final copy of taxtion fm

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INTRODUCTION

The Tax Structure in India is quite strong and follows the financial year. Thetaxation under the tax structure in India is applicable for any kind of incomepertaining to a person working as an employee under the public sector units,private sector units, foreign companies in India, Departments of the StateGovernments of India, and Departments of the Central Government of India or selfemployed individuals engaged in commercial activities which is legal in nature. heseveral corporations engaged in commercial activities also come under thetaxation. The public bodies, state governments and central government have cleardemarcation of their functioning. The central government imposes tax on all kindsof income such as central excise, customs duties, and service tax apart from

income pertaining to agriculture. The State Governments of India is responsiblefor imposing tax pertaining to Value Added Tax (VAT), sales tax, income fromagriculture, state excise duty, stamp duty, professional tax, land revenue, etc.Taxes imposed by the local bodies are pertaining to octroi tax, water supplyutilities, drainage and sewage utilities, property tax, etc.

Different taxes levied under tax structure in India:

Direct Taxes

Personal Income Tax Tax on Corporate Income

Tax Incentives

Capital Gains Tax

Indirect Taxes

Securities Transaction Tax

Service Tax

Excise Duty

Customs Duty

Taxes Levied by State Governments and Local Bodies

Other Taxes

Sales Tax or Value Added Tax


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Financing Decision

Financing decision is the important function to be performed by the financial

manager. It must be decide when, where and how to acquire funds to meet the firms

investment needs. The central issue before him or her is to determine the proportion

of equity and debt. The mix of debt and equity is known as the firms capital

structure. The financial manager must strive to obtain the best financing mix or the

optimum capital structure for his or her firm. The firms capital structure is

considered to be optimum when the market value of shares is maximized. The use of

debt affects the return and risk of shareholders; it may increase the return on equity

funds but it always increases risk.

A proper balance will have to be struck between return and risk. When the

shareholders return is maximized with minimum risk, the market value per share will

be maximized and the firms capital structure would be considered optimum. Once

the financial manager is able to determine the best combination of debt and equity,

he or she must raise the appropriate amount through the best available sources. In

practice, a firm considers many other factors such as control, flexibility loan

convenience, legal aspects etc. in deciding its capital structure.


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Taxation of corporations

Corporations may be taxed on their incomes, property, or existence by various jurisdictions.Many jurisdictions impose a tax based on the existence or equity structure of the corporation.For example, Maryland imposes a tax on corporations organized in that state based on the

number of shares of capital stock issued and outstanding. Many jurisdictions instead impose atax based on stated or computed capital, often including retained profits.

Most jurisdictions tax corporations on their income. Generally, this tax is imposed at a specificrate or range of rates on taxable income as defined within the system. Some systems have aseparate body of law or separate provisions relating to corporate taxation. In such cases, the lawmay apply only to entities and not to individuals operating a trade. Such laws may differentiatebetween broad types of income earned by corporations and tax such types of income differently.Generally, however, most such systems tax all income of a corporation in the same manner.

Some systems (e.g., Canada and the United States) tax corporations under the same frameworkof tax law as individuals. In such systems, there are normally taxation differences related todifferences between the inherent natures of corporations and individuals or unincorporated

entities. For example, individuals are not formed, amalgamated, or acquired, and corporations donot generally incur medical expenses except by way of compensating individuals.

Many systems allow tax credits for specific items. Such direct reductions of tax are commonlyallowed for foreign taxes on the same income and forwithholding tax. Often these credits arethe same as those available to individuals or for members of flow through entities such aspartnerships.

Most systems tax both domestic and foreign corporations. Often, domestic corporations aretaxed on worldwide income while foreign corporations are taxed only on income from sourceswithin the jurisdiction. Many jurisdictions imposing an income tax impose such tax income froma permanent establishment within the jurisdiction.

Corporations are also subject toproperty tax, payroll tax, withholding tax, excise tax, customsduties, value added tax, and other common taxes, generally in the same manner as othertaxpayers. These, however, are rarely referred to as corporate tax.

Minimum alternative tax: MAT

According to this section, if the taxable income of a company computed under thisAct, in respect of previous year 1996-97 and onwards is less than 30 % of its book

profits, the total income of such company is chargeable to tax for the relevantprevious year shall be deemed to an amount equal to 30 % of such book profits.
http://en.wikipedia.org/wiki/Tax_creditshttp://en.wikipedia.org/wiki/Withholding_taxhttp://en.wikipedia.org/wiki/Permanent_establishmenthttp://en.wikipedia.org/wiki/Property_taxhttp://en.wikipedia.org/wiki/Payroll_taxhttp://en.wikipedia.org/wiki/Withholding_taxhttp://en.wikipedia.org/wiki/Excise_taxhttp://en.wikipedia.org/wiki/Customs_dutieshttp://en.wikipedia.org/wiki/Customs_dutieshttp://en.wikipedia.org/wiki/Value_added_taxhttp://en.wikipedia.org/wiki/Withholding_taxhttp://en.wikipedia.org/wiki/Permanent_establishmenthttp://en.wikipedia.org/wiki/Property_taxhttp://en.wikipedia.org/wiki/Payroll_taxhttp://en.wikipedia.org/wiki/Withholding_taxhttp://en.wikipedia.org/wiki/Excise_taxhttp://en.wikipedia.org/wiki/Customs_dutieshttp://en.wikipedia.org/wiki/Customs_dutieshttp://en.wikipedia.org/wiki/Value_added_taxhttp://en.wikipedia.org/wiki/Tax_credits


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A new tax credit scheme is introduced by which MAT paid can be carried forwardfor set-off against regular tax payable during the subsequent five year periodsubject to certain conditions, as under:-

When a company pays tax under MAT, the tax credit earned by it shall be

an amount which is the difference between the amount payable under MATand the regular tax. Tegular tax in this case means the tax payable on thebasis of normal computation of total income of the company.

MAT credit will be allowed carry forward facility for a period of fiveassessment years immediately succeeding the assessment year in whichMAT is paid. Unabsorbed MAT credit will be allowed to be accumulatedsubject to the five year carry forward limit.

In the assessment year when regular tax becomes payable, the differencebetween the regular tax and the tax computed under MAT for that year willbe set off against the MAT credit available.

The credit allowed will not bear any interest.

MAT credit will be allowed carry forward facility for a period of fiveassessment years immediately succeeding the assessment year in whichMAT is paid. Unabsorbed MAT credit will be allowed to be accumulatedsubject to the five year carry forward limit.In the assessment year when regular tax becomes payable, the difference

between the regular tax and the tax computed under MAT for that year willbe set off against the MAT credit available.

Corporate Tax Rate in IndiaThe corporate tax rate in India is at par with the tax rates of the other nations worldwide. Thecorporate tax rate in India depends on the origin of the company.

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 toIndia are taxed on the global income whereas the foreign companies in India are taxed on theirincome within the Indian territory. The incomes that are taxable in case of foreign companiesare interest gained, royalties, income from the capital assets in India, income from sale ofequity shares of the company, dividends earned, etc.

Domestic Corporate Income Taxes Rates:


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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

Some of the tax rebates under corporate tax rate in India:

The gains pertaining to long term capital is subjected to low tax incidence

The venture capital funds and venture capital companies has special tax provisions

The Specula tax provisions are applicable for the non resident Indian's involved in

activities in India

Under the Finance Bill 1996, minimum alternative tax (MAT) on the corporate sector is

levied

Foreign Companies income tax rates:

For dividends: - 20% for non-treaty foreign companies and 15% incase of companiesunder the treaty based in the United States

For interest gains: - 20% for non-treaty foreign companies and 15% for companiesunder the treaty based in the United States

For royalties: - 30% for non-treaty foreign companies and 20% for companies under thetreaty based in the United States

For the technology based services in case of non-treaty foreign companies & 20% forcompanies under the treaty based in the United States

For all other kinds of income and gains: - 55% in case of non-treaty foreign companiesand 55% for the companies under the treaty based in the United States

Attention should be given on levying inter corporate rates in case holding is minimum

Attention should be given on the fact that sanctions of the tax authorities on taxwithholding

Attention should be given on several of the tax treaties that India signed with othercountries and also on the various encouraging tax rates

The Tax Implications of FinancialDecisions

The Tax Implications of Financial Decisions


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The Internal Revenue Code is a very complex, often confusing, and constantly changing set of rules.

Individuals sometimes let tax issues cloud their decision-making. Here are three areas where some

simple reminders can help you make wiser financial decisions.

The income tax rate structure

Our marginal tax rate structure generally means that income at lower levels is taxed at lower rates

than income at higher levels. There are complex rules about how to calculate taxable income, taking

into account deductions and exemptions. The 2001 Tax Law started to bring rates down and the 2003

Tax Law accelerated that reduction. The tax rates start at 10% and go up to 35%.

2010 Single Return Rate Schedule

Taxable income levels Tax rate

0 to $8,375 10%

$8,376 to $34,000 15%

$34,401 to $82,400 25%

$82,401 to $171,850 28%

$171,581 to $373,650 33%

Over $373,650 35%

Impact Of Corporate Taxes for government


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Taxes are designed as a means for government bodies to collectrevenue to provide services and finance themselves.Furthermore, tax code is structured to redistribute wealththroughout the population. Business people monitor tax law and

act accordingly to improve their bottom lines.Identification

The government taxes business profits and capital gains frominvestments. Tax law is also written to provide tax breaks thatreward investment within particular industries. Businessesrespond by executing strategy that allows for tax savings andlimiting transactions that are heavily taxed.

Considerations

Tax law is dynamic and heavily politicized. Views upon whichindustries should be rewarded or restricted by tax policychange over time, according to the economy. Remainpolitically active to stay up to date.

Benefits

Business decisions based upon thoughtful tax planningincrease profits by reducing tax expense. Knowledge of tax lawalso minimizes the risks of undergoing time-consuming audits.

Misconceptions

Business tax deductions reduce taxable income by a setamount, before taxes are calculated upon the reduced taxableincome. Tax credits generate more savings, because theydecrease your tax bill upon a dollar for dollar basis.

Warnings

Businesses should prioritize making money, rather than strictlycutting tax expenses. Do not forgo profit opportunities simplyto avoid paying taxes

Impact of Tax Rate Uncertainty on Financial

Decisions
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When the business case refers to a non taxpaying government ornon-profit organization, the question oftax effects on thebusiness case is non-issue. For tax-paying companies, however,it is an important question. Results of "before tax" and "after tax"

business cases can look quite different. (For spreadsheetexamples showing how tax effects enter business case cash flowcalculations, see Financial Modeling Pro.) Here are some waysthat taxes can impact the cash flow results of a business case.

Taxes lower overall gainsWhere the business case shows gains or net cash inflows, taxes operate to lower overall gainsbecause operating income and capital gains are normally taxed. If the total income tax rate is,say 30%, a $100 operating gain becomes a $70 net gain after taxes.

Taxes also reduce overall cost and expenseimpacts

Where the business case shows losses or net cash outflows, tax effects operate to reduce theoverall loss. For a company that pays 30% taxes on income, a $100 operating loss (or net cost)also reduces the company's tax liability by $30. The net effect of the $100 loss on overall cashflow is thus $70.

When the Corporate case includes capital

assets, tax savings from depreciation improvethe bottom line

Where the business case includes the acquisition of capital assets (either through purchase orcapital lease), tax savings from depreciation can operate to increase overall cash flow.Depreciation expenses themselves do not contribute to cash flow: they are an accountingconvention that impacts reported income, but not a real cash outflow. However, becausedepreciation expenses lower reported income, they also lower the tax liability, which doesimpact real cash flow. If a company claims $100 depreciation expense on an asset during theyear, and if the company ordinarily pays a 30% tax rate on operating income, then thedepreciation expense lowers taxes by $30 (that is, the net cash flow for the year is increased by

$30).Should you build an "after tax" or a "before tax" version of the financial business case?Sometimes one version is more appropriate than the other; in other cases, both versions arecalled for. Here are some factors to consider:

What effect does adding or removing taxconsequences have on business case results?
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Tax effects can be especially important where different financingoptions are under consideration, as for instance in a "Lease vs.Buy" comparison, or when comparing a capital lease scenariowith an operating lease scenario. In situations where before and

after tax versions of the business case differ substantiallywheretax effects on overall results are largethen tax planning itselfmay be an important management concern, and both versions ofthe case should probably be in view.

Impact of Tax on Business Decisions

Tax can also impact business decisions in a number of ways. Since businesses can deductexpenses of running a business, the company may wish to make a purchase within a given yearin order to get the tax benefit for that year. Businesses can also take depreciation on certainproperty, so this can impact how and when new items are purchased.

The biggest impact on taxes on business decisions, however, normally focuses on how thebusiness is structured. There are several major ways in which businesses can be structured, eachof which have different tax impacts. A sole proprietor is taxed as an individual, and the


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individual normally files a personal tax return that includes business profits and losses. Forpartnerships and limited liability companies (LLCs) the individual members of the organizationcan also claim business profits and losses on personal tax returns.

More complex business structures, however, have different tax structures. S-corporations and C-corporations allow for different deductions and the business generally files taxes separately and

then pays a salary to the business owners employees who declare profits on their personal taxreturns. Incorporating a business can thus dramatically change your tax picture. To make thisdecision, you should speak with a tax professional who can help determine which businessstructure is right for you.

Conclusion

Understanding the Impact

For most investors and small business people, taxes play a role in how businessand investment decisions are made, but ultimately the most important thing is todetermine which investments or business decisions will have the best affect onyour personal or businesses value. As you gain more money and become a moresophisticated investor, the impact of tax on investment and business decisions


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becomes more important and getting help from aprofessional to reduce your taxliability is usually advisable.

The current uncertainty over the tax rates after 2010 has created unusual planningsituations for anybody holding stock or receiving compensation from stock

options, restricted stock, or other types of equity awards.On year-end financial and tax planning. With a fog of uncertainty still shroudingthe post-2010 tax landscape, year-end planning will be much harder than usual thisyear for employees, executives, and advisors who must make decisions aboutstock holdings and compensation received from stock options, restricted stock,restricted stock units, performance shares, employee stock purchase plans, andstock appreciation rights. Depending on whether tax rates will go up or down in2011, they may want to accelerate income or capital gains into 2010 or defer theseinto the future.
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