorable tax rates under various tax treaties between India and other countries.. Wealth Tax Net Taxable Wealth

Tax Rate

Over

Not Over

0

Rs.1,500,000

0

Rs.1,500,000

above

1%

Wealth tax is levied on non-productive assets whose value exceeds Rs.1.5 million. Productive assets like shares, debentures, bank deposits and investments in mutual funds are exempt from wealth tax. The nonproductive assets include residential houses, jewelry, bullion, motor cars, aircraft, urban land, etc. Foreign nationals are exempt from wealth tax on non-Indian assets. In arriving at the net taxable wealth, any debt incurred in acquiring specified assets is deductible. Gift Tax Net Taxable Gift

Tax Rate

Over

Not Over

0

Rs.30,000

0

Rs.30,000

above

30%

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Gifts to dependent relatives at the time of marriage are exempt upto Rs.100,000. Foreign nationals are exempt from gift tax on non-Indian assets. Tax on cash withdrawal from banks Withdrawn in the 2008 Budget. [0.1% tax used to be levied on cash withdrawals of over Rs 25,000 from banks on a day. US$1=Indian Rs. 4 app. All rates as per on the date of update. For Updated Tax Rates and International Tax Treaties Contact us Please Read Disclaimer

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Corporate Income Tax in India For companies, income is taxed at a flat rate of 30% for Indian companies. Foreign companies pay 40%. An education cess of 3% (on the tax) are payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies. From the tax year 2005-06, electronic filing of company returns is mandatory. Fringe Benefit Tax Fringe Benefit Tax is a tax payable by companies against benefits that are seen by employees but cannot be attributed to them individually. This tax is paid as 33.99% of the benefit, which is only a percentage of the actual amount paid. Some fringe benefits and their taxable rates are mentioned:

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Medical reimbursements

Taxable percentage 20%

Effective Tax Rate 6.8%

Telephone bills

20%

6.8%

Fringe Benefit

Employee Stock Options (Difference between market value 100% 33.99% and purchase price on vesting date) From April 1, 2007 , Employees Stock Option Plan (ESOP) or Sweat Equity has also been brought within ambit of fringe benefit tax. Section 115WB(1)(d) specifies that any ESOP will attract Fringe Benefit Tax, and the benefit is equal to the difference between the price paid and the fair market value of the share, as determined by the Board. Tax is levied on the date of vesting of such options. “Fair Market Value” is not yet defined by the Income Tax Department.

COMPARISION BETWEEN VARIOUS FORMS OF LEGAL ENTITIES OF BUSSINESS UNITS Sole proprietary Partnership firmCompany concern Taxed as an individual. Tax Slabs: Upto Rs. 1,10,000 : No tax Rs.1,10,000 to

Taxed as a partnership firm. The profits from partnership is not included in the partner’s (individual’s) tax return.

Taxed as a company. Dividend tax to be paid by the company.

Tax Slabs:

Upto Rs. 1 crore: Taxed

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Tax Slabs:

Rs.1,50,000: Taxed at 10% Rs.1.5 lakhs to Rs.2.5 lakhs: Taxed at 20% Rs.2.5 lakhs to Rs. 10 Lakhs: Taxed at 30%. No surcharge

Upto Rs. 1 crore: Taxed at 30% + cess at 30% + cess Above Rs. 1 crore: Taxed Above Rs. 1 crore: Taxed at 30% + surcharge + at 30% + surcharge + cess cess

Above Rs. 10 Lakhs: Taxed at 30% + surcharge

TAX SAVING BY CREATING A HINDU UNDIVIDED FAMILY Mr Sharma has two sources of income: 1. Individual income of Rs 1,00,000 a year 2. Income of Rs 60,000 a year from ancestral property Case A: No HUF. All income clubbed together. Total income Rs 1, 60, 000 Tax on total income Rs 22, 000 Case B: Mr sharma creates an HUF and income from ancestral property is treated as HUF income HUF income Rs 60, 000 Tax (at HUF rates, which are same as those for Rs 1, 000 individuals) Individual income Rs 1, 00, 000 Tax Rs 9, 000 Total tax (Rs 1, 000+Rs 9, 000) Rs 10, 000

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