Know all about Tax planning on Companies

Last Updated On: March 16, 2021, 9:38 p.m.
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TAX PLANNING ON COMPANIES

What is Tax Planning?

Tax planning is the analysis of one’s financial situation from a tax efficiency point of view so as to plan one’s finances in the most optimized manner. Tax planning allows a taxpayer to make the best use of the various tax exemptions, deductions and benefits to minimize their tax liability over a financial year. Tax planning is a legal way of reducing income tax liabilities, however caution has to be maintained to ensure that the taxpayer isn’t knowingly indulging in tax evasion or tax avoidance.

 

Tax Planning in India:

In India, there are a number of tax saving options for all taxpayers. These options allow for a wide range of exemptions and deductions that help in limiting the overall tax liability. The deductions are available from Sections 80C through to 80U and can be claimed by eligible taxpayers. These deductions are made against the quantum of tax liabilities. There are various other sections under the Income Tax Act, 1961 that can reduce your tax liabilities such as exemptions and tax credits.

When tax planning is done inside the frameworks defined by the respective authorities, it is fully legal and in fact a smart decision. However, using shady techniques to avoid tax payments is illegal and you may get into trouble for doing so. Tax saving practices include tax avoidance, tax evasion and tax planning. Out of these tax planning is the only legal manner of reducing your tax liabilities. The government offers the different opportunities to save on taxes with the intention of reducing tax burden on a taxpayer through legal income tax planning methods.

 

Corporate Tax Planning:

Corporate tax planning is a means of reducing tax liabilities on a registered company. The common ways to do this includes taking deductions on business transport, health insurance of employees, office expenses, retirement planning, child care, charitable contributions etc. Through the various tax deductions and exemptions provided under the Income Tax Act, a company can substantially reduce its tax burden in a legal way. Once again, tax planning should not be confused with tax avoidance and all the planning should be done within the framework of law.

Increasing profits for a company results in higher tax liabilities. As such, it becomes imperative for them to devote enough time on tax planning to reduce the liabilities. With proper tax planning, the direct tax and indirect tax burden is reduced at times of inflation. It also assists in proper planning of expenses, capital budget and sales and marketing costs, among others. A good tax planning results out of:

  • Disclosing correct information to relevant IT departments.
  • Not being ignorant of applicable tax laws as well as court judgements regarding the same.
  • Legal tax planning should be done which is under the purview of law.
  • Planning must be done with business objectives in mind and should be flexible enough to incorporate possible changes in the future.

 

Types of Tax Planning:

Purposive tax planning: Planning taxes with a particular objective in mind

Permissive tax planning: Tax planning that is under the framework of law

Long range and Short range tax planning: Planning done at the start and end of a fiscal year respectively.

 

Tax Saving Objectives:

  • The primary objectives of your tax planning should be the following:
  • Reduction in overall tax liability
  • Economic stability
  • Growth of economy
  • Litigation minimization
  • Productive investment.
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TAX PLANNING FOR COMPANIES:

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 lac 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 the clause (1)(ba) in section 194j of income tax act,1961, TDS on any remuneration or fees or commission by whatever name called shall be liable to be deducted @ 10%.

Rent Expense – Just make a rent agreement in name of owner, start transferring rent and book rent expense in company’s book which eventually has the same impact as discussed in previous points. Here also you can book dual save of tax.

Capitalization – So, of you buy an equipment for the office like laptop, printer, furniture which usually has the life of more than year, you should book them as fixed asset in book which ultimately gives you tax benefits in over the years.

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.

Entertainment Expense – Get at flat discount of applicable tax rate on your party bill by book keeping the same in books and get your tax saved.

Director’s vehicle expense

Meeting expense – These expenses include taking a client to dinner, to a theatre show, or to a sporting event. These expenses are usually tax- deductible. Also, as for your business purpose,

Above expenses are easy ways for saving 30% tax of companies. But just booking the expenses won’t work that way, the above expenses required proper documentation and planning to take a maximum and true benefit of it but that is really worthy doing.

Filing return on time. You can carry forward business income losses for a consecutive period of 8 years, and so 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 you file your tax returns on or before the tax filing due date.

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