COVID-19: Know how to do tax planning

Financial Tax planning in respect of certain special cases at the Time of Covid -19(Assessment Years 2020-2021 and 2021-2022)

Tax planning is a complicated one .Therefore, a thorough understanding of different sections of Income –Tax Act is necessary to carry out that exercise. Even though, Department of Income Tax, Ministry of Corporate Affairs ,Reserve Bank of India, SEBI and Institute of Chartered Accountants of India have announced certain adjustments /concessions in the wake of Covid-19,you have to understand Income Tax planning in respect of the following areas which will help you to formulate your plans in a more strategic and practical manner. Following are the special cases in which you have to concentrate more to make your future tax compliance efforts in a beneficial manner.

1. Tax planning Relating to Capital Structure Decision
2. Tax planning With respect to Dividends
3. Tax Planning in respect of Free Trade Zone
4. Tax Planning in respect of Business in special Economic Zone

1. Tax planning Relating to Capital Structure Decision.

Capital structure

Capital structure refers to the various sources through which finance can be arranged. It includes the following:---------

1. Equity shares,
2. Preference shares,
3. Debentures,
4. Long-term loan either individually or in combination.

Income Tax is one of the important item which affects capital structure decisions.

Assessment Year 2020-2021

You may follow the following procedure to find out Earning per share in the case of each alternative and select the best alternative which gives maximum Earning per share (If the assesse is a company)

Earnings before Interest and Tax (EBIT)

Less: interest on Debenture
Less: interest on bank loan
Less: Lease Rent

Earnings before Tax (EBT)

Less: tax @ Effective Rate

Earnings after Tax (EAT)
Less: Preference dividend
Less: DDT @20.56%
Less: DDT on Equity Shares
[@20.56%]

Earnings Available to Equity Shares (EAES)

EPS = Earnings Available to Equity Shares (EAES)/Number of Equity Shares

Assessment Year 2021-2022

As per the Finance Act, 2020 passed, Dividend Distribution Tax has removed and now companies will not be required to pay Dividend Distribution Tax .After April 1, 2020, recipients have to pay tax on dividend received including it in their total income under the head “Income from other Sources”

You may follow the following procedure to find out Earning per share in the case of each alternative and select the best alternative which gives maximum Earning per share (If the assesse is a company)

Earnings before Interest and Tax (EBIT)

Less: interest on Debenture
Less: interest on bank loan
Less: Lease Rent

Earnings before Tax (EBT)

Less: tax @ Effective Rate

Earnings after Tax (EAT)

Earnings Available to Equity Shares (EAES)

EPS = Earnings Available to Equity Shares (EAES)/Number of Equity Shares

2. Tax planning With respect to Dividends.

Assessment Year 2020-2021

You have to understand the following provisions to plan your dividend decisions.

Definition of Dividend (sec 2(22))

The following distributions or payments by a company to its shareholders are deemed as dividends to the extent of accumulated profits of the company:

(a) Any distribution which entails the release of all or any part of the assets of the company ;

(b) Any distribution of debentures, debenture-stock, or deposit certificates  and any distribution to its preference shareholders of shares by way of  bonus ;

(c) Any distribution made to the shareholders on its liquidation;

(d) Any distribution on the reduction of its capital

(e) Any payment by a closely –held company by way of advance or

Loan to a shareholder (being a person who is the beneficial owner of shares) having at least 10% of the voting power or to any concern in which such shareholder is a member or a partner and is beneficially entitled to not less than 20% of income of the concern.

Advances /loans received by HUF from a closely-held company is taxable as deemed dividend u/s 2(22) (e) if Karta, who is shareholder in lending company has substantial interest in the HUF even if HUF is not a registered shareholder.

If a person takes trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in Sec 2(22) (e) of the Act. Hence, not liable to tax.

Taxability.

a. Normal Dividend income becomes taxable in the previous year in which it is so declared.

b. Deemed Dividend u/s 2(22) is deemed to be income of the previous year in which it is so distributed or paid.

c. Interim Dividend is deemed to be income of the previous year in which it is so distributed or paid.

d. Dividend paid by a Indian company outside India shall be deemed to accrue or arise in India.

e. Shareholder has no liability to pay tax on Deemed Dividend u/s 2(22) (a) to (d) as Dividend Distribution Tax (DDT) is to be paid by an Indian Company on Deemed Dividend u/s 2(22) (a) to (d).

f. DDT is not payable on Deemed Dividend u/s 2(22) (e) .Therefore, such dividend is taxable in the hands of shareholders.

g. The company is bound to deduct TDS whenever the payment made to shareholder falls within the provisions of section 2(22) (e)

Bonus shares

h. By issuing bonus shares to equity shareholders, Companies can avoid the tax u/s 115-O on dividend distributed. Where bonus shares are issued to the preference shareholders, on their issue it is deemed to be dividend and liable to tax

INTER-CORPORATE DIVIDEND

i. When a domestic Company receives dividend (Including deemed dividend) from another company (except a closely –held Company) it is exempt u/s 10(34).

j. Tax planning through purchase of own shares or distribution of dividend

A company can reduce its tax liability by purchasing its own shares .But, the shareholders has to pay LTCG tax on such circumstances.

k. Tax planning through issue of Bonus Debentures instead of Bonus Shares

Following are the important points you have to understand in that connection

i. The interest on debentures is deductible in computing Income
ii. A company can issue Bonus debentures if it wants to distribute deferred dividend.

Assessment Year 2021-2022

NO DIVIDEND DISTRIBUTION TAX [Amendment to sections 115O, 115R, 10(34), 10(35) ETC. ]

It has been decided to remove the concept of Dividend Distribution Tax u/s 115-O (from Companies) and 115R (From Mutual Funds etc ).The amendment is applicable to dividend received after 01/04/2020.Now dividend is taxable in the hands of recipients. Dividend is not exempt in the hands of recipient u/s 10(34) and 10(35). Dividend taxable in the hands of the recipient as per their regular income, without any exemption ceiling. The previous ceiling was Rs.10 Lakhs. Deduction u/s 57 can be claimed maximum up to 20% of such dividend. New Section 80M to introduced to remove the cascading effect of dividend distributed by the company a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company, the dividend received from a foreign company and business trust as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date. TDS u/s 194 to be deducted by companies on dividend exceeding the limit of Rs 5000 per payee

3. Tax Planning in respect of Free Trade Zone

Assessment Year 2020-2021.

You have to understand the following provisions to plan your Income Tax in Free Trade Zone

Section 10A of the Income-tax Act relating to special provision in respect of newly established undertakings in free trade zone, etc.

Sub-section (1) of the said section provides that subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assesse.

The deduction under the said section shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form the report of an accountant, as defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.

Assessment Year 2021-2022

Same provisions applicable to Assessment Year 2020-2021

4. Tax Planning in respect of Business in special Economic Zone

Special provisions in respect of newly established Units in Special Economic Zones.

10AA. (1) While computing the total income of an entrepreneur ,as per section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed—

1. hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years
2. and fifty per cent of such profits and gains for further five assessment years and thereafter;
3. For the next five consecutive years ,50% of such profits and

Gains or the amount debited to profit and loss account and credited to the ‘special Economic Zone Re-Investment Allowance Reserve Account (to be created and utilized for the purpose of the business of the assesse) whichever is less

(3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account has been utilized for any purpose other than those specified purposes, the amount so utilized; or has not been utilized before the expiry of the period specified the amount not so utilized, shall be deemed to be the profits, and shall be charged to tax accordingly :

(4) This section applies to any undertaking, being the Unit, which fulfils

all the following conditions, namely:—

(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;

(ii) It is not formed by the splitting up, or the reconstruction, of a business already in existence:

(iii) It is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.

Computation of Profits

Profit derived from export of articles manufactured in a unit in SEZ can be calculated using the following formula:-

• Profit of the business of the unit in SEZ ×Export sales of the unit in SEZ/ Total sales of the unit in SEZ

Assessment Year 2021-2022

Same provisions applicable to Assessment Year 2020-2021