Tax Planning

Dr. N.K.Gupta

Tax PlanningTax PlanningArranging one’s financial affairs so as to reduce the tax liability to the minimumThrough legal means onlyTake advantage of all possible exemptions, deductions, rebates and reliefs permitted under the actHelps to achieve social and economic goalsEncourages savings and investments

ExampleChoice of form of business organisation at the time of starting a new businessDepends upon various tax reliefs available to different forms and the prevailing tax rates

Tax EvasionReduction in total income by making false claims or withholding information so as to reduce tax liabilityIllegal, immoral, anti-social and anti-national practiceAttracts penalty and prosecution

Tax can be evaded by:

Inflating expensesNon-disclosure of incomeOmission of transactions from books of accountsUnderstatement of incomesSubmitting bogus receipts for donation to claim deduction

ExampleHolding meetings at hill stations for holidayingCharging medical expenses incurred on distant relatives to the accounts of the company

Tax AvoidanceArt of dodging tax without actually breaking the lawReduces tax incidenceAvails of certain loopholes in the lawExcludes fraud, concealment and other illegal measures

ExampleBuying agricultural land

or undertaking foreign journey

at the cost of the organisation but

for the sake of personal enjoyment

Tax rates for the Assessment Year

2010-11

(A). For woman, resident in India and below the age of 65 years at any time during the previous year

Upto Rs.1,90,000 Nil

Rs. 1,90,001 to Rs. 3,00,000 10%

Rs. 3,00,000 to Rs. 5,00,000 20%

Above Rs.5,00,000 30%

(B)For an individual, resident in India who is of the age of 65 years or more at any time during the previous year Upto Rs.2,40,000 Nil

Rs.2,40,001 to Rs. 3,00,000 10%

Rs. 3,00,000 to Rs. 5,00,000 20%

Above Rs.5,00,000 30%

(C).Individuals, other than those mentioned in (A). and (B)., HUF, AOP/BOI (other than co-op societies

Upto Rs.1,60,000 Nil

Rs. 1,60,001 to Rs. 3,00,000 10%

Rs. 3,00,000 to Rs. 5,00,000 20%

Above Rs.5,00,000 30%

Education cess @ 3% is charged on the sum of the amount of income tax and surcharge

WHY BUDGETTo function efficiently and discharge all its duties and obligations, every government needs resources.Through the budgetary process, the Indian Parliament authorizes the government of the day to collect funds by way of taxes, duties, cess, borrowings and so on.The funds so collected by the government are used, with the approval of parliament, to meet the expenditures.

Contd…The President Of India is obliged constitutionally to have the Annual Financial Statement for ensuring financial year laid on the Table of the House under Article 112.But, according to Article 77(3), The Finance Minister has been made responsible to prepare the Annual Financial Statement and pilot it through Parliament.This Annual Financial Statement is called the Budget

THE TEAM

The Finance Minister prepares the Union Budget and budgets of those states under President’s Rule.Though the ministry of finance has the overall responsibility of framing the budget, other organs of the state are also involved in budget-making.

THE FINANCE MINISTRYIn common usage, the budget is referred to as being the Finance Minister’s speech and the documents tabled on the day of the budgetThe actual process, however, starts much earlier and continues even after the budget is presented to the Parliament.Each department in the finance ministry is charged with a particular responsibilty.

1. The Planning Commission: Sets the overall targets for the ministries

2. The Controller and Auditor General:Keep a check on Accounts

2. Administrative Ministries:Finance Minister has to consult the administrative ministries for their requirements and to incorporate plan priorities.

Expenditure:Department of Expenditure

Revenue:Non-Tax – Department of Economic AffairsTax- Department of Revenue

Deficit:Department of Economic Affairs

THE PROCESSThe Budgeting exercise kicks of in September every year with the issue of a budget circular by the Budget Division of the Department of Economic Affairs (DoE) to all Union Ministers, all states and UTs, autonomous bodies and departments and the three arms of the defence forces for preparing revised estimates for the current financial year and the budget estimate for the next financial year.

DUE DATES

Due dates for rendition of estimates for2010-11 budget ministries/ departmentsto Budget Division of Department ofEconomic Affairs are:

October 26, 2009- Interest receipts/ recovery of loansOctober 27, 2009- Capital receipts (including public account transactions)

Contd…

October 31, 2009- Statement of (proposed) Budget estimates (SBE)November 30, 2009- Revenue receiptsImmediately after ceilings are communicated (Other information)OrWithin 3 days of receipt of plan allocation from Planning Commission

CONSULTATIONS1. Administrative Ministries:

After the line ministries submit relevant documents, pre budget meetings begin. These involve extensive consultations between line ministries and the Department of Expenditure

2. Interest Groups:Meanwhile the Department of Economic Affairs and Department of Revenue engage with shareholders such as farmers, labour unions, business, FIIs, economists and civil society groups

Contd…3. State Governments:

Demands to the state governments are sent to the concerned finance ministry departments for evaluation

4. The Finance Ministry also undertakes an intense internal assessment:

Spending Priority- Department of Economic AffairsRevenue Mobilization- Department of RevenueAligning with policy goals- Department of Economic Affairs

Contd…5. Once the Pre-Budget meetings are over, the approved

ceiling for expenditure, as financed in these meetings, is communicated. It includes internal ceilings of revenue and capital expenditure. Based on these limits, each ministry/ department will prepare a final statement of budget estimates and send to the budget division.

6. The Revenue Department goes through the demands and works out their revenue implications. A final call on the tax proposals is taken by the Finance Minister. The proposals are discussed with the Prime Minister before a final decision is taken.

7. Budget Division then gets on with the task of preparing the budget documents. There are 13+ core documents

THE SECRET WORLD OF THE FINANCE MINISTER

The entire process of collating data and preparation of the text of the budget document is done by a few selected officials and stenographers working on computers which are de-linked from all networks, including NIC hot link Intelligence Bureau Sleuths monitor every movement, phone calls and the security of all officials involved with budget preparation and productionUse of cell phones is monitored and jammed in some areas, All electronic storage devices are out of bound.

PRINTING OF THE BUDGET DOCUMENTS

Finance Ministry hands over the CD containing print ready templates of all budget documents for printing around February 24The Union Budget is printed at the special printing press in the basement of the North Block of the Central Secretariat in New Delhi.Initially, budget papers were printed in Rashtrapati Bhawan. From 1950s the venue was shifted to Minto Road. Since 1990 budget papers are being printed in the press at North Block.

QUARANTINE

All officials, technicians and workers, involved with the printing press are quarantined, they have to sleep in North block.The legal experts on taxation from the law ministry who check the text and wordings of the Tax Acts are also quarantined.The Press Information Bureau officials who prepare press notes in English, Hindi and Urdu are also quarantined.

Contd…

All quarantines officials walk out of the North Block only once the budget has been tabled by the FM in the Lok SabhaThe cabinet gets to see the budget summary only 10 minutes before Parliament assembles for the Budget presentation.

HOW THE BUDGET IS PASSED

The Budget is presented to Parliament on a date fixed by the President. By convention, since 1999, it is being presented at 11 am on the last working day of FebruaryThe budget session of Parliament opens with the address by the President.

PRESENTATIONFinance Minister presents the budget in the Lok SabhaThe Budget speech of the FM has two parts:

Part A deals with general economic survey of the country and policy statementsPart B contains taxation proposals

‘Annual Financial Statement’ is laid on the table of Rajya Sabha after the FM’s speech.

DISCUSSIONNo discussion follows immediately after the budget is presentedFew days later the Lok Sabha discusses the Budget as a whole and not the details for 2-3 days.The FM makes a reply at the end of the discussion.A ‘Vote on Account’ for expenditure for the next two months of ensuring financial year is obtained from Parliament.

Contd…

The House is adjourned for the fixed period.During this period, the Demands for Grants of various ministries/ departments including Railways are considered by relevant standing committees.

VOTE

Standing Committee reports are presented to the House. It discusses and votes on demands for grants, ministry-wise.The speaker puts all the outstanding Demands to the vote of the House. This device is known as the Guillotine. The Lok Sabha has the power to assent to or refuse any demand or even to reduce the amount of grant sought by the government.

Contd…In the Rajya Sabha, there is only a general discussion on the Budget. It does not vote on the Demands for GrantsAfter the general discussion on the budget proposal and voting on Demands for Grants have been completed, government introduces the Appropriation Bill. The Appropriation Bill is intended to give authority to the government to incur expenditures from and out of the Consolidated Fund of India.

DOCUMENTS

The Finance Minister takes the followingdocuments in the Lok Sabha:

Key to BudgetBudget HighlightsBudget SpeechAnnual Financial StatementsBudget at a glanceFinance Bill

Thank You

sirnkgupta@yahoo.com