CHAPTER I:

INTRODUCTION

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 Chapter I : Introduction

TAX PLANNING

Tax planning is a legal way of reducing your tax liabilities in a year. It will help you to
utilize the tax exemptions, deductions, and benefits in the best possible way for
minimizing your tax burden. However, it should be done in a legal manner.

What is Tax Planning?

Tax planning is the analysis of one‘s financial situation from a tax efficiency point of
view so as to plan one‘s finances in the most optimized manner. Tax planning allows a
taxpayer to make the best use of the various tax exemptions, deductions and benefits to
minimize their tax liability over a financial year. Tax planning is a legal way of reducing
income tax liabilities, however caution has to be maintained to ensure that the taxpayer
isn‘t knowingly indulging in tax evasion or tax avoidance.

Tax Planning in India:

In India, there are number of tax saving options for all taxpayers. These options allow for
a wide range of exemptions and deductions that help in limiting the overall tax liability. The
deductions are available from sections 80C through to 80U and can be claimed by eligible
taxpayers. These deductions are made against the quantum of tax liabilities. There are various
other sections under the Income Tax Act, 1961 that can reduce your tax liabilities such as
exemptions and tax credits.

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Corporate Tax Planning

Corporate tax planning is a means of reducing tax liabilities on a registered company.

The common ways to do this includes taking deductions on business transport, health
insurance of employees, office expenses, retirement planning, child care, charitable
contributions etc. Through the various tax deductions and exemptions provided under the
Income Tax Act, a company can substantially reduce its tax burden in a legal way. Once
again, tax planning should not be confused with tax avoidance and all the planning
should be done within the framework of law.

Increasing profit for a company results in higher tax liabilities. As such, it becomes
imperative for them to devote enough time on tax planning to reduce the liabilities. With
proper tax planning, the direct tax and indirect tax burden is reduced at times of inflation.
It also assists in proper planning of expenses, capital budget and sales and marketing
costs, among others. A good tax planning results out of:

 Disclosing correct information to relevant IT departments.

 Not being ignorant of applicable tax laws as well as court judgements regarding
the same.
 Legal tax planning should be done which is under the purview of law.
 Planning must be done with business objectives in mind and should be flexible
enough to incorporate possible changes in the future.

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CORPORATE TAX:

Corporate tax is the income tax that is paid by companies from the revenue they earn.
This tax also comes with a slab of its own that decides how much tax the company has to
pay. For example a domestic company, which has revenue of less than Rs. 1 crore per
annum, won‘t have to pay this tax but one that has a revenue of more than Rs. 1 crore per
annum will have to pay this tax. It is also referred to as a surcharge and is different for
different revenue brackets. It is also different for international companies where the
corporate tax may be 41.2% if the company has revenue of less than Rs. 10 million and
so on.

As per Union Budget 2018, corporate tax relief has been extended to companies with a
turnover less than Rs.250 crore. In FY2015-16, the corporate tax rate was reduced to 25%
for companies with a turnover less than Rs.50 crore. Now, the same reduced rate of 25%
is extended to companies who have reported a turnover less than Rs.250 crore in FY
2016-17. This extension in tax relief will benefit micro, small and medium companies
filing their tax returns. By leaving more investible surplus, the companies now have an
opportunity to create more jobs.

There are four different types of corporate tax. They are:

Minimum Alternative Tax:

Minimum Alternative Tax, or MAT, is basically a way for the Income Tax Department to
get companies to pay a minimum tax, which currently stands at 18.5%. This form of tax
was brought into effect through the introduction of Section 115JA of the Income Tax Act.
However, companies involved in infrastructure and power sectors are exempt from
paying MAT.

Once a company pays the MAT, it can carry the payment forward and set-off (adjust)
against regular tax payable during the subsequent five-year period subject to certain
conditions.

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Fringe Benefit Tax:

Fringe benefit, or FBT, was a tax which applied to almost every fringe benefit an employer
provided to their employees. In this tax, a number of aspects were covered. Some of them
include:

1. Employer‘s expense on travel (LTA), employee welfare, accommodation, and

entertainment.
2. Any regular commute or commute related expense provided by an employer.
3. Employer‘s contribution to a certified retirement fund.
4. Employer Stock Option Plans (ESOPs).

FBT was started under the Indian government‘s stewardship from April 1, 2005.
However, the tax was later scrapped in 2009 by the-then Finance Minister Pranab
Mukherjee during the 2009 Union Budget session.

Dividend Distribution Tax

Dividend Distribution Tax was introduced after the end of 2007‘s Union Budget. It is
basically a tax levied on companies based on the dividend they pay to their investors.
This tax is applicable on the gross or net income an investor receives from their
investment. Currently, the DDT rate stands at 15%.

Banking Cash Transaction Tax:

Banking Cash Transaction Tax is yet another form of tax that has been abandoned by the
Indian government. This form of taxation was operation from 2005-2009 until the then
FM Pranab Mukherjee nullified the tax. This tax suggested that every bank transaction
(debit or credit) would be taxed at a rate of 0.1%.

Provision relating to taxation of a Company

Indian companies are taxable in India on their worldwide income, irrespective of its

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source and origin. Foreign companies are taxed only on income which arises from
operations carried out in India or, in certain cases, on income which is deemed to have
arisen in India. The later includes royalty, fees for technical services, interest, gains from
sale of capital assets situated in India (including gains from sale of shares in an Indian
company) and dividends from Indian companies. Thus, the tax-liability on income of a
company depends upon the residential status of the company.

A Company is said to be resident in India during any relevant previous year if:-

 It is an Indian Company; or
 The control and management of its affairs is situated wholly in India. In case of
Resident Companies, the total income liable to tax includes [section 5(1)]:-
 Any income which is received or is deemed to be received in India in the relevant
previous year by or on behalf of such company
 Any income which accrues or arises or is deemed to accrue or arise in India
during the relevant previous year
 Any income which accrues or arises outside India during the relevant previous
year.

Similarly, a Company is said to be non-resident during any relevant previous year if:

 It is not an Indian company ,and

 The control and management of its affairs is situated wholly/partially outside
India. In case of Non-Resident Companies, the total income liable to tax
includes[section 5(2)]:-
 Any income which is received or is deemed to be received in India during the
relevant previous year by or on behalf of such company
 Any income which accrues or arises or is deemed to accrue or arise to it in
India during the relevant previous year.

As a result a situation may arise where the same income becomes taxable in the hands of
the same company in one or more countries, leading to 'Double Taxation'. The problem

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of double taxation may arise on account of any of the following reasons:-

 A company (or a person) may be resident of one country but may derive income
from other country as well, thus he becomes taxable in both the countries.
 A company/person may be subjected to tax on his world income in two or more
countries, which is known as concurrent full liability to tax. One country may
taxon the basis of nationality of tax-payer and another on the basis of his
residence within its border. Thus, a person domiciled in one country and residing
in another may become liable to tax in both the countries in respect of his world
income.
 A company/person who is non-resident in both the countries may be subjected to
tax in each one of them on income derived from one of them, for example, a non-
resident person has a Permanent establishment in one country and through it he
derives income from the other country.

In India the relief against double taxation has been provide under Section 90 and Section
91 of the Income Tax Act.

 Section 90 of the Income Tax Act relates to bilateral relief. Under it, the Central
Government has entered into an agreement with the Government of any country
outside India. These agreements called as "double taxation avoidance agreements
(DTAA's)" , provide for the following:-

 Granting of relief in respect of:-

o Income on which income tax has been paid both in India and in
that country or
o Income tax chargeable in India and under the corresponding law in
force in that country to promote mutual economic relations, trade
and investment, or
 The type of income which shall be chargeable to tax in either country so
that there is avoidance of double taxation of income under this Act and

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 under the corresponding law in force in that country

In addition the

Central Government may enter into an agreement to provide:-

 For exchange of information for the prevention of evasion or avoidance of

income tax chargeable under the Act or under the corresponding law in
force in that country, or investigation of cases of such evasion or
avoidance, or
 For recovery of income tax under the Act and under the corresponding law
in force in that country.

India has entered into DTAA with 65 countries including countries like U.S.A.,
U.K., Japan, France, Germany, etc. In case of countries with which India has
double taxation avoidance agreements, the tax rates are determined by such
agreements.

Under the section, the assesses is given relief by credit/refund in a particular

manner even though he is taxed in both the countries. Relief may be in the form
of credit for tax payable in another country or by charging tax at lower rate. The
steps involved in granting such a bilateral relief are:- (a) Compute the total
income of person liable to pay tax in India in accordance with the provisions of
the Income Tax Act (b) Allow relief as per the terms of the tax treaty entered into
with the other contracting company, where the taxation has suffered double
taxation.

The liabilities to tax arising under the Income Tax Act are subject to provisions of
the double taxation avoidance agreements between India and foreign country.
Thus the treaty provisions shall prevail over the income tax provisions.

The types of agreements under DTAA's can be majorly categorized as:-

 Comprehensive Agreements:-These are elaborated documents which

puts forward in detail that how incomes under various heads may be dealt
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 with.
 Limited Agreements :-These are entered into to avoid double taxation
related to the income derived from operation of aircrafts, ships, carriage of
cargo and freight.
 Other Agreements :-including double taxation relief rules.

Section 91 of the Income Tax Act relates to unilateral relief. Under it, if any
person/company is resident in India in any previous year and paid the income, which
accrued to him in India, to any country with which there is no agreement (under
Section 90) for relief from double taxation, he shall be entitled to deduction from the
Indian Income-tax payable by him of a sum calculated on such doubly taxed income
at the average Indian rate of tax or the average rate of tax of said country, whichever
is lower, or at the Indian rate of tax if both the rates are equal.

The steps involved in calculating relief under this section are:- (a)Calculate tax on total
income(including foreign income) and claim relief applicable on it (b)Add surcharge and
education cess after claiming rebate under the Section 88E (c)Compute average rate of
tax by dividing the tax computed in previous step with the total income (d)calculate
average rate of tax of foreign country by dividing income-tax actually paid in the said
country after deduction of all relief due (e)Claim the relief from the tax payable in India
at the rate computed in previous two steps on the basis of whichever is less.

WHY DO WE NEED TAX PLANNING

Every tax payer knows the toll that paying taxes puts on their financial income. Tax
Planning helps you to smartly invest in savings instruments, thereby offering combined
benefits of investment growth as well as reduction in the amount of taxes paid to the
Government.

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How to Save Income Tax

Declaring investments - From HRA, Life Insurance Premiums, National Savings

Certificate, Leave Travel Allowance to Fixed Deposit (minimum of 5 years), ELSS Tax
Saving Mutual Funds, and more, by ensuring that you have declared all your investments,
you can achieve more deductions on tax. The following options can be considering for
saving on income tax:

1. Investment options
o Mutual funds such as Equity Linked Savings Schemes (ELSS) can be
claimed for tax deduction under Section 80C. Compare to fixed deposits
and PPF‘s, the ELSS offers shorter lock-in period and more benefits when
it comes to making money.
o Unit Linked Insurance Plans (ULIP) are insurance schemes that are linked
to the market. The investment made under ULIP qualifies for tax
deductions.
2. Insurance
o Life insurance and health insurance - The money paid towards life
insurance and health insurance policies are considering for tax deductions
under Section 80C
3. Loans
o When we take a loan for buying a house or for renovation purpose, we are
eligible for tax deductions up to Rs.1.5 lakh for a financial year.

You can also consider the following options for reducing tax amount on
your income:

 Fixed Deposits (FD) - An FD with a lock-in period of five years can help you
save on tax while earning the interest on the deposited amount.

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  National Saving Certificate (NSC) - The NSC offers a safe and reliable method of
investing money. You can deposit as low as Rs.100 for a 5-10 year lock-in period.
The investments made under NSC are eligible for tax deductions.
 Provident Fund (PF) - You can also choose to invest more amount towards your
PF account that will help you reduce your taxable amount.

Types of Tax Planning:

 Purposive tax planning: Planning taxes with a particular objective in mind

 Permissive tax planning: Tax planning that is under the framework of law
 Long range and Short range tax planning: Planning done at the start and end of
a fiscal year respectively.

Tax Saving Objectives:

The primary objectives of your tax planning should be the following:

 Reduction in overall tax liability

 Economic stability
 Growth of economy
 Litigation minimization
 Productive investment.

INCOME TAX SLAB APPLICABLE FOR FY 2020-2021 :

1) Individuals And Hindu Undivided Family (HUF) Less Than 60 Years Old - Part
(I):

Annual Income Tax Rates Higher education and secondary cess

Up to Rs.2.5 lakhs* Nil Nil
Rs.2,50,001-Rs.5 lakhs 5% 3% of Income Tax
Rs.5,00,001-Rs.10 lakhs 20% 3% of Income Tax
Above Rs.10 lakhs 30% 3% of Income Tax

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Surcharge: When the total income is Rs.50 lakh or more but less than Rs.1 crore, the
surcharge is 10% of the income tax.

Surcharge: When the total income is more than Rs.1 crore, the surcharge is 15% of the
income tax.

*For the Financial Year 2017-2018, the income tax exemption limit is up to Rs.2.5 lakh
for individual and Hindu Undivided Family (HUF) except those who are covered under
Part (II) or Part (III).

2) Senior Citizen Who Are 60 Years Old Or Higher , But Less Than 80 Years Old –
Part (II) :

Annual Income Tax Rates Higher education and secondary cess

Up to Rs.3 lakh* Nil Nil
Rs.3,00,001-Rs.5 lakh 5% 3% of Income Tax
Rs.5,00,001-Rs.10 lakh 20% 3% of Income Tax
Above Rs.10 lakh 30% 3% of Income Tax

Surcharge: When the total income is Rs.50 lakh or more but less than Rs.1 crore, the
surcharge is 10% of the income tax.

Surcharge: When the total income is more than Rs.1 crore, the surcharge is 15% of the
income tax.

*For the Financial Year 2017-2018, the income tax exemption limit is up to Rs.3 lakh
except for those who are covered under Part (I) or Part (III).

3) Senior Citizens Who Are 80 Years Old Or More – Part (III):

Annual Income Tax Rates Higher education and secondary cess

Up to Rs.5 lakh* Nil Nil
Rs.5,00,001-Rs.10 lakh 20% 3% of Income Tax
Above Rs.10 lakh 30% 3% of Income Tax

Surcharge: When the total income is Rs.50 lakh or more but less than Rs.1 crore, the
surcharge is 10% of the income tax.

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Surcharge: When the total income is more than Rs.1 crore, the surcharge is 15% of the
income tax.

*For the Financial Year 2017-2018, the income tax exemption limit is up to Rs.5 lakh
except for those who are covered under Part (I) or Part (II).

Tax Deducted at Source (TDS) has to be deducted at applicable rates as mentioned above
along with the surcharge and Health and Education Cess.

Eligibility To Claim Rebate U/S 87A FY 2017-18 (AY 2018-19)

You can claim the rebate if you meet both the following conditions:

1. You are a Resident individual.

2. Your total income after deductions (under Section 80) is equal to or less than
Rs350000.
3. The rebate is limited to Rs 2,500. This means that if the total tax payable is lower
than Rs 2,500, then that amount of tax will be the rebate under section 87A. This
rebate is applied to the total tax before adding the Education Cess (3%).

INCOME TAX SLABS APPLICABLE FOR DOMESTIC COMPANIES

Turnover Particulars Tax Rate

If the gross turnover in the previous year is less than Rs.50 crore 25%
If the gross turnover in the previous year is more than Rs.50 crore 30%
Additional rates which are applicable:

Cess: 3% of the corporate tax

Surcharge: When the taxable income is higher than Rs.1 crore but less than Rs.10cr, the
applicable surcharge will be 7%. If the net income exceeds Rs. 10cr. rate is 12 %. In case
of foreign company, if the net income is between Rs. 1 cr.-10 cr. the rate is 2%, if the
income exceeds 10cr. rate is 5%

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TAX PLANNING STATEGIES

1. Employee Profit Sharing Plans (EPSP)

An EPSP can be utlilized by corporations with one of the benefits being a postponement
of source deductions payable on a year end tax planning bonus.

With the recently reduced corporate income tax rates, this vehicle receives less attention
than in the past.

When an EPSP is implemented, the normal 180 days rule for bonus payouts can be
increased, sometimes by as much as 13 months. This allows the corporation to hold the
additional payroll source remittance funds and earn interest on these amounts. In
addition, it postpones the required date for final determination of who the amounts will
be paid out to, thereby increasing flexibility.

2. Retirement Compensation Arrangements (RCA)

An RCA is a special trust account which is created to hold funds earmarked for the
retirement of key management personnel. These funds are held in a special account in
much the same way as RRSP funds would be. No income is reported by the individual
taxpayer until the funds are finally paid out of the RCA to the individual. If structured
properly, payments into the RCA are tax deductible by the payor corporation. Tax rates
of approx. 50% are initially paid by the RCA and the after tax funds are invested inside
the RCA. In certain cases, the income will be taxed in the hands of the individual at tax
rates much lower than normal. This can occur where the individuals taxable income

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drops as a result of retirement, or where the individual becomes resident for tax purposes
in a different province or a different country.

3. Capital Dividend Accounts (CDA)

CDA's can be used by business owners to convert retained earnings or capital gains to tax
free payments by the corporation to the individual shareholders. These plans are often
based on specialized life insurance policies which are owned by the corporations.

4. Holding Companies for Credit Proofing.

In certain circumstances it can be prudent to creditor proof your company. The basic
concept is to protect your current and future corporate retained earnings from future
creditors. While nothing can be done regarding current creditors, it may be possible to
protect a large portion of your companies value from future claims and lawsuits with the
use of properly setup holding companies.

5. Income Splitting and Small Business Deduction

In certain circumstances it may be reasonable to utilize more than a single corporate

small business tax deduction or to have a spouse or other relative participate in income
from a company. In theses cases, it is possible that substantial tax savings may also be
experienced as a result of such splitting of income and additional small business tax rates
.This solution often requires two distinct business units and the use of a partnership.

6. Crystallizing the $750,000 Capital Gains Deduction (CGD)

In certain circumstances an individual who owns shares of an active business in Canada

may be able to obtain a $750,000 CGD on the sale of those shares. This tax deduction
can be crystallized or "locked in" to ensure that the shareholder is able to take advantage
of this tax opportunity in the event of a future sale. A crystallization of the CGD in any
given year normally sees the individual reporting a gain of $750,000 without paying any

15
income tax on this amount. One of the requirements to qualify is that the shares sold are
"qualifying small business shares".

7. Flow Through Shares and Income Trusts

Certain individual investors and finding success with Flow Through Shares and Income
Trusts. Typically these investments are Real Estate based or are involved with Mining
and Oil and Gas investments. These investments can produce very substantial tax
deductions and tax credits on personal income tax filings.

8. Individual Pension Plans [IPP's]

IPP's can be utilized by business owners to provide an alternative to RRSP

contributions. In many cases, IPP contributions can be substantially higher than RRSP
contributions - sometimes more than double the amount [For 2004 the maximum RRSP
contribution is $15,500]. The terms of an IPP plan are definitely less flexible than an
RRSP however many business owners have found that the benefits associated with these
plans far outweigh the associated costs and limitations.

Like the EPSP's above, with the recently reduced corporate income tax rates, this vehicle
receives less attention than in the past.

9. Family Trusts

Family trusts can be excellent estate planning tools - they can assist business owners with
achieving their estate objectives in a controlled manner and can also produce overall
income tax savings. Family trusts can also be used to allow minor children to participate
in the $750,000 capital gains deduction [see item #6 above].

10. Other Ideas...

Other idea's which may represent opportunities for business owners include:

 Consider utilizing currently lower corporate tax rates and opt for NO BONUS',

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 Dividends to children who have reached 18 years of age,
 Scientific Research Tax Credits,
 Low Interest Loans to Spouses and other family members to split income,
 Alberta Trusts (recent CRA requirements have reduced interest in these),
 Health and Welfare Trusts for medical expenses,
 Employee Stock Option Plans, and
 Tax Free Scholarship Grants for certain children attending post secondary
institutions.

Tax Evasion

Tax evasion is the illegal evasion of taxes by individuals, corporations, and trust. Tax
evasion often entails taxpayers deliberately misrepresenting the true state of their
affairs to the tax authority to reduce their tax liability and includes dishonest tax
reporting, such as declaring less income, profits or gains than the amounts actually
earned, or overstating deductions.

Tax evasion is an activity commonly associated with the informal economy. One
measure of the extent of tax evasion (the ―tax gap‖) is the amount of
unreported income, which is the difference between the amount of income that should
be reported to the tax authorities and the actual amount reported.

Tax Avoidance

In contrast, tax avoidance is the legal use of tax laws to reduce one‘s tax burden. Both
tax evasion and avoidance can be viewed as forms of tax noncompliance, as they
describe a range of activities that intend to subvert a state‘s tax system, although such
classification of tax avoidance is not indisputable, given that avoidance is lawful,
within self-creating systems.

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 CHAPTER II:

RESEARCH DESIGN

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 Chapter II: Research Methodology

Research is a systematic process of collecting and analyzing information (data) in order

to increase our understanding of the phenomenon about which we are concerned or
interested. A research design is the framework or plan for a study which is used as a
guide in collecting analysing the data collected. It is the blue print that is followed in
completing the study. The basic objective of research cannot be attained without a proper
research design. It specifies the methods and procedures for acquiring the information
needed to conduct the research effectively. It is the overall operational pattern of the
project that stipulates what information needs to be collected, from which sources and by
what methods.

 Title of the study:

The present study is titled as ―A Project report on Tax Planning of Companies.‖

 Significance of the study:

The main purpose of this study is to show the real side of the corporate tax planning, how
corporate take benefits of loopholes. Systematic planning of tax with the help of
professionals and policy makes easier. The study helps to understand the different tax
avoidance cases.

 Objective of the study:

Objective of a project tell us why project has been taken under study. It helps us to know
more about the project topic that is being undertaken and helps us to explore future
prospects of that organization. Basically, it tells what all have been studied while making
the project.

The following are the objective of the present study:-

To study about the concept of tax planning

To understand the corporate tax planning

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 To know the rate of corporate tax
To learn the planning strategies
To understand the loophole of tax

 Data and Methodology

Research methodology is a way to systematically solve the problem. The process used to
collect information and data for the purpose of making business decisions. The project is
descriptive in nature because its throws light on the cases of the company related to tax
planning. This chapter examines the research methodology appropriate to tax planning.

 Limitation of the study

 The study has got all the limitations using secondary data because the inferences
were made based on that.
 There were not relevant data related to tax planning of corporate
 The time constraint was the major problems
 The title of the project was second major problem

 Chapter Layout/ Presentation of the study :

The present study is arranged as follows:

 Chapter I: Introduction gives introduction to the Direct tax, advantages and

disadvantages of direct tax, slab rates, methods etc.
 Chapter II: Research Methodology gives introduction to the report.
 Chapter III: Review of Literature deals with previous researches on the report.
 Chapter IV: Data analysis covers the topic.
 Chapter V: Summarizes the results of the study.

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 CHAPTER III:

REVIEW ON LITERATURE

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 Chapter III: Review on Literature

According to International Journal of Management and Social Sciences Research (5 may

2013), Savita Gautam according to her study, ―Tax planning is an essential part of
our financial planning. Effective tax planning enables us to reduce our tax liability to the
minimum. This is done by legitimately taking advantages of all tax exemption,
deductions rebates and allowance while ensuring that your investments are in line with
their long term goals. The purpose of the study is to find out the most suitable and
popular tax instruments to save tax and also to examine the tax amount saved by using
that instrument. Overall all findings reveal that the most adopted tax saving instrument is
Life Insurance Policy, which got the first rank in this study and the second most adopted
tax saving instrument is Provident fund‖.

In other words all arrangements by which the tax is saved by ways and means, which
comply with the legal obligation and requirements and are not colorable devices or
tactic to meet the letters of law but not the sprite behind these, would constitute tax
planning. Tax planning should not be done with the intent to defraud the revenue, All
transactions entered into by an assesses could be legally correct, yet on the whole these
transaction may be devised to defraud the revenue. All such device where status is
followed strict words but actually spirit behind the statute is marred would be termed
colorable devise and they do not form part of the tax revenue. All transaction in respect
of the tax planning must be in the according with the true spirit of statute and should be in
the form and substance.

The form and substance of transaction is a real test of any tax planning devise. The form
of transaction, as it appears superficially and the real intention behind such transaction
may remain concealed. Substance of a transaction refers to lifting the veil of legal
documentation and ascertaining the intention to parties behind the transaction.

Tax planning is the arrangement of one‘s affairs in such a manner that the tax planner
may either reduce the incident of wholly tax or to reduce it to maximum possible extent

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as may be permissible in the framework of the taxation land. It does not amount to
evasion of tax. It is an act of prudence and farsightedness on the part of the payer who is

entitled to reduce the burden of his liability to maximum possible extent under the
existing law. Tax planning ensures not only accruals of tax benefit with in the four
corners of law, but it also ensures that the tax obligations are properly discharged to
avoid penal provision.

Tax evasion and tax avoidance

It refers to a situation where a person try to reduce his liability by deliberately

suppressing the income or by inflation the expenditure showing the lower than the actual
income and resorting to various types of deliberate manipulation. An assesses guilty of
tax evasion is punishable under the relevant law. Tax evasion may involve stating an
untrue statement knowingly, submitting misleading documents suppression of facts, not
maintaining proper account of income earned omission of material facts in assessment.
An assessee, who dishonestly claims the benefit under the statute by making false
statements, would be guilty of tax evasion.

Tax planning excludes:

1) Tax planning is not tax evasion it involves sensible planning of your income sources
and investments. It is not tax evasion, which is illegal under Indian laws.

2) Tax planning is not just putting your money blindly into any 80C investments.

3)Tax planning is not difficult. Tax planning is easy. It can be practiced by everyone and
with a very little time commitment as long as one is organized with their finances.

According to multi-disciplinary Journal (July 2017) Adedeji, Zacchadelabu says that,

―the impact of corporate governance on tax planning of non-financial quoted companies
in Nigeria between 2004 and 2014.A sample of fifty (50) companies out of 151 non-

23
financial quoted companies that covers 10 sectors were purposively selected on stratified
random sampling basis. The data used in the analysis were collected from the audited
financial statement of the selected non-financial quoted companies in Nigeria and Nigeria
Stock Exchange Fact books and analyzed using generalizes method of moments (GMM).
The result showed that there is positive and significantly relationship between Effective
Tax Rates (ETR) and firm value (Tobin Q). The positive relationship as shown in the
result implies that tax planning activities has not be benefiting the increase in firm value.
All the variables such as leverage (LEV), Liquidity (LIQ), Net Working Capital (NWC),
Growth opportunities (MTB) and capital intensity (CIN) were found to have a positive
and significant relationship with the firm value .The recommendation thus is that firms
need to institute more healthy tax planning practices and engage the services of
professional tax consultants for higher firm value‖.

The characteristics of the board of directors have been argued to be most effective
mechanism in management monitoring. As such, studies have documented the effect of
board characteristics on corporate tax planning. The tax planning is a significant element
of business strategy which requires attention from managers of all functional areas in the
firm. Particularly, Desai and Dharmapala argued that the existence of information
asymmetry between managers and shareholders for tax planning can help managers to
manage earnings in their own interest resulting in a negative association between tax
planning and firm‘s value.Management actions designed solely to reduce taxes by setting
up tax planning activities are becoming more common in all companies world-wide.
Lanis and Richardson (2011) found that taxes are a factor of motivation for many
decisions made by managers. The corporate governance has been playing an important
role in monitoring different actors and harnessing on planning procedures. It has a global
vision of the activities of management, but the question of its performance had been
several debates and disputes in time and in space, as a way to rehabilitate the
informational efficiency. The tax practices are not unique to develop countries but are
also encountered in developing countries and huge amount of money are lost by such
practices. In the Anglo-Saxon context, researchers have studied the relation between tax
aggressiveness and some governance mechanisms and found contradictory results.

24
The effectiveness of the board depends on its size (Jensen, 1993). In fact, the size of
the board can influence the management policy of the company. For Minnick and
Noga (2010), small boards of directors strengthen good tax management, while large
boards are proving ineffectiveness because of the difficulties in decision-making about
tax aggressiveness policy. Likewise, Lenis and Richardson (2011) reported that the
size of the board has a significant effect on the availability of tax aggressiveness which
is synonymous to tax planning. In contrast, Alani and Zarai (2012) reported the non-
significance between the size of the board and tax aggressiveness in the American
context. They found that the number of directors does not influence the strategies to
minimize tax expenses.

Gender Diversity
The Higgs Derek Report (2003) in the United States argued that diversity could
improve the effectiveness of the Board and that companies can benefit from the
existence of professional women in their boards. In the findings of Kastlungeret al.
(2010), there are the perfectionist feminine values in the processing of tax topics.
However, Adams and Ferreira (2009) suggested that women exert intensive monitoring
of managers‘ actions and have a percentage of attendance at meetings actually high.
Consistent with the literature on gender differences in risky behavior and tax
compliance, Croson&Gneezy(2009) and the findings of Alianiet that there is
a negative effect of gender diversity of the board of directors on tax optimization.

According to International Association of African Researchers and Reviews,2017 tax

planning : evidence from European countries, ―The purpose of this study is to examine
whether corporate tax planning behavior increases firm value in European context. The
impact of tax planning on firm value is a function of tax savings and Effective Tax Rate
(ETR) in disclosures of tax reduction in the financial statements. This study argues that
tax planning affects negatively firm‘s value due to higher agency costs by analyzing a
sample of 73 firms listed in the Euro next 100 index for the period from 2008 to 2012.
This relationship can be also explained as being related to the permanent differences
component of tax saving where firm value is reported as negatively related to permanent

25
differences. In addition, we find also that corporate ETRs are below the statutory tax rate.
Indeed, increasing the difference between tax statutory rate and tax rate effectiveness
leads to increased tax saving. In this case, tax planning can be considered as steps taken
by taxpayers so as to reduce tax liability in obtaining the tax saving benefits

According to journals of social science and Humanities (22 April 2015), Longitudinal
Study of Corporate Tax Planning: Analysis on Companies‘, ―Globally, the corporate
tax planning activities remain unresolved issues faced by the varioustax authorities. In
Malaysia, these issues have received serious attention from policymakers, especially
among the tax authorities concerned with either direct or indirect taxes. The
transformations in the tax systems and accounting standards have given companies
opportunities to manage their tax affairs for the benefit of their shareholders. Hence,
using the longitudinal approach, this study analysed tax expense and financial ratios of
4,500 firm-years from publicly listed companies prepared for the years 2001 to 2012. A
company‘s tax planning is rejected in its effective tax rate reported in the financial
statements. Thus, the difference between the statutory tax rate and the effective tax rate
shows the gap which indicates the level of aggressive tax planning undertaken by the
companies. The statistical results from the pooled OLS regression model disclosed that
financial ratios such as inventory intensity, capital intensity, leverage and research, as
well as development expenditure have a significant relationship with the level of
companies‘ tax expense. Thus, the findings implied that companies‘ financial ratios could
be used as red tags to identify aggressive tax planners which can be further investigated
for potential tax frauds‖.

According to Corporate Tax Burden and Financial Attributes of Fraud Firms and Non-
Fraud Firms 2014, ―The goal of this study was to examine corporate tax burdens and the
financial attributes of fraud firms (FF) and non-fraud firms (NFF) in Malaysia. This study

26
used the company‘s effective tax rate (ETR) to determine the level of corporate tax
burden. The sample of fraud firms was obtained from the Enforcement Release reported
by the Securities Commissions focusing on criminal prosecutions from the year 2001 to
2010. The fraud firms were then matched with the non-fraud firms on the basis of size,
time period and industry. The investigation period of this study covered a period of four
years, i.e., a fraud year and the three years prior to the companies being prosecuted for
fraud. Using a total of 264 firm years from 33 fraud firms and 33 non-fraud firms, this
study examined the level of corporate ETR, the variation of corporate ETR from
Statutory Tax Rate (STR), and the association between companies‘ financial attributes
and their ETR. Five financial attributes were examined; firm size, leverage, return on
assets, capital intensity and inventory intensity. The statistical results revealed that both
the mean ETR for fraud firms (50.14%) and non-fraud firms (36.07%) were higher than
the mean STR (27.67%) imposed by the government during the period under study. The
findings indicate that fraud firms paid higher tax expense than the non-fraud firms.
Further, the findings also indicate that return on assets and capital intensity were
significantly associated with the variability of the corporate ETR. The study has provided
empirical evidence that both fraud firms and non-fraud firms paid higher effective tax
rate than the statutory tax rate. Thus, the findings imply that the sample fraud firms were
not tax-motivated. Hence, the study has contributed to the tax literature on the financial
attributes of fraud firms which could assist relevant authorities, specifically in selecting
cases for the tax audit and investigation.

Malaysian Fraud Scandals

Fraud can be defined in various terms to represent the wrongful actions. Elliott and
Willingham (1980) defined management fraud as deliberate fraud committed by
management that injures investors and creditors through misleading financial Meanwhile,
Wallace (1995) defined fraud as a scheme designed to deceive which can be
accomplished with fictitious documents and representations that support fraudulent
financial statements). After the collapse of Enron and Arthur & Andersen, the cases of

27
financial statement fraud reported among the public listed companies have increased all
over the world including Malaysia. Even the media has highlighted the fraud cases which
occurred in Malaysia and various ways of combating the issues were suggested, but such
mismanagement seems to still continue. As an example, Transmile Group Berhad,
which was involved in one of the most talked about fraud cases in Malaysia, was reported
to overstate its group‘s revenue figures by 30% in 2006‘s financial statement and 35% in
2005‘s financial statement of their consolidated revenues. Another example is Megan
Media Holdings Berhad, which was suspected to be involved in fictitious trading of more
than RM500 million. Other cases involving fraudulent actions and misconduct include
Tat Sang Holdings and Hospitech Resources Bhd. Both companies submitted false
statements in the year 2000 and 2002 respectively. Moreover, PasarayaHiong Kong
SdnBhd and Polymate Holdings were alleged for submission of false statement in the
year 2003. The economic scandal scontinued to occur in the following years, where in
2006, Welli Multi Corp Bhd and GP Oceant Food Berhad were charged for submitting
misleading information. Similarly, MEMS Technology was also charged for submitting
misleading informationin year 2007. In 2009, PwC‘s survey on global economic crime
disclosed that 66% of Malaysian companies reported a decline in financial performance,
presumably as a result of the economic downturn. The results also indicated that 82% of
the respondents faced increased pressure to report better financial performance, and this
could have led to more fraudulent activities within their companies. Further, KPMG
(2009) revealed that 61% of the respondents believed that fraud would rise in the next
two years as more than three quarters of Corporate Tax Burden and Financial Attributes
of Fraud Firms and Non- Fraud Firms 81 the respondents believed that financial
statement fraud would continue. The survey also found that about 49% of the
respondents experienced at least one fraud during the survey period with a total of 714
separate fraud incidences being reported with the value of fraud reported to be RM63.95
million. However, not all respondents disclosed information on the number of fraud
incidents or the value of fraud detected. This was expressed by only 15% of the 85
respondents, who claimed that they were victims of fraud, but they were unsure of the
number of incidents. Meanwhile, only 53% stated being unsure about the value of
financial losses. Therefore, these findings suggest that losses may be far bigger than the
disclosed amounts. The regulators had taken action
28
on those companies and perpetrators involved in fraud cases, and the professional
accounting bodies had given recommendations to enhance good governance to the
business entities. However, the mismanagements, wrongful actions and economic
scandals in Malaysia are still being reported by the media, which indicates that the issue
of fraud is still transpiring. of 2002 until 2007. The study revealed the number of
corporate fraud reported from 2002 to 2007 which were categorized by nature of the
fraud, perpetrators, ethnicity, industry and type of companies. The highest number of
cases for criminal prosecutions was reported in 2002 with fifteen cases, while the lowest
was four cases in 2004.

According to International Journal of Management Research & Review CORPORATE

TAX PLANNING AND MARKET VALUE OF LISTED OIL AND GAS COMPANIES
IN NIGERIA , ―This study examines the influence of corporate tax planning and market
value of oil and gas companies in Nigeria. The data was collected from annual reports
and accounts of the sampled companies for the period of ten years from 2005 to 2014.
Data is analyzed by means of descriptive statistics and Pearson correlation technique was
used to determine the relationship between the dependent and explanatory variables.
Panel data regression technique was used to analyze the data using STATA software
version 12.00. The results found that effective tax rate and tax saving have significant
negative effects on the market value of listed oil and gas Companies. The study also
found return on equity and leverage have significant effect on market value of listed oil
and gas companies in Nigeria. Companies in the oil and gas sector did not tab the benefit
of various inceptive obtainable through tax planning activities. Hence, the needs for tax
consultant to actually educate companies on the benefit of effective tax planning activity
that could influence the shareholders wealth.

This paper use two main theory to further explain the relevance of effective tax Planning
and performance of firms in the oil and gas companies in Nigeria. These are Planning
theory and agency cost theory. Crocker &Slemrod (2005) use the agency theory to
determine how penalties for tax evasion should be amended to achieve desirable goals.
The consequence for tax evasion can be applied on both tax managers and or corporation

29
but the higher deterrence can be actualized by penalizing tax managers instead of the
firms. Similarly, Desai &Dharmapala (2009) states that the present of complex tax
avoidance activities may permit management to engage in opportunistic behavior through
earning manipulations and as such the tax saving resulting from application of tax
planning schemes may not increase after tax profit. This agency cost theory is concern
more on the relationship between tax planning and diversity of inherent problems in the
modern day corporations. The traditional theory on the other hand, is concern with those
activities that increase after tax income thereby increasing the shareholders wealth. Firms
engage in tax planning activities with the aims of minimizing their tax liability and
increases their after tax profit. Tax planning can positively or negatively affects the value
of the firm. This made the issue of tax avoidance and firm performance a debatable topic
for both researchers and practitioners. Chen, Hu, Wang, & Tang (2013)examines whether
corporate tax avoidance behavior increases firm value in Chinese context, using a large
sample of Chinese listed-firms data for the period 2001-2009 and fixed effects regression
mode were used to analyzed the data collected, the study found that tax avoidance
increase reduce firm value as part of benefit are encroached by opportunistic of
managers. This implies that tax avoidance behavior can only lead to increase agency cost
not shareholders value.

According to Desai and Dharmapala (2009) tax avoidance has significant influence on
firm market but the effect depend on firm‘s governance structure. The study suggest that
tax avoidance is not the best way of transferring from benefit to shareholder as it‘s
characterized by agency problems between management and shareholders. In the African
context, the study of Kawor and Kportorgbi (2014) states that tax avoidance influence the
performance of listed non-financial companies in Ghana but pre suppose the perception
that every cdi of tax saving as a result of tax planning activities reflect in the pocket of
shareholders. This findings lend it support to agency cost of tax planning in the sense that
tax saving alone can-not mitigate the agency cost between management and shareholders.
However, the study of Mucai ,Kinyi, Noor and Jame (2014) provides a contrary findings
that tax planning has no relationship with performance and value of small and medium
enterprises in Kenya. This is due to level of corruptions and the lack of effective

30
 regulatory to salvage the affairs of small and medium ventures. On the other hand, Ftouhi
et al (2014) examined whether corporate tax planning behavior increases firm value of 73
firm listed in the Euronext 100 index for the period of four years (2008 – 2012).
Generalized least square methods (GLS) were used to analyze the data. The results of the
study shows negative and significant relationship between the tax planning and firm
value due to high agency cost. The outcomes of the studied was consistent with
shareholders concerns of moral hazard risk in tax. The study also found tax planning
activities as a mechanism through which a firm generate permanent tax saving. While the
study of Chen et al. ( 2013) examined whether corporate tax avoidance behavior
increases firm value in Chinese context, using a large sample of Chinese listed-firms over
the period of eight years from 2001-2009. Generalized least square regression (Fixed
effects) model were used to analyze the data collected. The study found that, tax
avoidance behavior increase agency cost and reduce firm value and concluded that tax
avoidance does not necessarily increase firm value, part of gains are encroached by self-
serving managers. This argument assumes that, tax avoidance behavior can only lead to
increase agency cost but does not increase shareholders value, may be the managers do
not usually pursue the goals of tax planning in the best interest of the firm.
According to, ―Moderating Effects of Board of Directors on the Relationship between
Tax Planning and Bank Performance: Evidence from Tunisia Ahmed Zemzem, This paper
contributes to the banking literature by investigating the moderating effects of two sources of
the monitoring board (board size and independent outside directors) on the relationship
between tax planning and bank performance. We propose that these monitor scan affect either
the form or the strength of the relationship between tax planning and performance. Our
empirical investigation uses a sample of 18 Tunisian banks during the period 2000-2011 and
various statistical tools including panel data techniques. Results showed that while board size
moderate the form of the tax planning-performance relationship, independent outside directors
influence the strength of that relationship. Its findings have direct policy relevance for
investors and tax administrations in monitoring and controlling banks' tax planning activities.

31
The Relation Between Tax Avoidance and Firm Value
The question of whether tax avoidance actually benefits investors and increases firm
value has attracted considerable attention from researchers. The previous literature
essentially builds on two competing views. The traditional view posits that tax avoidance
is beneficial to investors because it mitigates wealth transfer to the government, and
maximizes after-tax cash flows and profits that can be reinvested and/or returned to
shareholders as dividends(Scholes, Wolfson, Erickson, Maydew, &Shevlin, 2009).
However, the empirical evidence on the value-enhancing role of tax avoidance is
inconclusive in U.S. studies. For instance, Desai and Dharmapala (2009) find no
significant association between tax avoidance and firm value and that there is only a
marginal association for well-governed firms. They interpret this result as indicating that
the agency costs associated with increased opportunities for self-dealing from tax
avoidance offset the benefits of tax avoidance, thereby driving firm value downward.
Hanlon and Slemrod (2009) find a negative response to news about tax sheltering in
general, and that response is less negative for well-governed firms. Wilson (2009)
documents that tax sheltering enhances firm value, although the positive relationship is
weaker for poorly governed firms. While the mixed results may be attributed to the
limitations of the G index used in these studies, finds no evidence that tax sheltering itself
is related to firm value. Using a large sample of U.S. firms covering the 1993-2010
period, also document no relation between tax-sheltering activities and a firm‘s
cost of equity. However, they find that less aggressive forms of tax avoidance, as
captured by book-tax differences, permanent book-tax differences, cash ETRs, and
generally accepted accounting principles (GAAP) ETRs, are associated with less costly
equity capital. A study conducted by Katz, Khan, and Schmidt (2013) examines how tax
aggressiveness affects future earnings, and demonstrates that tax avoidance significantly
reduces.

According to, ―Journal of Accounting, Auditing & Finance association between current
and future profitability, on average. The authors maintain that tax avoidance is associated
with low future returns on equity and low returns on net operating assets. Conversely,
Blaylock (2016) finds that a 1-standard-deviation increase in tax avoidance is associated

32
with a 0.2% to 0.6% increase in future returns on assets. Thus, overall, the relation
between tax avoidance and firm value is inconclusive, and the value enhancing or value-
destroying nature of tax avoidance is an empirical question. Instead of assuming that tax
avoidance has no cost, current studies suggest that investor perceptions of tax avoidance
pertain to reputational costs, agency costs, uncertainty, and increased risks (Chan et al.,
2016; Desai &Dharmapala, 2009; Inger, 2014). Among these costs, the potential agency
costs associated with rent extraction have received considerable attention. The agency
view of tax avoidance posits that tax avoidance can be detrimental to shareholder
interests because it can be used to conceal and facilitate opportunistic rent extraction. For
example, managers may hide their opportunistic actions and their real intent to extract
private benefits at shareholders‘ expense by claiming that obfuscated information
disclosure is meant to conceal accounting activities from tax authorities. Furthermore, tax
avoidance can generate more cash resources from which insiders can extract. While
investors perceive that tax avoidance could be used by managers and/or controlling
shareholders to divert resources from a firm, they would discount such tax avoidance due
to its high agency costs. In such cases, tax avoidance is likely to reduce rather than
increase firm value.

According to Corporate Income Tax Planning and Financial Performance: Evidence from
Serbia, ―Corporate income tax planning refers to all activities undertaken to legally
minimize corporate income tax liabilities. Significant number of companies, especially
big and multinational, invest considerable resources in tax planning. This is not surprising
given the empirical evidence showing that benefits of tax planning remarkably exceed
invested resources. There are many methods to declare lower level of taxable income to
national tax authorities, such as the transfer pricing arrangements between subsidiaries of
multinational company. It could be expected that legal reduction of income tax expense
leaves greater part of pre-tax income available for reinvesting or distribution to the
owners, and positively influences company profitability and market value. However,
previous research only partially confirm these theoretical assumptions. A lack of the clear
line between tax planning and illegal tax evasion, as well as suspicion of rent diversion
by managers may lead to negative market reaction to tax planning. Since tax planning can

33
increase private benefits for shareholders and/or managers at the expense of society, tax
planning opens some ethical issues. Many types of tax planning efficiency measures have
been developed during previous decades. Current effective tax rate, i.e. ratio between
current income tax expense and pre-tax income, will be used as a measure of tax planning
efficiency in this paper. Most of the previous research has been conducted in countries
with relatively high corporate income tax burden. On the other hand, with statutory tax
rate of 15% and many types of tax incentives, Serbia can be regarded as a country with
moderate corporate income tax burden. In this paper is examined whether tax planning
influences profitability (measured with ROA and ROE ratios) and market value of
companies in Serbia, by using OLS regression and controlling for some company-specific
and macroeconomic variables. Following previous literature findings, it is hypothesized
that tax planning positively influences profitability and negatively influences market
value of companies. A sample of 23 nonfinancial companies, quoted on the Belgrade
Stock Exchange in the period between 2013 and 2016, is used. Initially, sample consists
of 92 company-year observations. Research results from this study indicate that tax
planning significantly and positively influences profitability and does not influence
market value of companies. To author‘s knowledge, this is the first research of this type
in Serbia. Research results can be of interest to company shareholders and managers as
well as national tax authorities.

Prior research on impact of CIT planning on company financial performance has

primarily been conducted in countries with high statutory CIT rate and/or weak tax
incentives. Grubert&Mutti (1991) and Hines & Rice (1994) show that subsidiaries of
multinational companies have lower profitability in countries with higher statutory CIT
rate. These findings indicate that multinational companies are shifting their income to
low-tax countries to pay as little tax as possible. Assidi et al. (2016) find negative impact
of GAAP ETR on Return on Assets (ROA) of Tunisian companies. They also find that
this impact is more important for listed firms, concluding that listed firms are better able
to optimize their tax burden. Lazar (2011) finds that listed companies in Romania had
higher ROA when difference between statutory CIT rate and current ETR was higher.
However, this study does not find such link using Return on Equity (ROE) or profit

34
margin instead of ROA. Pitulice et al. (2016) add that impact of ETR on net income and
ROA is significantly negative in Romania. Unlike previous research findings, Al-Jafari&
Al Samman (2015) argue there is not significant impact of ETR either on profit margin
or ROA of listed companies in Oman, primarily due to low statutory CIT rate. Hasan et
al. (2014) find that US companies with higher book-tax differences (difference between
pre-tax income and taxable income) and lower cash ETR have higher cost of bank loans
which negatively affects profitability. In such situations, banks anticipate additional tax
risk of their clients.

According to, ―Tax Planning and Firm Value: A Review of Literature, This paper
articulates extant literature that is related to tax planning and firm value with a view to
identifying gaps for further extensive empirical consideration. Companies are always
looking for means to reduce their corporate tax liability, and this has led to some high-
level corporate fraud involving tax evasion in both developed and developing countries.
This paper, therefore, presents a review of extant literature on tax planning and firm
value. The methodology adopted is a desktop study that is based on deductions from the
literature reviewed. The paper identified gaps that require hardcore empirical
investigation to reduce the inconsistencies observed in the results of the literature.

Tax Planning and Firm Value Tax planning and firm value are anchored on two
theoretical perspectives: the traditional theory and the theory of agency. The traditional
theory of tax planning (or tax avoidance) is seen as leading because it increases after-tax
earnings and it is in the interest of the shareholders. As a result of this, it is usually taken
in valuation model. Tax planning activities that reduce or transfer resources from
shareholders to the government should enhance shareholders wealth or firm value. The
agency theory perspective of tax planning posits that tax planning can be complex and
vague, and this can result to managerial opportunism. According to this theory, tax
planning can lead to a reduction in firm value when managers may either have the
opportunity to understate reported accounting profit or have the incentive to reduce
corporate incentive tax liability by understating taxable income (Desai &Dharmapala.

35
2009; Desai &Dharmapala, 2006; Minnick &Noga, 2010; Wahab& Holland, 2012).Desai
and Dhamarpala(2009) investigated the relationship between tax avoidance activities and
firm value using a sample of 862 U.S firms. In the research, tax avoidance is measured by
a book-tax gap, while Tobin‘s q is the proxy for firm value. They found no significant
direct relationship between tax avoidance activities and firm value. Wang (2010)
examines the relationship between tax avoidance, corporate transparency, and firm value.
The author used effective cash rates and permanent book-tax difference to measure tax
avoidance with firm value as a proxy by Tobin‘s q and using S & P 1500 firms in the
period 1994-2001. The author found a positive significant relationship between tax
avoidance and firm value.Chashiandani and Martani(2012) examined the relationship
between long-run tax avoidance behaviour and firm value by using a sample of non-
banking and financial firms quoted on the Indonesian Stock Exchange between 2010
and2011. The authors used a method similar to that employed by Dyreng Hanlon,
&Maydew (2008) who measured long-run tax avoidance and firm value is proxied by
Tobin's‘ q. They found that long-run tax avoidance has a significant negative relationship
with firm value, the study suggests that firm with lower ETR, has higher firm value. In
the same vein, Desai and Dharmapala(2009) found no direct relationship between tax
planning and market performance. The reasons forth is indirect and insignificant
relationship are the complex nature and tax implications of the transactions; hence, it
becomes difficult for stakeholders to evaluate the performance of the firm fully. Tax
planning can be measured by using Effective Tax Rate (ETR) and tax savings.

According to, ―School of Management, Jinan University, Guangzhou, China published

on 16 November 2015 This article reviewed the researches on tax planning published in
the domestic and foreign authoritative magazines, and found that scholars put their
emphasis on three points: research on the motivation of tax planning; research on the
measurement of tax planning; research on the economic consequences of tax planning.
With the improvement of the market economy system and the tax system in our country,
tax planning can help enterprises to achieve maximum direct economic benefits and
value. Besides, with the four-year reform of ―business tax to value-added tax‖
coming to the
36
end, it is particularly important for the enterprises to establish effective corporate tax
planning strategy to achieve the scientific and sustainable development‖.

Reviews on the Motivation of Tax Planning held an investigation about the large and
medium-sized public and private manufacturing enterprises with the method of
questionnaire survey, and the survey found that enterprise managers‘ behavior motive
and their behavior would affect the degree of enterprise tax planning, and pointed out that
the personal cost of public enterprise executives for tax planning was higher, which lead
to the desire of tax planning for the public enterprises is not strong. Mills and Newberry
took the manufacturing enterprises in the United States as the research object, analyzed
the difference of tax planning degree between the private listed companies and the public
listed companies, and believed that the cost of financial report for the listed enterprise
managers is a major determinant of whether the listed companies would conduct tax
planning or not, the cost of financial report for public listed enterprise managers is higher,
thus the motivation for tax planning is weaker. Took a questionnaire survey of the tax
directors for 600 companies, and the study found that 69% of the tax directors would
regard the costs of reputation as the main cause why they did not take tax planning
strategy. Besides, they also found that financial accounting motivation is one of the
important factors when conside tax planning strategy. Domestic research took the
property rights as the breakthrough point, and put much emphasis on the different tax
planning policies caused by the different enterprise characteristicsowned enterprises and
non-state-owned enterprises, and the results showed that relative to the non-state-owned
enterprises, tax planning motivation for state-owned enterprises is smaller, the reason for
this is that state-owned enterprises executives had pressure in performance appraisal and
political promotion, and tax contribution is set to be an important indicator of
performance for the state-owned enterprises executives. partition method, she collected
and counted up the tax data of every economic zone from, and found significant regional
tax gap of our country, she also pointed out that the difference of corporate
ownershipstructure between the zones was the fundamental reasons of this phenomenon,
such as the area where the state-owned enterprises accounted for a larger part , the tax
revenues were high, which reflected from the side that our state-owned enterprises pay

37
more taxes, i.e. the degree of tax planning in state-owned enterprises was weak took the
implementation of the new Enterprise Income Tax Law a s an opportunity and researched
the relationship among trace-analysts, property rights arrangement and the company‘s tax
avoidance behavior; he found that with more trace -analysts, lower degree of information
asymmetry, the enterprises‘ implicit tax cost was lower , which would lead to a more
aggressive tax avoidance behavior.

The Measurement of Tax Planning

The effective tax rate method
The most widely existing calculation method for tax planning is the effective tax rate
method (ETR), because of the different purpose, definition of molecule and denominator
in ETR metrology will have big difference. By reviewing and sorting, the following four
methods have been widely used to calculate the effective tax rate:
a) ETR = Income tax expenses/Earnings Before Interest and Tax
b) ETR = (Income tax expenses-deferred income tax expenses)/Earnings Before Interest
and Tax
c) ETR = Income tax expenses/profit before tax-deferred income tax expenses /statutory
rates
d) ETR = (Income tax expenses-deferred income tax expenses)/(profit before tax-the
deferred tax changes)
The effective tax rate index as the measurement of the tax planning
for the listed company, i.e. ETR = The current income tax/the main business income.

38
 CHAPTER IV:

DATA ANALYSIS

39
 Chapter IV: Data analysis

Tax planning

Tax planning is a legal way of reducing your tax liabilities in a year. It will help you to
utilize the tax exemptions, deductions, and benefits in the best possible way for
minimizing your tax burden. However, it should be done in a legal manner.

Tax planning turned to tax evasion

Tax Planning is process of analysing one's financial situation in the most efficient
manner. Through tax planning one can reduce one's tax liability. Although Tax
avoidance is a legal method, it is not advisable as it could be used for one's own
advantage to reduce the amount of tax that is payable. Tax evasion is a illegal way to
reduce tax liability through fraudulent techniques likes deliberate under- statement of
taxable income or inflating expenses. It is an unlawful attempt to reduce one‘s tax
burden.

Penalties for Tax Fraud and Tax Evasion

Committing tax fraud or tax evasion includes deliberately refusing to file your taxes,
filing incorrect returns, making false claims and failing to declare your full income. If
you‘re caught committing tax fraud or evasion, a tax audit will likely take place in your
near future.
If you haven‘t done anything wrong, you won‘t have problems during an IRS audit. If
you‘ve cheated, however — and you‘re wondering what happens if you don‘t pay
taxes — here‘s what you might be in for:

 Failure to file a tax return, false withholding exemptions, delivering or

disclosing false tax documents: A maximum sentence of one year in prison
and/or fines of $100,000, plus all taxes owed and legal fees
 Conspiracy to defraud with respect to false refund claims: A maximum of 10
years in prison and $250,000 in fines
 Filing or preparing a false tax return: Three years in prison and $250,000 in
fines
 Tax evasion, failure to pay taxes, conspiracy to commit a tax offense or
conspiracy to defraud: A maximum of five years in prison and a $250,000 fine

40
Those who intentionally evade paying income taxes might be charged with a civil
penalty, too, which can add up to 75 percent of the unpaid tax that‘s attributable to fraud,
on top of whatever taxes are owed. As a taxpayer, it‘s important you remember that if
you‘re not honest with the IRS, you could run into stiff IRS tax fraud penalties.

Different techniques used by the company for tax planning one of it is

“amalgamation”.

Tax Planning in case of Amalgamation

Carry forward and set off of loss and depreciation, when the companies
amalgamated (sec 72A)

Conditions 1. The amalgamating company has been engaged in business in which the
accumulated business loss occurred or depreciated remains unabsorbed, for 3 or more
years.

Condition 2. The amalgamating company has held continuously as on the date of the
amalgamation at least three- fourths of the book value of fixed assets held by it two years
prior to the date of amalgamation.

Condition 3. The amalgamated company continues to hold at least three- fourth in the
books value of fixed assets of the amalgamating company which is acquired as result of
amalgamation for five years from the effective date of amalgamation.

Condition 4. The amalgamated company continues the business of the amalgamating

company for a minimum period of 5 years from the date amalgamation.

Case 1. Unabsorbed depreciation and unabsorbed Business Loss.

Company A is proposed to be merged with company B. The following are the particulars
of the former company:

Unabsorbed depreciation Rs. 2,50,65,000

41
Unabsorbed business losses Rs. 1,15,10,000

Consider which of the benefits can be availed of by company B and advise the latter on
the condition to be fulfilled to claim each such benefit.

Answer to the given problem can be given under the following three situations:

a. if the merger is not ―amalgamation‖ within the meaning of sec 2(2B); or

b. if the merger is an ―amalgamation‖ within sec 2(1B) but it does not fulfil conditions of
section 72A: or

c. if the merger satisfies conditions of sec 2(1B) as well as sec 72B.

Under the aforesaid situations, the position regarded the set off of the unabsorbed
loss/allowance by company B will be as under:

There is no indication in the question whether merger of company A and company B

satisfies conditions of sections 2(1B) and 72A.

a. if the merger is not ―amalgamation‖ within the meaning of sec 2(2B); or

b. if the merger is an ―amalgamation‖ within sec 2(1B) but it does not fulfil conditions of
section 72A: or

c. if the merger satisfies conditions of sec 2(1B) as well as sec 72B.

Under the aforesaid situations, the position regarded the set off of the unabsorbed
loss/allowance by company B will be as under:

Whether the company B can set off unabsorbed allowance/ business loss of company A

Situation (a) situation (b) situation (c)

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Unabsorbed depreciation Rs. 2,50,65,000 no no yes

Unabsorbed business losses Rs. 1,15,10,000 no no yes

As is evident from the aforesaid chart, all unabsorbed losses/allowances can be set off if
the merger satisfies requirement of sec 72A. Alternatively, in order to retain the
advantage of claiming set off of unabsorbed business loss/allowance, the business of
company B may be taken over by company a. In that case all unabsorbed business
losses/allowances can be set off by company A, even if the merger does not satisfy the
conditions of sec 2 (1B) and 72.

Impact of tax evasion on economy

It reduces the government tax revenue. If it is widespread it impact the ability of the
government to pay its expenses, which might include social services, infrastructure, the
military etc. If the government can‘t pay its expenses, it either must cut spending, go into
debt, or increase taxes. One person‘s avoiding taxes is not going to do all that, obviously,
but widespread tax evasion could.

What is tax avoidance?

Tax avoidance is a means of lowering your taxes -- legally.

Every year, countless taxpayers look for ways to lower their taxable income and shield
more of their hard-earned money from the IRS. This practice is known as tax avoidance,
and while it may seem unscrupulous, it's actually perfectly legal.

Tax avoidance is the use of legitimate methods to reduce the amount of income tax you
owe the IRS. Common examples of tax avoidance include contributing to a retirement
account with pre-tax dollars and claiming deductions and credits. Tax evasion, by

43
contrast, is the illegal act of concealing or misrepresenting income to avoid taxation, and
it's not only dishonest, but also punishable by law.

Though the words "tax avoidance" might sport somewhat of a negative connotation, in
reality, the tax code is designed to help workers pay as little tax as possible. In fact, there
are a number of IRS-sanctioned methods for avoiding taxes, the most common of which
include:

In fact, part of the reason the tax code is so complicated is that it's loaded with tax
avoidance provisions. And the more tax avoidance measures you take, the more money
you stand to save.

Is tax avoidance illegal?

Tax avoidance is perfectly legal provided you follow the rules. For example, you're
allowed to deduct charitable contributions on your taxes, so if you give $500 to charity
over the course of a given tax year, you have every right to deduct that amount on your
return. But if you lie and claim you donated $1,500, that's not only dishonest, but also
illegal.

Tax avoidance versus tax evasion

Some people use the terms "tax avoidance" and "tax evasion" interchangeably, but they
actually have opposite meanings. Tax avoidance means taking legal steps to lower your
taxes, whereas tax evasion means lying, concealing income, or utilizing similarly illegal
tactics to avoid paying taxes.

The Penalty For Tax Evasion In India

In case someone has concealed details of their income or any fringe benefits that are
taxable, the penalty can range from 100% to 300% of the tax amount due. In case a
person or a company fails to maintain their accounts properly as directed by section
44AA, a penalty of Rs. 25,000 may be levied.

44
Tax avoidance and tax evasion

No one likes to pay taxes. But taxes are the law. The terms "tax avoidance" and "tax
evasion" are often used interchangeably, but they are very different concepts. Basically,
tax avoidance is legal, while tax evasion is not.

Businesses get into trouble with the IRS when they intentionally evade taxes. But your
business can avoid paying taxes, and your tax preparer can help you do that.

Tax avoidance

Tax avoidance is the legitimate minimizing of taxes, using methods included in the tax
code. Businesses avoid taxes by taking all legitimate deductions and by sheltering income
from taxes by setting up employee retirement plans and other means, all legal and under
the Internal Revenue Code or state tax codes.

You may have heard of "tax shields" These shields are for protection against higher
taxes, and they are the strategies that make up tax avoidance.

SOME EXAMPLES OF TAX AVOIDANCE STRATEGIES

 Taking legitimate tax deductionto minimize business expenses and thus lower
your business tax bill.
 Setting up atax deferral plansuch as an IRA, SEP-IRA, or 401(k) plan to delay
taxes until a later date.
 Taking tax creditsfor spending money for legitimate purposes, like taking a Work
Opportunity Tax Credit for hiring workers in your business.

45
Tax Evasion

Tax evasion, on the other hand, is the illegal practice of not paying taxes, by not
reporting income, reporting expenses not legally allowed, or by not paying taxes owed. In
this situation, the phrase "ignorance of the law is no excuse" comes to mind.

Tax evasion is most commonly thought of in relation to income taxes, but tax evasion can
be practiced by businesses on state sales taxes and on employment taxes. One common
tax evasion strategy is failing to pay turn over taxes you have collected from others to the
proper federal or state agency.

These taxes are called trust fund taxes, because they are given in trust to a business, with
the expectation that they will be turned over to the appropriate state or federal agency.
Failing to pay employment taxes to the IRS and sales taxes to a state taxing authority and
other federal, state, and local taxes can mean high fines and penalties.

46
TAX EVASION CASES

GOOGLE INDIA

Company profile

Google LLC is an American multinational technology company that specializes in

Internet-related services and products, which include online advertising technologies,
search engine, cloud computing, software, and hardware. It is considered one of the Big
Four technology companies, alongside Amazon, Apple and Facebook.

Google was founded in 1998 by Larry Page and Sergey Brin while they were Ph.D.
students at Stanford University in California. Together they own about 14 percent of its
shares and control 56 percent of the stockholder voting power through supervoting stock.
They incorporated Google as a privately held company on September 4, 1998. An initial
public offering (IPO) took place on August 19, 2004, and Google moved to its
headquarters in Mountain View, California, nicknamed the Googleplex. In August 2015,

47
Google announced plans to reorganize its various interests as a conglomerate called Alphabet
Inc. Google is Alphabet's leading subsidiary and will continue to be the umbrella company for
Alphabet's Internet interests. SundarPichai was appointed CEO of Google, replacing Larry
Page who became the CEO of Alphabet.

The company's rapid growth since incorporation has triggered a chain of products,
acquisitions, and partnerships beyond Google's core search engine (Google Search). It
offers services designed for work and productivity (Google Docs, Google Sheets, and
Google Slides), email (Gmail/Inbox), scheduling and time management (Google
Calendar), cloud storage (Google Drive), instant messaging and video chat (Google Allo,
Duo, Hangouts), language translation (Google Translate), mapping and navigation
(Google Maps, Waze, Google Earth, Street View), video sharing (YouTube), note-taking
(Google Keep), and photo organizing and editing (Google Photos). The company leads
the development of the Android mobile operating system, the Google Chrome web
browser, and Chrome OS, a lightweight operating system based on the Chrome browser.
Google has moved increasingly into hardware; from 2010 to 2015, it partnered with
major electronics manufacturers in the production of its Nexus devices, and it released
multiple hardware products in October 2016, including the Google Pixel smartphone,
Google Home smart speaker, Google Wifi mesh wireless router, and Google Daydream
virtual reality headset. Google has also experimented with becoming an Internet carrier
(Google Fiber, Project Fi, and Google Station).Google.com is the most visited website in
the world. Several other Google services also figure in the top 100 most visited websites,
including YouTube and Blogger. Google is the most valuable brand in the world as of
2017, but has received significant criticism involving issues such as privacy concerns, tax
avoidance, antitrust, censorship, and search neutrality. Google's mission statement is "to
organize the world's information and make it universally accessible and useful", and its
unofficial slogan was "Don't be evil" until the phrase was removed from the company's
code of conduct around May 2018.

Google is the world‘s favorite search engine and has plethora of companies functioning
under it. There is one extremely clever and elaborate tax avoidance strategy, which is

48
used by many large corporations including Google, which is called the ―Double Irish
with a Dutch Sandwich‖.

It is a dubious trick used by Google to avoid taxes through subsidiaries in Netherland and
Ireland. In this technique large corporations use a combination of Irish and Dutch
subsidiary companies to shift profits to low or no tax jurisdictions. It further involves
sending profits first through one Irish company, then to a Dutch company and finally to
second Irish company, headquartered in a tax haven. This particular technique allows
many corporations to reduce their overall corporate tax rates dramatically. Using this
technique, Google has successfully saved billions of dollars.

Similarly, Google India which is a subsidiary of Google International LLC and is an

authorised distributor of Google Ireland‘s ‗AdWords‘ programme to Indian advertisers.
Google AdWords is Google‘s advertising system in which advertisers bid on certain
keywords in order for their clickable ads to appear in Google‘s search results. Google
Ireland owns the ‗AdWords‘ technology and as it merely authorized Google India to use
it, the revenue will come back to Google Ireland, where google has to pay tax way less
than India.

However, for the same transaction, Income Tax Appellate Tribunal, India, ordered
Google India to pay tax close to Rs.1457 crores which were avoided in tax by Google

49
India for the assessment year 2006-2007 – 2011-2012.

Google India paid taxes on Rs 1,457 crore remitted by Google India to Google Ireland
Limited (GIL) between 2007-08 and 2012-13, according to a ruling from the Bangalore
bench of the Income Tax Appellate Tribunal. This pertains to Google Adwords, Google‘s
flagship and core advertising service, and the sale of advertising in India, and the
deduction of tax at source.

Google Ireland is at the centre of an alleged global tax-avoidance structure for the
company (more on that here), and others do this too. This report last year details how
Apple paid only 0.005% tax, and this details how Microsoft avoids tax. All this, by
routing sales through tax havens. In fact, earlier this year, in July, Google France
narrowly avoided having to pay back taxes on $1.28 billion, after a Paris court ruled that
since Google doesn‘t have a permanent office in the country it couldn‘t be fined.

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) dismissed all six
appeals made by Google India and has ruled that it is ―clear and conspicuous that they
[Google India and Google Ireland] wanted to avoid the payment of taxes in India.‖

The tribunal says that Google India failed to deduct tax at the time of remitting payment
to Google Ireland, saying that:

50
―This is a clear design to skip the liability by both the assessee as well as
Google Ireland Limited by having mutual understanding. Therefore, the assessee
deliberately not sought permission for making the payment to GIL and is taking chance to
avoid taxes within the four corners of IT Act.‖

Techniques used by the company

In its arguments, Google India said that the distribution fee payable to Google Ireland for
the period December 2006 to June 2009 had remained unpaid till the fiscal year 2011-12.
In November 2011, Google had approached the Reserve Bank of India (RBI) seeking
approval to remit the fee to Google Ireland. Google India finally received approval on
May 12, 2014 and only then it remitted the fee to Google Ireland.

FACTS OF THE CASES

 Google India entered into an agreement with Google Ireland Limited for resale of
online advertising space under the Google AdWords Program Distribution
agreement dated December 12, 2005. According to Google India, it is merely a
reseller of advertisement space. It only ―performs market-related activities
to promote the sales of advertisement space. No right or intellectual properties
were transferred by Google to Google India or to the advertiser.‖
 In FY 2008-09, Google India had credited a sum of Rs 119 crores to the account
of Google Ireland without deduction of tax at source. Google Ireland had also not
obtained a NIL deduction certificate on the sums payable to it from the Income
Tax Department. It was the same for the remaining years in the period under
review.
 A show cause notice was issued on November 20, 2011, asking Google India to
explain why it shouldn‘t be treated as a tax defaulter.

51
  Google India‘s reply wasn‘t satisfactory and the amounts payable to Google
Ireland were determined to be royalty by the Assessing Officer, and
subsequently the Commissioner of Income Tax (Appeals). That is when
Google India filed its appeal with the Income Tax Appellate Tribunal.

Google India’s grounds for the appeal

Ground 1: AdWords is a standard advertisement product through which the advertiser is

able to publish its advertisement on the Google website, but the the tax assessment erred
in holding that the AdWords program is a complex computer software.

Ground 2: Google India is only involved in marketing and distribution of advertisement

space to the Indian advertisers, and Google Ireland handles the back-end processes of
actually displaying the advertisement. So, there‘s no ―parting with the copyright‖ in
this case.

The Tribunal said that in their view it is not the advertisement or selling of the space
rather it is focused targeted marketing for the product/ services of the advertiser by
Google India with the help of technology for reaching the targeted persons based on the
various parameters, information etc.

Ground 3: The tax assessment acknowledged that Google India is distributing

advertisement space to advertisers in India, yet held that the amount payable towards
purchase of advertisement space should be considered ‗Royalty‘.

The Tribunal held that IP of Google vests in the search engine technology, associated
software and other features, and hence use of these tools for performing various activities
mentioned herein above, including accepting advertisements, providing before or after
sale services, clearly fall within the ambit of ―Royalty‖.

52
Ground 4: The distribution agreement and service agreement between Google India and
Google Ireland are not interconnected in any way, because as per the service agreement
Google India ―performs an independent global outsourcing function for Google
Ireland for which it receives consideration and is not linked in any manner to the function
of sale of advertisement space to the Indian advertisers.‖

The Tribunal held that without exercising its right under this agreement [the service
agreement dated 1.4.2004], the obligation of the Appellant (Google India) under the
[distribution] agreement dated 12.12.2005 and under the appellant-advertiser agreements
cannot be discharged. Therefore the Assessing Officer was right in relying on [service]
agreement for the purposes of bringing the case under Royalty, as per the provisions of
section 9(1)(vi) of the Income Tax Act read with the Indo-Ireland Double Taxation
Avoidance Agreement (DTAA). As per clause 8 of the [distribution] agreement
mentioned herein above, the distributor is under an obligation to maintain the user data
and therefore is having access to such data. The said user data is being used by the
appellant for discharging its obligation towards the advertisers and the claim of the
assessee is wrong that it does not have the access to the user data.

Ground 5: The tax assessment erred in holding that ―the distribution rights granted are
itself IP rights covered by ―similar property‖ used in Sec 9(1)(vi) of the IT Act.‖
This after it acknowledged that as per the distribution agreement Google Ireland will
provide ad space to Google India via the AdWords program for distribution to India
advertisers.

Ground 6: The amount payable to Google Ireland was incorrectly determined to be

royalty by attributing it to the right of use of trademark, even though it was accepted that
Google India had been permitted to use Google‘s trademark ―for the purpose
of marketing and distribution of Adwords program.‖

The Tribunal said that in their view the payments made by the assessee (Google India)
under the agreement was not only for marking and promoting the Adword program but

53
was also for the use of Google brand features. Needless to add that the said Google brand

54
features were used by the appellant as marketing tool for promoting and advertising the
advertisement space, which is main activity of Assessee and is not incidental
activities. Hence for this reason also the payment made by the Appellant to GIL [Google
Ireland Limited] also falls within the four corners of royalty as defined under the
provisions of the IT Act as well as under the DTAA [Double Tax Avoidance Agreement].

Ground 7: Without appreciating the facts of the case, the tax assessment erred in holding
that the amount payable by Google India to Google Ireland Limited towards purchase of
advertisement space to be in the nature of ‗royalty‘ under Section 9(1)(vi) of the IT Act.

Ground 8: That the tax assessment erred in upholding the order of the AO that the
amount payable by Google India to Google Ireland is towards right to use of trademark
and copyrighted computer program and process, hence is in the nature of ‗Royalty‘ as
per the Article 12 of the India-Ireland DTAA.

Ground 9: The training provided to Google India‘s distribution team in regards to

functionality, tools available, etc., is ―restricted to use of the Adwords program and
not how to develop the Adwords program,‖ yet it was incorrectly determined to be
services rendered to Google India by Google Ireland.

Ground 10: Erred in not following the principle laid down by Hon‘ble Mumbai Tribunal
in the case of Yahoo India and Pinstorm Technology on similar facts by stating that the
facts and issues are completely different and at no stage the Mumbai Tribunal consider
what exactly is the Adwords Program, nor did it have occasion to examine the right to
use trademark or other IP rights.

Ground 11: Erred in not following the decision of the Calcutta Tribunal in the case of
Income Tax Officer vs Right Florists Pvt Ltd (ITA No. 1336/KolI2011) on similar facts.

The Tribunal said that: we are unable to persuade ourselves to agree with the reasoning
for treating the payment made by the advertisers as a business profit and not as a royalty.

55
As in our opinion, the detailed working of the AdWords program of the appellant and
GIL clearly shows that the appellant is having the right to access not only to the patented
technology but also to the customer data, information (like telephone number, user
behaviors, region, gender , language, colour, photographs, place of visit, mobile device
used, time spent etc.,) and which was not the case in the the decisions in Yahoo India,
Pinstorm and Right Florist (supra). As clear from the distribution agreement, the assessee
is also having right, title and interest over the intellectual property right of Google.
Further, as per the standard advertisement with the advertiser, which specifically
empowers the appellant to delete / remove / withdraw the advertisement.

ITAT Slaps Google India With Tax Liability On Rs 1,457-Cr Revenue For Failure To
Deduct TDS For Remittances to Google Ireland [Read Order]
Google India has been slapped with tax liability worth crores, with the ITAT dismissing
six appeals filed by Google India for the assessment years 2007-08 to 2012-13. The issue
was whether Google India was liable to deduct tax at source for its remittances made to
Google Ireland Limited (GIL) as advertisement revenue amounting to Rs 1,457 crores.
Google India was appointed as a non-exclusive authorized distributor of AdWords
programmes to advertisers in India by GIL. Further, Google India had entered into an
agreement with GIL for resale of online advertising space under the advertisers‘
programme to advertisers in India.

When it was found that Google India had been crediting sums to the account of GIL
without deduction of tax at source, proceedings under Section 201 were initiated against
Google India for failure to comply with provisions of Section 195 of the Income Tax Act.
As per Section 195, there is an obligation on the part of the payer to deduct TDS, in case
the assessee is making payment to a non-resident. Notice was issued to Google India
calling upon it to answer why it should not be treated as assessee in default for
notdeducting the tax at source on the sums payable to GIL.

It was contended by Google India that no rights in the intellectual property of the Google
were transferred to it from GIL and that Google India was a mere reseller of advertising

56
space made available under the AdWord distribution programme by GIL. Further, it was
contended by Google India that it was not paying any amount in the nature of royalty
under the law or the Double Taxation Avoidance Agreement (DTAA). It was submitted
on behalf of the Income Tax Department that the amount credited by Google India to the
account of Google Ireland would constitute sum chargeable under the provisions of the
Income Tax Act as the payment is in the nature of royalty for the purpose of license to
use intellectual property rights. Hearing both sides, the ITAT decided against Google
India and held that it had used the information, patented technology, etc from GIL, which
is royalty, and therefore, as per the mandate of Article 12(2) of the DTAA, royalty was to
be taxed in accordance with the laws of India. The ITAT observed, ―Thus the intention of
the assessee as well as of the GIL is clear and conspicuous that they wanted to avoid the
payment of taxes in India. That is why, despite the duty of the assessee to deduct the tax
at the time of payment to GIL, no tax was deducted nor any permission was sought for
paying the amount.‖ It was further observed by ITAT that, ―In our view, whether it
is business profit or royalty, in both the circumstances, so far as the assessee is
concerned, the assessee is duty-bound to deduct the TDS unless there is an adjudication
by the AO to the contrary u/s.195(2)‖.

After losing six years long battle, Google India spokesperson in an interviewsaid that
Google India complies with all tax laws in India and pays all applicable taxes and they
will file an appeal, as the ITAT ruling, according to Google, ―is a clear departure from
previous judgments on the issue and is not in line with India‘s double taxation avoidance
agreements‖.

57
TATA INDUSTRIES

Company profile

Tata is India‘s oldest and largest private sector business entity. Founded in 1868, the
group now consists of more than 100 companies, with a turnover of more than $70bn. It
has a wide range of interests, with companies trading in fields as diverse as steel, cars and
trucks, chemicals, IT consultancy, retailing and hotels. The Tata group is highly
decentralized, and member companies have great autonomy in terms of strategy and
operations. The main instrument for unifying the group is the Tata corporate brand,
which embodies values that are shared by all companies in the group.

Background of case

Tata Industries sold their shareholding in Idea cellular in 2007 to Birla TMT Holdings
through its subsidiary called Apex situated in Mauritius and through this, avoided to pay
tax in India. Income Tax officials flagged this deal and determined the capital gains tax in
this deal to the tune o f INR 1,00,000 crore under Section 93 of Income Tax Act.

58
However, Income Tax Appellate Tribunal held that as there was no transfer of assets by a
tax resident of India to a non-resident, and they cannot be taxed on the capital gains that
arose on sale of Idea shares by its Mauritius subsidiary.

Tata Industries under its umbrella, has several charitable trusts formed for charitable
purposes called Tata Trusts. These charitable trust such as, Jamshedji Tata Trust and
Navajbhai Ratan Tata Trust, enjoy tax exemptions under the Income Tax Act. According
to Controller and Auditor General‘s report of 2013, Tata trust was earning huge profits
instead of utilizing it for charitable purposes and accumulating surplus funds. These
surplus funds were then used for creating fixed assets for earning more profits or were
transferred to other trusts, rather than for charitable purposes in order to avoid tax. The
Mumbai Bench of the Income Tax Appellate Tribunal (Tribunal) ruled in favour of Tata
Industries Limited (Taxpayer) on the invocation of Section 93 of the Income Tax Act,
1961 (IT Act). The Tribunal held that Section 93 is inapplicable to the Taxpayer's case
and thereby deleted an addition of capital gains of approximately INR 1 trillion to its
income, which arose to the Taxpayer's offshore wholly owned subsidiary on transfer of
shares of an Indian company.

As per Section 93 of the IT Act, transfer of an asset to a non-resident by any person

(provision does not expressly deal with tax residence of the transferor) results in
taxability of income arising from such asset in the hands of the transferor, where the
transferor retains the power to enjoy income from such assets and such income would
otherwise than for the transfer be taxed in India in the hands of the transferor.

Facts Of the Case

The Taxpayer, an Indian company, had entered into a shareholders' agreement with Apex
Investment (Mauritius) Holdings Private Limited, a Mauritius resident company (Apex)
and Birla Group of Companies (Birla) to merge the joint venture promoted by Apex and
Birla with one of the group companies of the Taxpayer. The resultant entity was named
Idea Cellular Limited, India (Idea). Apex was held by AT&T Corporation, US (AT&T).

59
Subsequently, AT&T merged with New Cingular Wireless Services Inc. (NCW) and the
Taxpayer acquired the entire shareholding of Apex from NCW. Thus, Apex became the
wholly owned subsidiary of the Taxpayer.

Subsequently, the Taxpayer and Apex sold their respective shareholding in Idea to Birla.
The Taxpayer duly paid tax on the capital gains arising out of the sale of shares sold by it.
However, since Apex was a Mauritius resident holding a valid Tax Residency Certificate
(TRC), Apex claimed an exemption under Article 13(4) of the India-Mauritius Double
Taxation Avoidance Agreement (DTAA) where under the gains arising to Apex on
transfer of shares of Idea would not be taxable in India.

During the assessment proceedings, the Tax Authorities invoked the provisions of
Section 93 of the IT Act and held that capital gains arising out of sale of Idea's shares by
Apex should be taxed in the hands of the Taxpayer. The Tax Authorities contended that
the Taxpayer had tried to take undue benefit of Article 13(4) of the DTAA by routing the
purchase of additional shares of Idea through Apex and not directly, and thus it is a clear
attempt to avoid the incidence of tax in respect of capital gains. It was argued that, since
there was a transfer of shares of Idea resulting into accrual of capital gains to Apex, the
same should be taxable in India in the hands of the Taxpayer, as the Taxpayer being the
parent of Apex would ultimately enjoy the income. Therefore, the case squarely fell
within the ambit of Section 93 of the IT Act. To further allege that the purchase of Idea's
shares through Apex was a conduit for avoiding taxes, the Tax Authorities submitted that
Apex had no substantial existence or business operations except for holding shares of
Idea and that its income and expenses were also negligible.

The order was confirmed by the first appellate authority. Being aggrieved, the Taxpayer
approached the Tribunal in appeal.

The Taxpayer submitted that the transfer of Idea's shares by Apex was bonafide and that
it was an arm's length transaction between two unrelated parties.

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Decision of the Tribunal

Whilst examining Section 93 of the IT Act, the Tribunal noted the following as the key
ingredients of Section 93:

 A Transfer Of Assets;
 By Reason Of Such Transfer, Income Arising From The Said Assets Becomes
Payable To A Non-Resident;
 The Resident By Means Of The Transfer Acquires A Right To Enjoy Such
Income; And
 The Income From The Said Assets If It Was The Income Of The Resident Would
Be Chargeable To Tax In India.

The Tribunal noted that on meeting the aforementioned criteria, the income of the non-
resident would be deemed to be the income of the resident for all the purposes of the IT
Act; unless the transfer was a bona fide transfer.

The intent of Section 93 of the IT Act, the Tribunal observed that the object of the section
is to prevent residents of India from evading the payment of tax by transferring their
assets to non-residents, while enjoying the income by adopting questionable methods.
The Tribunal laid emphasis on the words of Section 93 which reads "means of any such
transfer" to highlight that the consequences flowing from the transfer of assets are of
relevance under Section 93. The Tribunal further noted that Section 93 being a 'deeming
provision' must be strictly construed and taken to its logical conclusion.

The Tribunal observed that one of the essential ingredients for invocation of Section 93
i.e. 'transfer of property by a resident (Taxpayer) to a non-resident (Apex)' was missing.
The Tribunal thus held that "Absence of transfer by resident to a non-resident entity takes
the transaction out of the ambit of section 93, a deeming provision."

The decision of the lower Tax Authorities was accordingly set aside and the ground of
appeal was decided in favour of the Taxpayer.

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VODAFONE CASE

Company Profile

Vodafone is a British multinationaltelecommunications conglomerate, with headquarters

in London and Newbury, Berkshire.It predominantly operates services in the regions of
Asia, Africa, Europe, and Oceania. Among mobile operator groups globally, Vodafone
ranked 4th (behind China Mobile, BhartiAirtel and Vodafone Idea) in the number of
mobile customers (313 million) as of 2018.

Vodafone owns and operates networks in 25 countries, and has partner networks in 47
further countries. Its Vodafone Global Enterprise division provides telecommunications
and IT services to corporate clients in 150 countries.

Vodafone has a primary listing on the London Stock Exchange and is a constituent of the
FTSE 100 Index. It had a market capitalisation of approximately £52.5 billion as of

62
10 February 2016, the eighth-largest of any company listed on the London Stock
Exchange. The company has a secondary listing on NASDAQ.

Vodafone International Holding vs Union of India

Vodafone International Holdings B.V. based in Netherlands, purchased Hutch Essar in

India through a complex tax avoidance strategy. The idea of this strategy was to avoid
paying capital gains tax in India through non-resident companies in the deal. The non-
resident companies were their own subsidiaries operating outside India. Vodafone
International Holding B.V. purchased 67% controlling shares of CGP International based
in Cayman Islands, which was a subsidiary company of Hutchison Telecommunication
International Limited (HTIL). CGP already had a controlling share in Hutch Essar in
India before the deal and by the transfer of 67% controlling share of CGP, Vodafone
International Holdings B.V., acquired the controlling stake in Hutch Essar India.

Following this deal, Income tax authorities issued show cause notice to Vodafone
International Holdings B.V. and in turn VIH filed a write in High court challenging the
same, which was dismissed by high court with a view that Vodafone International
Holdings B.V. must pay capital gains tax, as the sale of shares from CGP to VIH B.V.
qualifies as capital transfer and attracts capital gains tax of nearly Rs.11000 crores.
Pursuant to High Court‘s dismissal, VIH filed a Special Leave Petition in Supreme Court
of India challenging the High Court‘s order. In 2012, Supreme Court of India held that
the High Court‘s view lacked authority of law and was quashed, as the transaction took
place between two non-resident Companies of India. Hence, Vodafone acquired Hutch
Essar India without paying capital gains tax.

The Centre's appeal against an order of the Delhi High Court that allowed arbitration in a
tax dispute under the India-UK bilateral treaty.Vodafone India is gearing up to face the
Centre‘s petition in Delhi High Court order asking it to participate in the dual arbitration

63
proceedings initiated by the company on a tax demand.The second largest telecom giant
has aRs 11,000 crore tax demand dangling over its head in relation to its $11 billion deal
for acquiring a stake in Hutchinson Telecom.

It begin from

Vodafone‘s famous ad that featured in 2008 with the tagline ‗Every day I want to fly,‘
and a pug.A decade ago in 2007, Vodafone International Holdings BV forayed into the
Indian mobile phone market by buying 52% stake in Hutchison Essar.

However, the company‘s subsidiary exchanged cash for shares with a similar holding
company for Hutchison Essar, in far off Cayman Islands. At the time, Indian tax
authorities did not have a say in the company‘s doings as the deal was done entirely
offshore.

In 2012, Vodafone had first initiated arbitration against the government invoking the
India-Netherlands Bilateral Investment Protection Agreement (BIPA). The Apex Court of
India ruled in favour of Vodafone by saying it acted ‗within the four corners of law‘.

The Government Said

The IT department‘s argument was based on Section 9 (1) (i) of the ITA that said, ―all
income accruing or arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or through or from any
asset or source of income in India or through the transfer of a capital asset situate in
India.‖

The Indian government saw over Rs 20,000 crore in unpaid taxes by Vodafone, a report
by the Hindu pointed out in 2014.

The government then came up with the General Anti-Avoidance Rule (GAAR). This rule
basically said that the government could dig up past deals, all the way back to 1962.
GAAR was postponed to 2016.

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Delhi High Court Ruling

Despite winning the $2 billion tax case in the Supreme Court five years ago, the matter
was picked up by the Delhi High Court.

On August 22, the High Court had restrained Vodafone Group‘s arbitration proceedings
under the India-UK BIPA. This was the company‘s second arbitration on the same issue,
as per a PTI report.

The government challenged the second arbitration as well stating 'the two claims were
based on the same cause of action and seek identical reliefs but from two different
tribunals constituted under two different investment treaties against the same host state'.

Vodafone, however, told the court it would not submit to the jurisdiction of the court in
relation to the Rs 11,000 crore tax demand.

At the end of October 2017, the HC allowed Vodafone Group representatives to

participate in the process of appointing a presiding arbitrator in its international
arbitration process against India in the tax dispute case.

This is what has been challenged by the Centre on December 12, 2017.

Its importance

Vodafone‘s tax feud with the government is not the only one of its kind. Global debates
on the tax planning strategies of companies and what governments can do to stop them
have been initiated.

Its impact

What lies at stake here are Vodafone‘s profit margins and reputation. Even though the
matter is still in court, it is important to know whether a company is paying its dues to the
government.

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Vodafone had 20.74 crore subscribers as on September 30, 2017, as per TRAI data.
Investors in Vodafone will be interested to know that the reported profits do indeed exist.

PROACTIVE STEPS BY INDIAN GOVERNMENT IN ORDER TO CURB TAX

AVOIDANCE

Tax avoidance strategies used by big business houses around the world cause a great deal
of loss to the revenue of many governments around the world, including India. In India,
many cases of tax avoidances arose in the last two decades, some of which have been
discussed in detail above, which forced the government to work out its laws and treaties
with foreign countries in order to curb tax avoidance. Indian Government framed certain
rules and guidelines in order to regulate and restrain tax avoidance through Income Tax
Act, 1961 and Finance Act, 2015.

General Anti-Avoidance Rule (GAAR) was included in Chapter X-A of Income Tax Act,
1961. GAAR was introduced in Income Tax Act, by the Finance Act, 2012, yet came into
effect from 1st day of April, 2017. The sole purpose of introducing GAAR was to curb
tax avoidance strategies through a provision ―Section 96. Impermissible avoidance
arrangement‖, which was imbedded in Income Tax Act. According to the provision,
arrangements or deals made in order to obtain a tax benefit were impermissible.

Amendment of section 6(3) of Finance Act, 2015 was done in order to replace a new test
of corporate residence, which provided that if place of effective management (POEM) is
found to be situated in India, then a foreign company will be a tax resident of India.
Before this amendment, for tax purposes, a company that was not a resident of India was
only considered resident, if it was controlled and managed in India.

Indian government in 2017 took various steps in order to align the rules and guidelines as
per the Base erosion and profit shifting (BEPS) suggested by The Organisation for
Economic Co-operation and Development (OECD), which could curb the menace of tax
avoidance, which includes BEPS action plan 13, 1 and 5.

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INTERPRETATION

Tax avoidance strategies used by these large corporations indeed help them save billions
of dollars each year, however tax avoidance causes great deal of loss to the government
and creates an unfair market, as a person working for a salary or a small business, has
very little knowledge or intellect for building up strategies in order to avoid taxes and end
up paying taxes in full. Whereas, big business houses continue to lower their burden on
tax through tax avoidance. It is difficult to prove that these corporate giants did actually
evade tax as they somehow do it in within the four walls of law. In reality, the business
model of these big business houses are actually based on how effectively they can avoid
tax and make huge profits for their investors. The idea behind tax avoidance still remains
that, apart from the transaction/deal, the company must make a good amount of profit and
not lose huge percentage of the profit in taxes. In this regard many countries have
lowered tax rates in order to cater the needs of these companies who in return help these
countries to develop. Therefore this particular nexus gives effective assistance in
avoiding billions worth of Rupees in taxes, thereby making tax avoidance advantageous
to big business houses.

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CHAPTER V:

CONCLUSION

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 Chapter V: Conclusion

Tax planning as an exercise is not just limited to filing returns and paying taxes. It is a
process whereby your larger financial plan needs to be taken into consideration after
accounting for the above-mentioned factors. Do not hesitate to look beyond section 80C.
you can smartly access the deductions available under section 80 and the exemptions too,
to save tax legitimately.

Remember to effectively know and structure each component of your salary income to
effectively save more tax. The study enables the people to wisely reduce their tax
liability, waiting till eleventh hour to do your tax planning exercise, is not going to help
in a big way. It would just lead to ―tax saving and not ―tax planning‖.

Just to reiterate, while you have host of tax saving investment options available under
section 80C, following an asset allocation model (for planning exercise), in accordance to
your age, ability to tale risk and investment horizon is going to make your tax saving
portfolio look more prudent. The people must take help of such tax planning study and
tax consultant while filing returns and seek their opinion, a self-study approach on your
tax planning exercise is also necessary as one should be well versed with at least those
tax provisions which affect you directly.

The foregoing analysis reveals that proper tax planning is very much helpful in
minimizing the burden of income tax for incurring expenses as well as having total
available. Therefore, whenever any consideration amount of expense on this account is
likely to arise, it is suggested that the taxpayer should plan strategy at that time itself and
certainly during the same financial year so that planning can be made, as required, to get
deductions and exemptions. Suggestion may also be given to keep a proper account of all
relevant expenses incurred. Sometimes during the course of borrowings for scrutiny of
assessment, the assessing officer asks for a details explanation about drawings including
the amount spent. In case of inadequacy of drawings, he may make an addition on
account of such drawings while framing the assessment, may avail benefits under
sections 10, 80C and 80E. the requirement laid down in the act should be kept in mind

69
and should be complied with while claiming deductions and exemptions with view to
saving tax. A taxpayer is, therefore, required to go through the different sections provided
in the act, the ever-flowing torrent of laws, circulars etc.

As long as governments exist they must collect tax revenue to survive. Many industries
may come and go, but you can be assured that not only are tax preparation businesses
needed today, but as long as people have to file tax returns and the tax laws are as
complex as they are, tax preparation businesses will be needed in the future.

If you have always dreamed of owing your own business now is the time to take the
plunge. Starting a tax preparation business is a great way to work for yourself. You‘ll set
your own hours and work as much or as little as you want –either full time or part time. If
you already have a full time job but would like to earn more money, starting a part time
tax preparation business can be very profitable. Being a professional tax preparer gives
you te opportunity to work with people and get to know them, while providing them a
valuable service. Your income potential will be exceptional and you‘ll be able to enjoy a
great deal of time off to pursue other interests during the off season. You‘ll decide the
hours you work and you‘ll never have to face a crowded highway during rush hour again.

Tax preparation is an ideal business with little downside risk. If you don‘t land too many
clients at first, then the only way to go is up. How quickly you build your tax preparation
business is up to you.The weeks before the end of a tax year in early April are the annual
tax saving season. Always try to look at your tax planning in the context of your general
financial planning. Although saving tax is important there are other factors to consider.
The cost and inconvenience of some tax saving strategies may not be worthwhile, so take
specialist advice when seeking to implement any new ideas. Have you considered the
timing of dividends or bonuses to minimize additional rate tax this tax year and next. The
tax saver should choose the right decision to save tax the five important things- Total
amount of deductions- see how much maximum you can avail, Types of tax saving,
tenure of the investment, taxability of income from the investment. Once you got a fix on
these, equally important is to choose a tax saving instrument which can be linked to a
specific goal.

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Bibliography

Taxman publication

Irjcjournals

Direct Tax (mananpublication)

Webliography

https://www.affventepa.com

http://en.m.wikipediaorg/wikipedia/direct_tax

http://schlar.google.co.in/schlar

http://m.economictimes.com/tech/internet/

http://www.medianama.com/2017/10/223

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