TAX PLANNING FOR NEW BUSINESS

                           TAX PLANNING FOR SETTING UP OF A NEW BUSINESS


When a person decides to set up a new business he has to consider a number of factors, namely the nature & size of business, location of business , the amount of capital required & means to raise it, risk bearing capacity of entrepreneur ,form of business organisation from the point of view of stability, cost, legal requirements & ease of operation from the stand point of management. 

    Apart from these consideration in the present era high income tax everybody has to consider tax effects of the following.
1.Nature & size of business
2.Location of business
3.Form of business organisation.

1.Location , nature and size of business :  The following tax benefits are available under income tax Act .

• Agriculture income is fully exempt.
• Income from newly established units in SEZ , is exempt for consecutive 15 assessment years up to specified limit.
• Deduction in respect of profits & gains from infrastructure development undertaking.
• Deduction in respect of profits & gains other than infrastructure development undertaking.
• deduction in respect of profits & gains from certain undertakings in certain special category states.
• Deduction in respect of profits & gains from specified business.
• Deduction in respect of profits & gains from housing projects.

Tax planning in respect of assesses engaged in certain businesses :

1.Tax planning for tea, coffee or rubber industry : 

Income from the manufacture of tea : 60% of income derived from the sale of tea grown and manufactured by the seller in India is deemed to be agriculture income the remaining 40% is taken as business income.

INCOME                                                                 Agricultural income           Business income

From manufacturing of coffee grown & cured                    75%                                  25%  

Coffee grown,cured,roasted& grounded                             60%                                   40%

Rubber                                                                                 65%                                   35%

2.Tax planning for hospitals :   If an assessee incurs capital expenditure in respect of business of building & operating a new hospital anywhere in India with at least 10000 beds for patients, he will be entitled to deduct such expenditure from income of such business.

3. Tax planning for hotels : 

 (A) An undertaking engaged in the business of hotel located in north eastern states, if such hotel has started or starts functioning between 1/4/07 and 31/3/17  , 100% of profits & gains derived from such business for 10 consecutive assessment years.

CONDITIONS FOR DEDUCTION :  

• It is not formed by splitting up or the reconstruction of a business already in existence.
• It is not formed by the transfer of machinery or plant previously used for any purpose.
• The assessee files audit report in the prescribed form ( form no : 10 CC BB A ) electronically certifying that the deduction has been correctly claimed.

(B) If an assessee capital expenditure incurred in respect of business of building &  operating a new hotel (>2 star) any where in India , he will entitled to deduct such expenditure from income of such business.

CONDITIONS FOR 2 & 3 ;

1. It should be a new business & not splitting up or reconstruction of a business already in existence.

2. Such business should be commenced after 31/3/10

3.The capital expenditure is incurred prior to the commencement of operations

4. The amount is capitalized in the books of account on date of commencement of its operations.

5.Capital expenditure shall not include expenditure incurred on acquisition of land or goodwill or financial instrument.

6.The assessee shall get his accounts audited & furnished the report electronically.

4.Tax  planning for business of generation & distribution of power :    An undertaking which :

(a)Is set up in any part of India for generation or generation & distribution of power if it begins to generate power after 31/3/93 but before 1/4/17.

(b)Starts transmission or distribution by laying a network of new transmission or distribution lines after 31/3/99 but before 1/4/17.

(c)Undertakes substantial renovation & modernization of the existing network of transmission or distribution of lines after 31/3/04 but before 1/4/17.

NOTE : Substantial renovation & modernization means an increase in the P&M in the network of transmission or distribution lines by at least 50% of the book value of such P&M  on 1/4/04.

100% of such profits for 10 consecutive Assessment years will be allowed as deduction.

CONDITIONS :    

• It is not formed by splitting up or the reconstruction of a business already in existence.
• It is not formed by the transfer of machinery or plant previously used for any purpose.
• NOTE :The assessee  can claim depreciation on assets acquired after 31/3/1997 on the basis of actual cost instead of WDV method .

5.Tax planning for the business of infrastructure  : 

A deduction will be allowed from gross total income to an assessee in respect of profits & gains derived from the business of,
(i) developing or
(ii)operating & maintaining or
(iii)developing ,operating & maintaining any infrastructure facility which fulfills the following conditions :

1. It is owned by a company registered in India or by an authority 
2. It enters into an agreement with the central or state government or local authority for developing , operating & maintaining a new infrastructure facility.
3. It starts operating & maintaining the infrastructure facility on or after 1/4/1995.

6. Tax planning for business of  Natural gas  : 
                     The deduction will be allowed if the central government( CG) has entered into an agreement with the assessee.
                 The assessee has before the end of the previous year has deposit the amount :
(a) In a special account with the SBI , for the specified purposes in a scheme approved in this behalf by the govt. Of India in the ministry of petroleum & natural gas.
(b) In an account-site restoration account (SRA) for the purposes specified in a scheme framed by ministry aforesaid.
1. A sum equal to the amount or the aggregate of the amount so deposit.
                                   ( OR )
2. 20%  of profits of such business before making any deduction under this section.
               
                         ( Which ever is lower )
(c) The accounts of the assessee must be audited for the previous year in which the deduction is claimed & the audit report must be furnished on demand in form no.3 AD.

 7. Tax planning for eligible assessee :    The provisions of section 44 AD are applicable to an eligible assessee who is engaged in eligible business. The income from such business shall be presumed to be:
6% of total turnover or gross receipts which is received by an account payee cheque or before the due date of furnishing the return of income  u/s 139(1) in respect of that previous year.
   
              However , an eligible assessee may declare a sum higher than aforesaid sum income actually earned from eligible business.

8. Tax planning for business of plying, hiring, or leasing goods carriages :  
         Tax provisions of section 44E are applicable to an assessee , who is engaged in the business of plying, hiring, or leasing of goods carriage(trucks) owning not more than 10 goods carriages at any time during the previous year.
    
             The income of such business shall be deemed to be the aggregate of the profits & gains from all the goods carriages owned by him in the previous year & will be computed as under :

             The profits & gains from each goods vehicle shall be rs.7,500 for every month or part of a month during which the goods vehicleis owned by the assessee in the previous year; However , an assessee may declare a sum higher than the aforesaid sum as income actually earned from such business.

Amendment w.e.f A.Y .2019- 20 :    The presumed income from heavy goods vehicle shall be rs.1000 per ton of gross vehicle weight or unladen weight, as the case may be , for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year.
  " Heavy goods vehicle" means any goods carriage , the gross vehicle weight of which exceeds 12,000 kilograms.

9. Tax planning for shipping companies :  
1. An Indian company operating qualifying ship/ ships may at its option compute income from qualifying ship/ships on the basis of deemed income or under section 28 to 43C .

2. Qualifying ship: A ship is qualifying if :
(a) It is a sea going ship or vessel of fifteen net tonnage or more.
(b)It is a ship registered under the merchant shipping Act, 1958, or a ship registered outside India in respect of which a license has been issued by the director general of shipping ; &
(c) a valid certificate in respect of such ship indicating its net tonnage is in force.
3. Option. A company may opt the same scheme making an application to the joint commissioner (in form no.65) within 3 months of the date of its incorporation or the date on which it became a qualifying company.
     Once such option is exercised there is a lock-in period of 10 years. If a company opts out, it is debarred from re-entry for 10 years.
4.Maintenance of accounts & audit : The business of operating qualifying ships is to be considered a separate business & separate books of account are to be maintained.
             The accounts of the qualifying company should be audited by a chartered accountant & the report should be furnished electronically.  


                           FORM   OF  BUSINESS  ORGANISATION 

A business can be either of an individual or joint Hindu family (H.U.F) or a firm or a joint stock company .The best form of business organisation from tax point of view is one which attracts minimum tax liability.

1. INDIVIDUAL  :  An individual pays tax on his total income at prescribed rates on the basis of slab system . However, he is not entitled to deduction , in computing business income, any remuneration for work done by him and interest on capital or own loan invested in the business.

2. Hindu Undivided Family (H. U. F ) :  A joint Hindu family pays tax on its total income at prescribed rates on the basis of slab system. The family can pay reasonable remuneration to the karta & other family members for their services to the business & it is allowed as a deduction in computing the business income. However, interest on capital contributed bybthe coparceners for the business is not deductible in computing business income. The member of the familyb, who has received the remuneration from the family will include it in his income under the head ' Salaries'.

3. Firm  :  A firm will pay tax on its total income ( for the assesssment year 2019-20), @ 30% . In computing the business income the following payments to the partners are deductible :
1. Interest on capital or loan given to the firm at the rate mentioned in the partnership deed but not exceeding 12% per annum.
2. Remuneration to working partners as mentioned in the partnership deed but not exceeding the following limits.
(i) on first Rs. 3,00,000 of the book profits @ 90%  or Rs.1,50,000 ( if 90% of book profits is less than Rs.1,50,000 or there is a loss), which ever is more;
(ii) on balance of the book profits @ 60%.

4. Company  :  A domestic company is liable to pay tax for the assessment year 2019-20 as under: 
(i)  Where the total turn over or the gross receipt in the previous year 2016-17  does not exceed 250 crore rupees ----@ 25 %
(ii)  In any other case -----@ 30 %

Surcharge. (i) @ 7 % if total income exceeds Rs. One crore but does not exceed Rs.10 crore; 
(ii) @ 12 % if total income exceeds Rs. 10 crore.

In computing the business income, the  company can deduct the whole amount of interest paid on loan taken for business purposes & the remuneration paid to the managing director, directors & other staff . Further, a deduction under section 80 IB is available.



Tax planning : 
1. Where the deduction from gross total income is allowed for certain number of assessment years, as far as possible the business should be commenced in the beginning of the year , so that the full advantage of the deduction may be available .
2. For availing the deduction under section 80-IA, 80-IB , 80-IC, 80-IE or 80- JJA etc., the conditions laid down for the deduction must be complied with.
3. The rates of tax applicable to H. U. F. are the same as applicable to an individual. Even then each case requires a careful analysis to avail the maximum tax benefit.
4. The firm should pay interest & remuneration to partners to the extent deductible under section 40(b) to reduce the incidence of tax.
5. A firm can pay interest to its partners on their capital contribution or loan subject to a maximum of 12 % per annum. If the rate of interest is more than 12 % , it is treated as a disallowed expense. To avoid this ceiling the partners may follow inter- deposit of funds scheme.
   Accordingly partners of firm A may deposit their funds in firm B and vice- versa. By this process the tax liability of the firm & its partners can be reduced.