PRESTIGE INSTITUTE OF
MANAGEMENT
Presentation
On
Corporate Tax Planning
Presented by :
Alok Srivastava
Tax treatment on issue of bonus
share
When bonus share are issued to the equity
shareholders, the value of the share is not
taxed as dividend distributed.
Where Redeemable preference share are
issued as bonus share on their redemptions,
the amount shall be taxed distributed.
Where bonus are issued to the preference
share holder , on their issue it is deemed to
be dividend and liable to tax.
Expanses on issue on bonus share is
allowed as deductions as per supreme court
judgment .
Tax planning
A company may capitalized its profit by
converting partly paid share into fully paid
up share instead of issues of bonus share.
This conversion will not be a deemed
dividend,further benefit of indexation for
the price paid by the share holders will be
available from the date of allotment of
share.
Inter Corporate Dividend
When any domestic companies receives
dividend from another domestic company
(expect loan from a closely held company )
it is exempted u/s 10(34), however the
domestic companies who is declaring
,distribution or paying dividend is liable to
pay tax on u/s 115-O in addition to tax on
total income.
Tax Planning
When s companies issue shares to its equity
shareholder it is not a deemed dividend
are not liable tax on such deemed
dividend .hence domestic companies may
issue bonus share to its equity share to its
equity share holder instead of cash
dividend in cash to reduce the tax liability.
Capital Structure
A mix of debt, preferred stock, and common stock with which
the firm plans to finance its investments.
Objective is to have such a mix of debt, preferred stock, and
common equity which will maximize shareholder wealth or
maximize market price per share
WACC depends on the mix of different securities in the capital
structure. A change in the mix of different securities in the
capital structure will cause a change in the WACC. Thus, there
will be a mix of different securities in the capital structure at
which WACC will be the least.
An optimal capital structure means a mix of different securities
which will maximize the stock price share or minimize WACC.
How Firms Establish Capital
Structure?
Most corporations have low debt-asset ratios
Changes in Financial Leverage affect Firm Value
There are differences in the Capital Structures of
Different Industries
Most companies have a target debt ratio
Target debt ratio is dependent on taxes, types of
assets, uncertainty of operating income, and pecking
order and financial slack.
Optimal Capital Structure:
Optimal capital structure is achieved by
finding the point at which the tax benefit of
an extra dollar of debt = potential cost of
financial distress. This is the point of:
– Optimal amount of debt
– Maximum value of the firm
– Optimal debt to equity ratio
– Minimal cost of WACC
This will obviously vary from firm to firm
and takes some effort to evaluate. No
single equation can guarantee profitability
or even survival
Tax Planning
If rate of return < rate of interests, maximum
debt fund since it shall increase the rate of
return on equity capital.
If rate of return on investment < rate of
interest, minimum debt fund should be
used.
Where assesses enjoys tax holidays under
various provisions of income tax case
minimum debt fund should be used,
The choice of structure shall depend upon
maximizing the return on capital
employed which is computed by using
follwing formula
= distributiable profit
equity capital * 100
