MF0012 – Taxation Management

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Summer 2013

Master of Business Administration- MBA Semester 3

MF0012 – Taxation Management - 4 Credits

(Book ID: B1760)

Note: Assignment (60 marks) must be written within 6-8 pages. Answer all questions.

Kindly note that 10 marks questions should not exceed 400 words and 5 marks should not exceed 200 words.

Q1.Explain the objectives of tax planning. Discuss the factors to be considered in tax planning.

(Objectives of tax planning 5 marks; Factors in tax planning 5 marks) 10 marks

Answer: Objectives of tax planning :

A. Objective of raising revenue:

The basic and primary objective of taxation is raising revenue.  Enormous amount needed by modern governments for National defense, creation of infrastructure and social upliftment schemes make regular and systematic resource mobilization compulsory.

B. Regulatory objectives:

Taxation performs an important regulatory role in different socio economic aspects.

• Regulatory consumption: State can discourage consumption of harmful and undesirable goods by levying prohibitive rates of tax.

Q2.Explain the categories in Capital assets. Mr. C acquired a plot of land on 15th June, 1993 for 10,00,000 and sold it on 5th January, 2010 for 41,00,000. The expenses of transfer were 1,00,000.Mr. C made the following investments on 4th February, 2010 from the proceeds of the plot.

 a) Bonds of Rural Electrification Corporation redeemable after a period of three years, 12,00,000.

b) Deposits under Capital Gain Scheme for purchase of a residential house 8,00,000 (he does not own any house).Compute the capital gain chargeable to tax for the AY2010-11.

(Explanation of categories of capital assets 4 marks ; Calculation of indexed cost of acquisition 2 marks; Calculation of long term capital gain 2 marks; calculation of taxable long term capital gain 2 marks) 10marks

Answer : Categories of capital assets :

1. Collectibles :

Long-term investments in collectibles are taxed at a flat 28%. Short-term investments in collectibles are taxed as short-term capital gains at your ordinary income tax rates. Collectibles include the following items:

• stamps,
• coins,
• precious metals,
• precious gems,
• rare rugs,
• antiques,
• alcoholic beverages, and
• fine art.

Q3.X Ltd. has Unit C which is not functioning satisfactorily. The following are the details of its fixed assets:

Asset	Date of acquisition	Book value (Rs. lakh )
Land Goodwill (raised in books on 31st March, 2005) Machinery Plant	10th February, 2003 5th April, 1999 12th April, 2004	30 10 40 20

The written down value (WDV) is Rs. 25 lakh for the machinery, and Rs.15 lakh for the plant. The liabilities on this Unit on 31st March, 2011 are Rs.35 lakh.

The following are two options as on 31st March, 2011:

Option 1: Slump sale to Y Ltd for a consideration of 85 lakh.

Option 2: Individual sale of assets as follows: Land Rs.48 lakh, goodwill Rs.20 lakh, machinery Rs.32 lakh, Plant Rs.17 lakh.

The other units derive taxable income and there is no carry forward of loss or depreciation for the company as a whole. Unit C was started on 1st January, 2005. Which option would you choose, and why?

(Computation of capital gain for both the options 4 marks; Computation of tax liability for both the options 4 marks ; Conclusion 2 marks) 10marks

Answer :  Total price of the unit is :

Option 1 :

The net wealth of the undertaking (aggregate value of the total assets of the undertaking minus the value of the

liabilities as appearing in books of accounts) shall be deemed to be the cost of acquisition and the cost of improvement for the purpose of computation of capital gains. No indexation would be given even in the case of LTCG.

Q4.What do you understand by customs duty? Explain the taxable events for imported, warehoused and exported goods. List down the types of duties in customs. An importer imports goods for subsequent sale in India at $10,000 on assessable value basis. Relevant exchange rate and rate of duty are as follows:

Particulars	Date	Exchange Rate Declared by CBE&C	Rate of Basic Customs Duty
Date of submission of bill of entry	25th February, 2010	Rs.45/$	8%
Date of entry inwards granted to the vessel	5th March, 2010	Rs.49/$	10%

Calculate assessable value and customs duty.

(Meaning and explanation of customs duty 2 marks; Explanation of taxable events for imported, warehoused and exported goods 3 marks; Listing of duties in customs 2 marks; Calculation of assessable value and customs duty 3marks) 10marks

Answer : Custom duty :

A customs duty is a tariff or tax on the importation (usually) or exportation (unusually) of goods. In the Kingdom of England, customs duties were typically part of the customary revenue of the king, and therefore did not need parliamentary consent to be levied, unlike excise duty, land tax, or other forms of taxes. Commercial goods not yet cleared through customs are held in a customs area, often called a bonded store, until processed. All authorized ports are recognized customs area.

Taxable events for imported , warehoused and exported goods :

Any event or transaction that results in a tax consequence for the party who executes the event.

Q5.Explain the Service Tax Law in India and concept of negative list. Write about the exemptions and rebates in Service Tax Law.

(Explanation of Service Tax Law in India 5 marks; explanation of concept of negative list 2marks; Explanation of exemptions and rebates in Service Tax Law 3 marks) 10marks

Answer : Service tax laws in India :

 Generally, the liability to pay service tax has been placed on the ‘service provider’. However, in respect of the taxable services notified under Sec.68(2) of the Finance Act,1994, the service tax shall be paid by such person and in such manner as may be prescribed at the rate specified in Sec.66 of the Act and all the provisions of Chapter-V shall apply to such person as if he is the person liable for paying the service tax.

The following services have been notified under Sec.68(2) of Finance Act,1994:

 the services,

Q6.Explain major considerations in capital structure planning. Write about the dividend policy and factors affecting dividend decisions.

(Explanation of factors of capital structure planning 6 marks; Explanation of dividend policy 2 marks; factors affecting dividend decisions 2 marks) 10marks

Answer :  Factors of capital structure planning :

1. Trading on Equity:

 The word “equity” denotes the ownership of the company. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to additional profits that equity shareholders earn because of issuance of debentures and preference shares.

2. Degree of control:

 In a company, it is the directors who are so called elected representatives of equity shareholders.

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